Industry Week in Review – April 28, 2017

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Aerospace & Defense Update

Boeing, Lockheed Martin, and Northrop Grumman all announced 1Q17 earnings this past week with mixed results.  Boeing raised its forecast for full-year earnings after it reported a ~19.0% year-over-year (“YoY”) increase in profit for 1Q17.  However, Boeing’s revenue decreased ~7.3% YoY and missed consensus analyst estimates by ~$330 million (~1.5%).   In contrast, Lockheed lowered its full-year earnings outlook but raised its revenue forecast for the remainder of the year.  Lockheed’s revenue during 1Q17 missed consensus analyst estimates by ~$170 million (~1.5%), but still showed a YoY increase of ~$690 million (~6.6%).  Lastly, Northrop Grumman raised its full-year earnings outlook after beating consensus analyst estimates for revenue by ~$125 million (~2.0%).  Northrop’s Aerospace Systems division, responsible for producing the center sections of the F-35 jets, increased revenue ~13.0% YoY.

On Friday, Congress approved a one-week, stopgap spending bill allowing the government to stay open through May 5th as it negotiates a budget for the remainder of GFY2017.  The government was operating under a Continuing Resolution (“CR”) that was set to expire on April 29th.  House Appropriations Committee Chairman Rodney Frelinghuysen is hopeful a funding package will be completed shortly.  There is speculation that the supplemental defense spending amendment will be close to half of President Donald Trump’s initial $30 billion request.  Additionally, President Trump is expected to lay out his 2018 funding proposal for GFY2018 over the next few weeks.

Government Technology Solutions Update

On Friday, Representative Will Hurd reintroduced his Modernizing Government Technology Act (“MGT”) to the House of Representatives.  Mr. Hurd had proposed an earlier version of the bill in late 2016, but despite being passed by the House, it was unable to get traction in the Senate.  The end goal of the bill remains relatively unchanged from prior iterations, giving agency Chief Information Officers (“CIOs”) access to funds which will enable them to upgrade and modernize legacy IT infrastructure.  While this new version of the bill follows a similar pattern of its predecessor, proposing a centralized fund as well as setting up individual agency funds for the procurement of major IT upgrades, the original MGT was more expensive and less appealing for lawmakers.  The bill Mr. Hurd introduced on Friday asks for $500 million in total compared to the $9 billion price tag assessed to the original bill by the Congressional Budget Office (“CBO”).  Mr. Hurd hopes that the smaller central fund, more appealing CBO score, and high-profile support will give the bill enough momentum to pass both the House and the Senate this time around.

The House Armed Services Committee held its Emerging Threats and Capabilities subcommittee hearing on Wednesday, during which members of Congress and other industry experts pressed for the Department of Defense (“DoD”) to overhaul and modernize the way the agency procures and implements new IT, saying that there are too many inefficiencies in the way it currently conducts acquisitions.  Industry insiders noted that the DoD should prioritize finding proven, commercial solutions before attempting the creation of proprietary systems. Mr. Terry Halvorsen, retired DoD CIO, said that the agency often over-allocates both funds and resources towards the customization and testing of commercial solutions compared to using technology which has been certified to industry standards.  Industry insiders also argued that the DoD needs to become more flexible in the manner through which small purchases are funded.  They note that current policies make it difficult to quickly procure smaller items, and that the acquisition process itself is currently overly burdensome.  Several in attendance proposed that Congress should enact legislation which would allow the more streamlined integration of commercial technology, and which would also give agency officials the authority they need for the flexible acquisition of IT systems

Big Movers

Airbus (up 5.6%) – Share prices were up this week after the Company reported growth in all its segments except defense during 1Q17.

TE Connectivity (up 5.1%) – Share prices were up this week after the Company raised its full-year sales and profit forecast.          

Transactions

Dubai Aerospace Enterprise has agreed to acquire AWAS, a provider of customized aviation solutions.  Terms of the deal were not disclosed.

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Industry Week in Review – April 14, 2017

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Aerospace & Defense Update

On Wednesday, President Trump held a joint press conference with North Atlantic Treaty Organization (“NATO”) Secretary General Jens Stoltenberg at the White House.  In his remarks, Trump stated that he no longer thinks NATO is “obsolete.”  The President reconfirmed his commitment to NATO and believes it is now doing more to fight terrorism.  Trump also reiterated that NATO allies must increase their financial obligations and reach the alliance’s goal of spending at least 2.0% of their gross domestic product (“GDP”) on defense by 2024.  Stoltenberg backed Trump’s message on member-nation defense spending and stated that NATO has turned a corner in fair burden-sharing.  NATO increased defense spending from 2015 to 2016 by ~$10.0 billion (3.8%).  Stoltenberg also echoed that NATO can and should do more in the global fight against terror.

In the same press conference, Trump announced that he will send National Security Adviser H.R. McMaster into Afghanistan to determine if more U.S. forces are necessary.  This statement came a day before the U.S. dropped the largest non-nuclear bomb on Afghanistan targeting tunnels and caves believed to be built by the Islamic State.  This move was the Trump Administration’s first significant step towards establishing a strategy for the deepening security crisis in Afghanistan.  In February, Army General John Nicholson requested a “few thousand” more troops to fight the Taliban and train the Afghan allies.  Of the ~13,000 NATO troops currently in Afghanistan, ~8,400 are American soldiers.  The Administration plans to work with NATO allies in establishing optimal troop levels but a timeline on when this review will be completed has not yet been established.

