Industry Week in Review – December 30, 2016

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Aerospace & Defense Update

Since October 1st, the United States has already eclipsed the GFY2016’s total foreign weapon sales by almost $12 billion, bringing the total to $45.2 billion.  The sharp increase can be attributed to 72 F-15s sold to Qatar and 32 F-18s sold to Kuwait.  These two transactions, which were originally expected to close in GFY2016, represent $31.2 billion of GFY2017’s current $45.2 billion.  When including all transactions, Gulf region sales account for 90% of GFY2017 sales.

As evidenced by GE’s acquisitions of Concept Laser GmbH and Arcam AB for a total purchase price of over $1 billion, additive manufacturing (also known as 3-D printing) continues to expand its market presence.  Additive manufacturing involves growing an object in layers using metal powders, which allows for light, complex, and multidimensional products that cannot be produced using traditional machining methods.  According to research firm IDTechEx, the 3-D printing powder market will grow from its current $250 million size to over $5 billion in 2025.  GE currently employs 3-D printing technology in making fuel nozzles for its LEAP engines, components in its advanced military engines, and a large portion of its general aviation turbo prop engines.  Other aerospace companies such as Boeing, Airbus, and Roll Royce have also utilized this technology with creating parts and prototyping on a small scale.

Government Technology Solutions Update

Thomas Bossert was recently appointed as the assistant to the president for homeland security and counterterrorism.  Having previously served as deputy national security adviser, Mr. Bossert has worked to develop infrastructure protection and counterterrorism policy in previous administrations.  It is believed that his appointment could lead to an increased level of cooperation between public and private organizations in the field of cybersecurity.  Mr. Bossert is expected to help shape a cybersecurity policy focused on open market innovation.  Combined with the President-elect’s emphasis on bolstering both offensive and defensive cybersecurity capabilities, there is an expectation that cybersecurity government contractors could see a significant uptick in workload under the new administration.

According to a recently released Govini report on Department of Defense (“DoD”) contract risks, 2017 could bring increased volatility to DoD IT vendors.  It is expected that over $210 billion worth of contracts are set to expire in 2017 and the associated recompetes are expected to experience a historic level of competition, given an expanded quantity of government contractors.  In particular, IT and services firms are at the greatest risk of increased competition and have the largest number of vendors and recompete risk, which is measured based on the size of expiring contracts held, total share of expiring contracts as a percentage of a company’s business, and the number of firms that submit bids on a given contract.  For example, Govini estimates that while there was an average of six competing bids for every contract expiring in 2016, that number is expected to rise to seven in the upcoming year.

Big Movers

Bombardier (up 3.1%) – Shares were up this week after Bombardier and the Austrian Federal Railways signed a ~$1.9 billion deal for the delivery of up to 300 Bombardier Talent 3 trains.

Smith & Wesson (down 4.7%) – Shares were down this week after an industry report forecasted low 2017 sales for gun makers; Sturm Ruger was also down 2.5%.

Transactions

Leonardo – Finmeccanica S.p.A. has purchased the remaining 60% of shares in Sistemi Dinamici S.p.A, a provider of remotely piloted aircraft systems.  Terms of the deal were not disclosed.

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Industry Week in Review – December 23, 2016

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Aerospace & Defense Update

On Wednesday, President-Elect Donald Trump met with Boeing CEO, Dennis Muilenburg, and Lockheed Martin CEO, Marillyn Hewson, to discuss cost reductions to Air Force One and F-35 fighter jets.  Both aircraft manufacturers came under fire earlier this month after Trump tweeted that the costs for those aircraft are ”out of control”.  Trump stated that discussions at the meetings were very productive and Hewson echoed this same sentiment.  Muilenburg assured Trump that the Air Force One replacement aircraft would not exceed $4 billion.  Hewson similarly promised she would initiate actions that would reduce costs for F-35 aircraft.

Airbus recently announced plans to delay the delivery of its new A330neo long-range aircraft, adding to the string of production setbacks the company has experienced this year.  The world’s second largest aircraft maker originally promised to deliver the new A330neo aircraft by the end of 2017, but has since announced that the first aircraft will not be delivered until March of 2018.  The new A330neo aircraft will be produced entirely with Rolls-Royce engines which will create greater fuel efficiency and range.  However, Airbus deliveries have fallen behind this year mainly due to its engine suppliers being unable to keep up with Airbus’ aircraft quantity production.  Airbus will have to deliver 94 aircraft this month if it wants to meet its announced target of 670 aircraft this year.