Government Technology Solutions Update

On Wednesday, the Department of Veterans Affairs (“VA”) issued a request for information (“RFI”) to potential vendors regarding a commercial, cloud-based version of the Vista electronic health record (“EHR”) system, with the goal of consolidating Vista down to just five physical data centers.  This would permit the VA to continue its use of Vista while outsourcing its maintenance to a commercial entity.  The RFI comes at a crossroads of the VA’s EHR modernization strategy.  The agency has until July 1st to decide whether it will continue to use, develop, and maintain the Vista system in-house or otherwise seek the procurement of a fully commercial EHR solution.  Some have argued that a cloud-based approach may be an acceptable middle ground, as it provides for the continued use of the familiar legacy Vista system while allowing an outside party to handle the logistics, complexity, and cost of maintenance and upgrades.  The VA pursued additional modernization initiatives this week when it launched a web-based access and quality tool designed to increase transparency, allowing veterans to view average wait times for local facilities and leave feedback regarding the quality of their visits.  Both the Vista cloud migration and web portal efforts are being made as the VA attempts to overhaul its practices by driving down costs, increasing efficiency, and providing higher-quality care for veterans nationwide.

The Army made awards on its $248.7 million Army Cloud Computing Enterprise Transformation (“ACCENT”) contract late last week.  The contract has 50 prime awardees, and will be used mainly to assist the Army in migrating its systems to a commercial cloud environment.  While the ceiling value of this ACCENT is relatively low given the number of awards, the Army noted that it will be, in part, a pilot program for future initiatives.  The contract is designed for ease of use, flexibility, and expediency, with a turnaround of one to two months envisioned from solicitation to award on each task order.  ACCENT is designed to procure several modernization solutions and services, such as cloud transition support, technical engineering, security requirements analysis, and data migration planning.  The Army is attempting to cut down on the costs associated with what it sees as an over-expanded IT infrastructure through data center consolidation, and believes that ACCENT will be a key component in laying the groundwork for a successful transition.

Big Movers

Orbital ATK (down 3.2%) – Share prices were down this week after a small ammunition plant run by the Company experienced a fatal explosion.  

Airbus (down 1.5%) – Share prices were down this week after Delta Air Lines announced it is reviewing its $14.0 billion purchase from Airbus.

Transactions

Buchanan & Edwards, Inc. has acquired The Reports and Requirements Company, LLC, a provider of data governance, data curation, cyber intelligence, collection management, and intelligence training to Intelligence Community (“IC”) and national security customers.  Terms of the deal were not disclosed.

Oasis Systems, LLC, has acquired Human Solutions, Inc., a provider of full lifecycle consulting in systems engineering, enterprise architecture, human factors, and user interface design for Federal and commercial customers.  Terms of the deal were not disclosed.

Wencor Group has acquired Accessory Technologies Corp., a provider of repairs for pneumatic valves, electro-mechanical actuators, and electrical components within aerospace industry.  Terms of the deal were not disclosed.

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Industry Week in Review – April 7, 2017

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Aerospace & Defense Update

On Thursday, April 6th, President Trump ordered a retaliation Tomahawk cruise missile strike against a Syrian Government controlled airfield that is suspected to be responsible for a chemical weapons attack against innocent civilians in Syria earlier this week.  The U.S. retaliation marks the first instance of direct military action against the Assad regime in Syria, adding further strain to already tense relationships in the region, both with Syria and its allies, including Russia.  Following the U.S. strike, Russia called on the United Nations Security Council to convene an emergency meeting and announced its intent to suspend communication channels designed to avoid air accidents in crowded Syrian airspace.  In the wake of U.S. military intervention, defense primes are trading up around 1% in contrast to an overall flat market for the day.

Last week, Boeing received a contract for at least 17 new P-8 Poseidon aircraft with a contract value of $2.2 billion and first delivery expected sometime in 2019.  The P-8 Poseidon is a militarized version of Boeing’s highly successful 737-800 platform and is used primarily for anti-submarine and anti-surface warfare as well as Intelligence, Surveillance, and Reconnaissance (“ISR”) capabilities.  Of the 17 aircraft already under contract, the U.S. Navy will purchase 11 units, with the Australian Royal Airforce and U.K. Royal Airforce purchasing an additional four and two aircraft, respectively.  This multinational agreement also contains options for 32 additional aircraft, which could bring the total contract value to $6.8 billion.

Government Technology Solutions Update

At the McAfee Security Through Innovation Summit held on Thursday, officials reiterated the Federal government’s focus on modernizing Federal IT.  The acting Federal Chief Information Security Officer, Grant Schneider, noted that the Trump administration would continue to place an emphasis on upgrading aging legacy IT systems throughout the government.  Representative Will Hurd, who has recently spearheaded such initiatives, has noted that he planned on attempting to reintroduce his Modernizing Government Technology Act sometime in the near future.  That particular piece of legislation, which would have created a multi-billion-dollar centralized fund dedicated on IT modernization, was not able to pass in the most recent lame duck session of Congress.  While there still have not been any specifics mentioned about new legislation or IT modernization, many people in the industry, as well as in the Federal government, believe that the Trump administration will continue to be amenable towards pushing for upgrading legacy government technology.

On Monday, the acting Chief Information Officer (“CIO”) of the Department of Veterans Affairs (“VA”) confirmed that the agency was targeting July 1st to decide whether Vista, the VA’s proprietary electronic health record (“EHR”) system, would continue to be supported.  David Shulkin, who was confirmed in February as VA Secretary, first proposed early July as the target date to make that decision.  Vista, which was originally created as an open-source platform over 25 years ago, will require another set of upgrades by mid-2018.  However, there are many in the industry who believe that the VA should not continue to fund and support the proprietary system, and that commercial procurement might instead be the best option.  For example, the Department of Defense (“DoD”) recently rolled out its MHS Genesis EHR system.  That platform was commercially-sourced, being procured from Cerner.  The VA has hired a team of consultants to help in the decision-making process, and believes that it is currently on track to have a decision about whether to proceed with Vista by their proposed July 1st deadline.

Big Movers

NCI (down 19.6%) – Share prices were down this week after the Company’s 4Q17 earnings missed analyst expectations.

Wesco Aircraft (up 3.5%) – Share prices were up this week after the Company announced an extension of a current contract to provide integrated supply chain services for C-class aerospace hardware in support of the F-35 program.

Transactions

Astronics Corp. has acquired Custom Control Concepts, Inc., a provider of cabin management and in-flight entertainment (“IFE”) systems for the complete range of privately operated Boeing and Airbus aircraft.  Terms of the deal were not disclosed.

Audax Group has acquired Fastener Distribution Holdings, LLC (FDH), a provider of aerospace fasteners and other c-class components to commercial and defense aircraft manufacturers, and subcontractors.  Terms of the deal were not disclosed.

Belcan, LLC, a portfolio company of AE Industrial Partners, has agreed to acquire Schafer Corporation, a portfolio company of Metalmark Capital Partners, and a provider of scientific, engineering, and technical services to military and civilian customers within the Federal government.  Terms of the deal were not disclosed.

Gowanda Components Group (GCG) has acquired Dyco Electronics, Inc. a provider of standard and custom magnetic components and electronic assemblies.  Terms of the deal were not disclosed.

L3 Technologies, Inc. has acquired OceanServer Technology, Inc., a provider of Provides autonomous, lightweight Unmanned Undersea Vehicles (“UUVs”).  Terms of the deal were not disclosed.

Mercury Systems, Inc.  has acquired Delta Microwave, LLC, a provider of high-value radio frequency, microwave and millimeter wave subassemblies and components for the military, aerospace and space markets.  The deal is worth an estimated $40.5 million.

PAE Group, a portfolio company of Platinum Equity, has agreed to acquire FCi Federal, Inc., a provider of managed professional, administrative, and technical services to Federal government customers.  Terms of the deal were not disclosed.

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Industry Week in Review – March 31, 2017

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Aerospace & Defense Update

Lockheed Martin is expected to receive approval from the Pentagon for the production of 200 CH-53K King Stallion helicopters for ~$29 billion.  This new helicopter has the ability to transport three times as much cargo as its predecessor, the Super Stallion.  The Defense Acquisition Board met on Thursday to review whether to approve production for the first 24 helicopters.  If approved, the King Stallion helicopter would be the first major acquisition decision under Defense Secretary James Mattis.  Lockheed’s Chief Financial Officer, Bruce Tanner, stated that the CH-53K’s large revenue potential was an important reason behind Lockheed’s $9 billion acquisition of Sikorsky Aircraft in 2015.  Based on a congressional hearing, the King Stallion is currently expected to cost ~$122 million per helicopter, but is expected to drop below $89 million once full-rate production begins.

Thursday’s launch of SpaceX’s used Falcon 9 rocket marked the first time an orbital rocket has launched into space for the second time.  This launch highlights the benefits of reusable boosters for rockets after SpaceX reused the Falcon 9’s repurposed lower stage, which included nine refurbished main engines.  SpaceX believes reusable rockets will reduce launch prices by ~10% in the initial stages and ~30% in the later years.  SpaceX plans to launch up to six reused Falcon 9’s this year.

Government Technology Solutions Update

On Monday, CSC’s shareholders voted to approve the merger of the company with the IT Services business of HP Enterprise.  The combined company, called DXC Technology, will begin trading publicly on Monday, April 3rd. DXC Technology is expected to have $24 billion in annual revenues, of which $2.9 billion is expected to be contributed by the company’s U.S. public sector business.  The majority of the government work will be brought by HP, as CSC had originally distanced itself from the Federal marketplace in late 2015 when it spun-off its government services business into what would eventually be called CSRA.  HP will also bring with it work performed on the Navy’s Next Generation Enterprise Network (“NGEN”) contract.  NGEN contributed nearly $700 million in revenue in 2016, which amounted to roughly one third of HP Enterprise’s prime contract revenue in that year.  While there has been some speculation that the combined entity will end up shedding its government business, corporate executives have not signaled that this is the case.  CSC CEO Mike Lawrie believes that the government services business of DXC Technology will see low single-digit top line growth, implying that he may be willing to hold onto the business in the near term.

On Monday, President Donald Trump signed an executive order creating the White House Office of American Innovation.  This new office, to be led by Jared Kushner, will “focus on implementing policies and scaling proven private-sector models to spur job creation and innovation.”  According to White House Press Secretary Sean Spicer, the office will have a particular focus on tech procurement aimed at increasing efficiencies within the Department of Veterans Affairs.  The office would focus on bringing in data, technology, and ideas from tech leaders in the private sector, as well as modernizing technology and IT throughout the Federal government.  Donald Trump’s most recent budget request has included a proposal for creating a centralized fund dedicated to IT modernization.  A similar fund was proposed at end of 2016 through the Modernizing Government Technology Act which contained a $3.1 billion price tag for its centralized fund.  However, there is as of yet no clarity as to how much Mr. Trump would request in his iteration of this fund.

Big Movers

SAIC (down 13.6%) – Share prices were down this week after the Company’s 4Q17 earnings missed analyst expectations.

Esterline (up 4.2%) – Share prices were up this week after the Company completed its sale of BVR Technologies to Kaney Aerospace.

Transactions

Deloitte Consulting LLP has acquired Day1 Solutions, Inc., a provider of cloud consulting services, systems integration, managed services, and value-added resale of cloud solutions for Federal government customers.  Terms of the deal were not disclosed.

GE Aviation has acquired Critical Technologies, Inc., a provider of web-based records management solutions, including aircraft maintenance records.  Terms of the deal were not disclosed.

Kaney Aerospace, Inc. has acquired BVR Technologies, a provider of actuation and motion control products.  Terms of the deal were not disclosed.

StandardAero Holdings, Inc. has agreed to acquire PAS International Holdings, Inc., a provider of cost-effective original equipment manufacturer (“OEM”) and maintenance, repair, and overhaul (“MRO”) solutions for the aerospace industry.  Terms of the deal were not disclosed.

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Industry Week in Review – March 24, 2017

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Aerospace & Defense Update

After recent intelligence that the Islamic State is developing a bomb to hide in portable electronics, the U.S. and Britain banned the carrying of electronics larger than a cell phone aboard flights directly from certain Muslim-majority countries in the Middle East and Africa.  Anonymous U.S. officials stated that the explosives of concern are designed to be concealed in laptop batteries.  The Trump administration has said the ban is not an indication that there is information on a credible, specific attack.  However, House Representative Peter King, a member of the House Intelligence and Homeland Security Committees, has indicated the intelligence reports are recent and there are reports of an event that is “possibly planned.”  Impacted countries include, but are not limited to, the United Arab Emirates, Jordan, Egypt, Morocco, Turkey, and Saudi Arabia and it is estimated that ~50 flights into the U.S. will be impacted each day.

As part of its three-year review cycle of top positions in state-owned companies, the Italian government named Alessandro Profumo, a career banker, to be the new Chief Executive Officer of Leonardo, replacing Mauro Moretti.  In January 2017, Moretti was convicted and sentenced to seven years in prison for his role in a train crash from 2009 where 32 people died, excluding him from another term as CEO.  Profumo was previously the CEO of UniCredit and chairman of Italian bank Monte dei Paschi di Siena and has strong center-left ties within the Italian government.  Though he has no aerospace and defense experience, he brings a considerable amount of international market experience, which the Italian government believes will be extremely valuable in expanding revenue channels.

Government Technology Solutions Update

The Department of Homeland Security’s (“DHS”) Flexible Agile Support for the Homeland (“FLASH”) contract was recently hit with a second round of protests last week. FLASH is a $1.4 billion, small business set-aside indefinite delivery / indefinite quantity (“IDIQ”) contract issued by DHS to procure Agile development solutions for the rapid deployment of several key IT capabilities. FLASH was initially awarded to 13 small businesses in November 2016, a decision which was quickly protested. Following corrective action in early March, DHS pulled back those original awards and issued new awards to 11 companies, dropping two of the original awardees. This triggered the recent protests, with four coming last week and three more this week, for which the government has until late June to make protest decisions.

The General Services Administration (“GSA”) recently proposed a new special item number (“SIN”) under IT Schedule 70 which would cover the acquisition of Continuous Diagnostics and Mitigation (“CDM”) solutions. GSA issued a Request for Information (“RFI”) on Wednesday, looking to get feedback from the industry to better understand how it improve efficiencies and increase the quality of CDM offerings available on Schedule 70. Currently, CDM solutions have been offered through a blanket purchase agreement (“BPA”), which is set to expire in August 2018. By adding a CDM-specific SIN to Schedule 70, GSA hopes to have the requisite approvals in place for agencies to access and procure the latest, and most effective set of tools and technologies. GSA wants to ensure that the current list of products and services offered through the BPA is not lost, and the SIN gives adequate flexibility to allow for the qualification of new CDM products as they become available. Responses to the RFI are due by early April, with awards under the SIN expected to be made sometime in May.

 Big Movers

 Bombardier (down 4.3%) – Share prices were down this week after information surfaced about a controversial intermediary named Multiserv Overseas and its possible involvement with Bombardier in a new project in Mongolia.

 Transdigm (down 12.5%) – Share prices were down this week after U.S. Representative Ro Khanna of California requested a probe into the Company’s sales practices.

  Transactions

Aircraft Recycling International has acquired Universal Asset Management, Inc., a provider of asset management and aircraft solutions for ageing aircraft.  Terms of the deal were not disclosed.

Sussex Wire, Inc. has acquired Marox Corp., a provider of CNC precision machined orthopedic implants and aerospace components utilizing CNC multi-axis machining and additive manufacturing technologies.  Terms of the deal were not disclosed.

Valence Surface Technologies has acquired Magnetic & Penetrant Services Company, a provider of metal finishing services to the Aerospace and Defense industries as a mission-critical supplier in the aerostructure supply chain.  Terms of the deal were not disclosed.

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Industry Week in Review – March 17, 2017

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Aerospace & Defense Update

On Thursday, President Donald Trump announced a $1.1 trillion budget proposal for GFY2018 which includes $639 billion for the Department of Defense (“DoD”).  The budget request consists of $574 billion for DoD base budget programs and $65 billion for Overseas Contingency Operations (“OCO”).  Congress is unlikely to accept the proposal due to significant reductions proposed for the State Department, Environmental Protection Agency, Department of Housing and Urban Development, and National Institutes of Health.  President Trump also proposed a $30 billion supplemental funding request for the remainder of GFY2017 allocating ~$25 billion to DoD base-budget programs and $5 billion to OCO.  The supplemental proposal is not expected to pass as it requires Congress to increase current budget spending caps (requiring 60 votes in the Senate) and would cut non-defense spending by $18 billion.

President Trump nominated Patrick Shanahan, a senior Boeing executive, to serve as the Deputy Defense Secretary, the second highest position in the DoD.  Shanahan has 30 years of experience within Boeing’s military, space, and commercial aviation businesses.  The appointment signals an increasingly close relationship between the Trump Administration and Boeing, despite harsh criticism from Trump on the cost of Air Force One aircraft in December.  If confirmed by the Senate, Shanahan will not be allowed to partake in any Boeing-related issues for two years, pursuant to government policies.

Government Technology Solutions Update

According to a recent report released by the Data Foundation and PricewaterhouseCoopers, switching over to a standard business reporting (“SBR”) format could save the U.S. government and the private sector up to a combined $10 billion per year. Currently, companies in the United States spend roughly $2 trillion annually to remain compliant with Federal regulations. Using SBR, which is a standardized open data approach, would allow for the increased implementation of software which could automate costly existing manual processes for both the regulator and regulated companies.  According to the recent report, Australia’s government and private sector saved close to $1B by switching to SBR, while the Netherlands was able to significantly reduce the number of unique data elements necessary for regulatory filings.  Hudson Hollister, the interim president of the Data Foundation, noted that the Federal regulatory landscape in the United States is overly complex and inefficient.  He thinks that the first step in reducing such complexity, and therefore driving down costs for regulated companies and the regulators themselves, would be to create a standardized, shared dictionary of terms which would be used across all regulatory bodies.  Doing so would require congressional action and it remains unknown when that could happen, but Mr. Hollister believes that support for such action within the Federal government is growing and that it would be mutually beneficial for both the public and private sectors.

Will Roper, director of the Pentagon’s Strategic Capabilities Office (“SCO”), stated that the Department of Defense (“DoD”) is attempting to pivot its focus to being an increasingly data-driven organization.  In a statement made this week at the South by Southwest (“SXSW”) Conference, Mr. Roper said that the DoD needs to increase its focus on software, noting that the collection, analyzation, and protection of data is critical.  Part of doing so would be to place an emphasis on commercial technology.  While Mr. Roper acknowledged that proprietary software or systems created in-house can be incredibly effective, often they can be vulnerable to attack if they fall into enemy hands or are left behind on the battlefield.  That is less of a problem for commercial technology, which is less customized specifically for the DoD.  Mr. Roper also believes that following the private sector’s lead by pursuing research in artificial intelligence and machine learning would also be a necessary component in transforming the DoD into a more data-centric organization.

 

Big Movers

Zodiac Aerospace (down 17.6%) – Share prices were down this week after Safran signaled it could review the terms of its proposed acquisition of Zodiac after it issued a profit warning.

Unisys Corporation (up 4.6%) – Share prices were up this week after the Company launched a new service offering as a part of its analytics platform.

Transactions

American Securities, LLC has agreed to acquire Air Methods Corp., a provider of aeromedical and aerospace technology.  The deal is worth an estimated $2.5 billion.

Enlightenment Capital has made an investment in 1901 Group, LLC, a FedRAMP certified provider of infrastructure, applications management and security services through its IT-as-a-service model to Federal customers.  Terms of the deal were not disclosed.

Timothy Cooke, CEO of ASI Government, has acquired ASI Government, a provider of consulting and advisory services around acquisition policy and strategy, category management, cost-price analysis, capital planning, IT governance, change management, and process improvement.  Terms of the deal were not disclosed.

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Industry Week in Review – March 10, 2017

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Aerospace & Defense Update

To end the current continuing resolution (“CR”), which has put new-start defense procurements on hold, the United States House of Representatives voted 371-48 to pass a $578 billion defense bill for GFY2017.  The spending bill includes $516.1 billion in the base budget and $61.8 billion in overseas contingency operations (“OCO”).  If ultimately passed, it would increase funding for the troubled F-35 program by $1.2 billion and increase funding for the F-18 by ~$1.0 billion.  The Navy would also benefit by receiving an additional $1.6 billion for a new amphibious ship.  The bill will now move to the Senate where it is expected to be met with some resistance from Democrats who are expected to want to evaluate the defense bill in the context of other non-defense budgets.

Heli-Expo was held from March 7th to March 9th in Dallas, TX and hosted over 20,000 industry professionals from around the world who visited 700+ exhibitors.  With over 1 million square feet of exhibit space, the conference included a display of over 60 helicopters.  In advance of the conference, Honeywell released its updated rotorcraft delivery estimates which decreased last year’s forecast by ~400 units. Honeywell is now forecasting 3,900 to 4,400 civilian use helicopters will be delivered from 2017 to 2021.  However, even with this news, the atmosphere at the Heli-Expo conference was still filled with high energy and excitement for the industry.

Government Technology Solutions Update

KeyW Corporation agreed this week to acquire Sotera Defense Solutions, Inc. from global asset management firm, Ares Management, L.P, for approximately $235 million.  This acquisition is highly strategic as it will nearly double KeyW’s size.  At the end of 2016, KeyW employed 1,000 people and had $288 million in revenue and Sotera will add another 1,100 employees and a projected $225 million of revenue in 2017.  Sotera was attractive to KeyW given its contract mix, high-profile customer base, and unique, high-end technical capabilities.  Approximately 80% of Sotera’s revenue is derived from prime contracts, driving KeyW’s prime revenue mix up to 67% from 58%.  In its investor presentation, KeyW noted that Sotera also provides KeyW with a stronger foothold in the Intelligence Community (“IC”), as well as across the Department of Defense (“DoD”).  KeyW, which has historically served 25% of the IC’s agencies, will now have access to 60% of its agencies.  The combined company will also have enhanced cyber security, cloud computing, big data, analytics, machine learning, artificial intelligence, and agile development capabilities.  The deal is expected to generate $7 to $10 million of long-term synergies via consolidated facilities and IT infrastructure and is expected to close by the end of June.

On Monday, Microsoft announced that it would expand its Azure Government Cloud offerings with the addition of two products, Power BI Pro and HDInsight.  The latter is an open-source platform which enables its users to more easily and efficiently create powerful big data analytics solutions, applying machine learning capabilities to process large amounts of data in real-time.  Power BI Pro is a cloud-based data visualization suite capable of tracking real-time or interactive changes in data.  In addition to Power BI Pro and HDInsight, the expanded Microsoft Azure Government suite would also include Cognitive Services, allowing for voice, facial, and emotional recognition.  Industry insiders believe that the ability to analyze, visualize, and stream large amounts of data in real time has great innovative potential, and may allow for significantly increased efficiency and speed with which functions can be carried out.

Big Movers

Bombardier (down 15.2%) – Share prices were down this week after Bombardier officials suspected of bribery were arrested in Sweden.

KeyW (down 8.3%) – Share prices were down this week after the Company announced disappointing 4Q16 earnings.

Transactions

CeramTec GmbH has agreed to acquire Morgan Advanced Materials plc’s UK Electro-Ceramics Business, a provider piezo and dielectric ceramic products used in a wide range of industrial, electronics, medical, and defense applications.  The deal is worth an estimated $57.3 million.

HEICO Corp. has agreed to acquire Air Cost Control SAS, a provider of connectors, wire, cable, protection, and fastening systems.  Terms of the deal were not disclosed.

KeyW Corporation has agreed to acquire Sotera Defense Solutions, Inc., from Ares Management, L.P., a provider of technology-based systems and solutions, including cyber security, big data analytics, machine learning, artificial intelligence, and data visualization, primarily for the IC and DoD.  The deal is worth an estimated $235 million.

Leonardo S.p.A has agreed to acquire Daylight Solutions, Inc., a provider of quantum cascade laser products and technology.  The deal is worth an estimated $150 million.

Rockwood Equity Partners, LLC has acquired Ibis Tek, LLC, a provider of transparent armor and accessory products for tactical and combat vehicles.  Terms of the deal were not disclosed.

Samuel, Son and Co., Ltd. has acquired Burloak Technologies, Inc., a provider of additive metal and plastic components for aerospace, defense, and commercial high-tech companies.  Terms of the deal were not disclosed.

West Star Aviation, LLC has acquired Avant Aerospace, Inc., a provider of Dassault Falcon Jet spares and equipment.  Terms of the deal were not disclosed.

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Industry Week in Review – March 3, 2017

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Aerospace & Defense Update

According to a White House official, President Trump’s upcoming budget proposal for GFY2018 will increase the defense budget by $54 billion to $603 billion, a ~10% increase over the spending levels set in the Budget Control Act.  This proposed amount is a relatively modest ~$18 billion more than the amount former President Obama had proposed in his final budget.  Trump proposed budget cuts, notably to the State Department, to offset this defense spending increase.  A portion of Trump’s budget proposal will be submitted to Congress in a few weeks, but the final budget proposal is not expected to be completed until early May.  In addition, Trump is expected to request another $20-$30 billion in defense spending this month for the remainder of GFY2017.  The Federal government is currently operating under a Continuing Resolution and will need to finalize their spending bills for GFY2017 by April 28th.

According to the Congressional Budget Office, the U.S. Navy’s 2017 shipbuilding plan, submitted to Congress last July, will cost ~$566 billion over a 30-year period, as the Navy aims to increase its fleet from 272 ships to 308 ships.  After factoring in the current ship retirement plans, 254 ships must be built over the next 30 years in order to reach the Navy’s target of 308 ships.  According to this proposed plan, seven ships will be built in 2017, 38 ships between 2017 and 2021, and 216 ships between 2022 and 2046.  The Navy plans to build 56 new submarines, which will consume a majority of the shipbuilding budget due to the high costs of building submarines capable of firing nuclear missiles.  This proposed increase will cost ~$19 billion a year, a 36% increase over the historical average that the Navy typically spends.  However, the Navy recently indicated that it has increased its’ target goal of 308 ships to 355 ships in anticipation of Trump’s campaign promise to build a 350-ship naval fleet.

Government Technology Solutions Update

Late last week, the Department of Defense (“DoD”) launched a new collaborative, open-source software development website called code.mil.  The website was created to promote further collaboration between the public and private sectors.  The only requirement for this new site is that potential private developers would read and agree to a document called the Defense Open Source Agreement (“DOSA”), and submit a signed-off Developer’s Certificate of Origin whenever they make a contribution to something on the site.  The DOSA is what allows the Federal government to make their projects open source. Work completed by Federal employees cannot normally be patented, and thus cannot be collaboratively developed in an open source format.  However, by using the DOSA to establish a contractual framework between themselves and private developers, the DoD is able to form a relationship that allows for open-source development.  Many insiders in the private sector have praised open-source methods for leading to increased efficiencies and innovation in the development and improvement of software projects.

The Defense Information Systems Agency (“DISA”) recently issued requests for proposals (“RFPs”) for its 10-year, $7.5 billion Systems Engineering Technology and Innovation (“SETI”) contract.  SETI will be a multiple award task order contract (“MATOC”), and is designed to be complementary to procurements made via DISA’s other major upcoming indefinite delivery / indefinite quantity (“IDIQ”) contract, ENCORE-III.  According to DISA, SETI will be used to “provide complex IT engineering required to design, develop, and deliver new DISA and DoD-provided IT capabilities.” The plan would be to initially develop and implement new IT solutions using SETI, and then provide for the maintenance of those new systems through ENCORE.  More specifically, SETI would be used to address higher-level technical issues, including systems engineering, design analysis, and systems architecture, among others.  The contract is initially slated to use a best value tradeoff method for procurement, and in terms of competition will have both a small-business pool as well as a full and open pool.

Big Movers

 Aerojet Rocketdyne (up 11.7%) – Share prices were up this week after the Company completed its acquisition of Coleman Aerospace from L3 Technologies.

 Meggitt (up 9.3%) – Share prices were up this week after the Company beat profit expectations.

 Transactions

Defense and Government Solutions has acquired Ti-Nanotech, a provider of titanium plating for end products within the aerospace, defense, and commercial sectors.  Terms of the deal were not disclosed.

Jabil Circuit, Inc. has acquired Lewis Engineering, Inc., a provider of aerospace products, turbine engine components, and industrial pumps.  Terms of the deal were not disclosed.

Veritas Capital has agreed to acquire the Capital Services Business of Chicago Bridge and Iron’s (“CB&I”) Capital Services business, a provider of comprehensive and integrated maintenance services, environmental engineering and remediation, program management, and disaster response and recovery services.  The deal is worth an estimated $755 million.

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Industry Week in Review – February 23, 2017

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Aerospace & Defense Update

After Retired Vice Admiral Bob Harward turned down President Trump’s offer to be National Security Advisor, the President selected Lieutenant General Herbert Raymond (“H.R.”) McMaster to replace Retired Lieutenant General Michael Flynn.  Ret. Lt. General Flynn resigned amid reports he communicated with Russian officials and could be vulnerable to blackmail.  Lt. General McMaster has served in the military since 1984 and was most recently the Director of the Army Capabilities Integration Center in Fort Eustis, VA.  General McMaster is well known for his book, Dereliction of Duty, in which he criticizes military leadership during the Vietnam era for giving in to powerful civilian officials such as President Johnson and Defense Secretary Robert McNamara.  He believes this caused the U.S. to not have a cohesive strategy in the Vietnam War.

This week, Airbus disclosed it is looking to renegotiate government contracts linked to its troubled A400M program, which is billions of euros over budget and years behind schedule.  In 2016, €2.2 billion in charges from the program was the main driver for companywide net income falling 63% for the year.  Over the last ten years, Airbus has faced ~€7.0 billion in charges in order to correct for unanticipated redesigns and problems with suppliers.  Airbus’ woes stem from back in 2003 when the Company agreed to absorb most of the development risk associated with the airplane, which is unusual in military aviation contracts.  Currently, Airbus has 174 total orders for the aircraft, but will need to win more orders to make the program profitable.

Government Technology Solutions Update

Secretary of Defense James Mattis recently issued a memo in which he described his desire for a review of some of the Pentagon’s business practices.  This was done in order to see if there were any ways in which the Department of Defense (“DoD”) could improve the efficiency with which it conducts business.  According to Mattis, some of the initial areas of focus in this review center on, among others, logistics and supply chain management and cyber and information technology management.  Some in the industry think that Mattis could potentially use this opportunity to drive innovation in the technical capabilities of the DoD.  Mattis’ memo was not entirely comprehensive in terms of exactly what measures will be taken.  Until a more thorough review of the Pentagon’s policies is completed, it remains to be seen what initiatives the DoD will take to modernize and improve efficiencies in its IT and cyber infrastructure.

Canada-based MacDonald, Dettwiler and Associates (“MDA”) has agreed to acquire DigitalGlobe, Inc., a provider of Earth-imagery products and services.  According to the terms of the deal, the acquisition will consist of $2.4 billion in cash and equity, as well as the assumption of approximately $1.2 billion in net debt, for a total enterprise value of $3.6 billion.  This acquisition is part of MDA’s strategy to increase its market share in the United States, and would substantially increase its presence in the Intelligence Community (“IC”).  DigitalGlobe’s satellite imaging, satellite constellation, and geospatial analysis offerings provide a variety of intelligence, reconnaissance, and analytics services to the Federal government.  Additionally, DigitalGlobe acquired The Radiant Group in October of 2016 for roughly $140 million.  That deal provided it with an expanded presence with customers such as the National Reconnaissance Office (“NRO”), the National Geospatial-Intelligence Agency (“NGIA”), the Defense Intelligence Agency (“DIA”), and U.S. Special Operations Command (“SOCOM”).  MDA hopes to leverage both DigitalGlobe’s high-end technical capabilities, as well as it’s valuable customer base, as it continues its push to expand further into the American marketplace.

Big Movers

MacDonald, Dettwiler and Associates (down 10.7%) – Share prices down this week after the Company agreed to acquire Digital Globe for $3.6 billion.

Emcor (down 10.9%) – Share prices were down this week after the Company missed 4Q profit forecasts.

Transactions

Aerojet Rocketdyne Holdings, Inc. has agreed to acquire Coleman Aerospace, a provider of suborbital launch vehicles, payloads, and launch services.  The deal is worth an estimated $15 million.

BAE Systems, Inc. has acquired IAP Research, Inc., a provider of electromagnetic metal forming technology, magnetic processing of metals and ceramic powders, and electrical and mechanical engineering solutions.  Terms of the deal were not disclosed.

Gooch & Housego plc has acquired StingRay Optics, LLC, a provider of high performance optical and opto-mechanical subsystems for demanding defense and commercial applications.  The deal is worth an estimated $10 million.

Gowanda Components Group has agreed to acquire Microwave Circuits, a provider of microwave components for commercial and military applications.  Terms of the deal were not disclosed.

MacDonald, Dettwiler and Associates Ltd. has agreed to acquire DigitalGlobe, Inc., a provider of high-resolution Earth-imagery products and services sourced from its own advanced satellite constellation and third-party providers.  The deal is worth an estimated $3.6 billion.

STG Group Inc. has agreed to acquire Preferred Systems Solutions Inc., a portfolio company of CM Equity Partners, and a provider of information technology, engineering, program management, intelligence, and staffing solutions to Federal government clients.  The deal is worth an estimated $119 million.

TransDigm Group, Inc. has acquired Takata Corp., Aerospace Business, a provider of specialty technical restraints covering Airbus and Boeing platforms.  The deal is worth an estimated $90 million.

 

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Industry Week in Review – February 17, 2017

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Aerospace & Defense Update

Two days before President Trump’s visit to Boeing’s South Carolina facility for the debut of Boeing’s 787-10 Dreamliner aircraft, 74% of the workers at the facility voted against unionization.  Union organizers with the International Association of Machinists and Aerospace Workers were unsuccessful in their efforts to unionize the workforce.  Workers in Boeing’s South Carolina facility currently earn ~1/3 less than unionized counterparts.  The Company began manufacturing aircraft in South Carolina in 2011 after a debilitating eight-week strike by 27,000 unionized workers in Washington state a few years earlier.  Analysts speculate Boeing placed the production of the 787-10 Dreamliner aircraft in South Carolina to reduce the leverage of the work force in Washington state.

This past week, U.S. Defense Secretary James Mattis demanded that the North Atlantic Treaty Organization’s (“NATO”) allies increase their defense spending by the end of 2017 to at least 2% of their gross domestic product (“GDP”).  Mattis stated that the Trump administration would “moderate its commitment” to countries that have not increased spending by year end.  The U.S. currently spends more on defense spending than all other countries combined (~3.6% of the U.S. GDP) and the Trump administration aims to have more sharing of military costs among NATO allies.  NATO Secretary-General Jens Stoltenberg believes the consensus among allies is to comply with Mattis’ ultimatum.  Despite President Trump’s recent praises of Russia, Trump and Mattis reassured Stoltenberg that the U.S. is still committed to supporting NATO and its allies.

Government Technology Solutions Update

The National Institutes of Health Information Technology Acquisition and Assessment Center (“NITAAC”) has been working to make the CIO-CS contract a much more attractive vehicle for prospective Federal agencies which may be seeking to procure cloud computing services.  Throughout the past year, NITAAC has used two main mechanisms in order to make this happen.  NITAAC first lowered the CIO-CS contract access fees, from 0.5% to 0.35%. More recently, at the end of January, NITAAC released a statement saying that they would be lowering the cap on the access fee for the CIO-CS contract to $70,000, as long as it was for an order with a base or option period ceiling greater than $20 million.  The organization has also been working with the industry and cloud service providers to create a more streamlined procurement process by asking providers how their services could best be used to service various agencies across the Federal government.  These efforts have started to pay off, with the Department of Veterans Affairs (“VA”) using CIO-CS to issue its Enterprise Cloud Services for IT Infrastructure Modernization contracts. According to industry insiders, NITAAC hopes that, with cheaper and more streamlined ways to access CIO-CS, an increased number of government agencies will make it their vehicle of choice for major cloud service acquisitions.

According to recent reports, several Federal agencies have already begun work on transitioning their IT and telecom infrastructure solutions from the legacy Networx vehicle to the new $50 billion Enterprise Infrastructure Solutions (“EIS”) vehicle.  Leading the way in this transition is the United States Department of Agriculture (“USDA”), who began the transition process back in 2014.  According to Federal guidelines, agencies have until March of 2020 to make the shift from Networx to EIS.  The General Services Administration expects that awards on EIS will be made soon, sometime in the spring of 2017.  According to industry insiders, other Federal agencies, such as the Department of Justice (“DoJ”), have been issuing requests for information to figure out how various vendors could potentially meet their needs.  As they gather more information, agencies such as the USDA and the DoJ will be getting a clearer picture on how they can leverage EIS to modernize and find efficiencies in their IT and telecom networks, potentially fundamentally changing how they are able to perform their core functions in the future.

Big Movers

LMI Aerospace (up 51.8%) – Share prices were up this week after the Company announced it entered into a merger agreement to be acquired by Sonaca Group.

Zodiac Aerospace (down 6.2%) – Share prices were down this week after an activist hedge fund voiced its opposition to Safran’s acquisition of Zodiac Aerospace.

Transactions

Convergence Technology Consulting, LLC has acquired Deep Run Security Services, LLC, a provider of cyber security services, cyber risk management, cyber due diligence for mergers and acquisitions (“M&A”), and other consulting services.  Terms of the deal were not disclosed.

Sonaca S.A. has agreed to acquire LMI Aerospace, Inc., a provider of structural assemblies, kits, components, and engineering services to the commercial, business, regional, and military aerospace markets.  The deal is worth an estimated $191.0 million. 

Verizon Communications Inc. has acquired Skyward, a provider of a drone management platform that help industries use drones to plan their flights, avoid restricted airspace, and register aircraft with the Federal Aviation Administration (“FAA”).  Terms of the deal were not disclosed.

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