Government Technology Solutions Update

The recently released National Defense Authorization Act (“NDAA”) of 2017 emphasizes more limited use of Lowest Price Technically Acceptable (“LPTA”) procurements.  Over the last few years, the prevalence of LPTA contracting has been steadily rising, partially driven by tightening Federal budgets and a focus on streamlining procurements, as LPTA has been cited as a means to reduce costs and potential protest awards.  As prevalence of LPTA usage has grown, it has drawn staunch criticism from public policymakers and industry professionals who have cautioned against the simplified evaluation methodology.  Research from the Department of Defense (“DoD”) showed that LPTA may result in short-term savings but often costs agencies more money in the long-term.  The NDAA legislates a Defense Federal Acquisition Regulation (“FAR”) Supplement revision, which would limit LPTA usage to only the most straightforward commodity procurements and specifically recommends avoiding LPTA for IT and cybersecurity services, Systems Engineering and Technical Assistance (“SETA”) services, and other knowledge-based professional services.

The Air Force recently announced the list of awardees on its Air Force Network Centric Solutions 2 (“NetCents 2”) application services contract, an $800 million extension that is expected to run through 2022.  The extension provides an additional three years of work, as the original award was expected to expire in 2019.  The list is composed of 12 small businesses who will be providing services aimed at making it quicker and easier for warfighters to obtain innovative IT services and capabilities across the full spectrum of missions and operations.  Specifically, the NetCents 2 contract offers Air Force contracting offices with a primary source for sustainment, migration, integration, training, help-desk support, and testing and operation support.

Big Movers

Meggitt (down 4.0%) – Shares were down this week after Meggitt sold its defense division to QinetiQ Group.

Kratos Defense & Security Solutions (up 5.3%) – Shares were up this week after Kratos was awarded a $23.4 million contract with the U.S. Army Aviation and Missile Command.

Transactions

Advanced Integration Technology, Inc. acquired KUKA Systems Aerospace North America, a provider of new robotic technologies and flexible automation solutions for the aerospace industry.  Terms of the deal were not disclosed.

Advanced Integration Technology, Inc. acquired Nova-Tech Engineering, a provider of critical assembly automation, materials handling and friction stir welding equipment, and tooling for the aerospace and space launch industries.  Terms of the deal were not disclosed.

Airmar Technology Corp. acquired Materials Systems, Inc., a provider of advanced materials and custom components for defense and commercial systems customers.  Terms of the deal were not disclosed.

Arlington Capital Partners acquired Molecular Products Group, Ltd., a provider advanced chemistry-based products for the defense and healthcare markets.  Terms of the deal were not disclosed.

Coalfire Systems, Inc. acquired Veris Group, LLC, a provider of cyber risk advisory, compliance assessment, technical testing, and engineering services.  Terms of the deal were not disclosed.

Corning, Inc. acquired Ace and Company, Inc., a provider of rugged fiber-optic and hybrid fiber / power connectivity solutions for harsh environments.  Terms of the deal were not disclosed.

ManTech International Corporation acquired Edaptive Systems, LLC, a provider of IT services, including software engineering, data abstraction, and business intelligence, primarily to Federal health agencies, with a significant focus on CMS.  Terms of the deal were not disclosed.  KippsDeSanto & Co. acted as the exclusive financial advisor to Edaptive Systems, LLC.

QinetiQ Group acquired Meggitt Target Systems, a provider of unmanned aerial, naval, and land-based target systems and services for test and evaluation (“T&E”) and operational training.  The deal is worth an estimated $71.2 million.

United Flexible, Inc. acquired Scotia Technology, a provider of small-diameter precision fixed tubular components for the aerospace and defense industries.  Terms of the deal were not disclosed.

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Industry Week in Review – December 16, 2016

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Aerospace & Defense Update

Boeing recently announced that it will move its’ Defense, Space, & Security business unit headquarters from St. Louis, Missouri to the Washington, D.C. area next year.  While only ~12 individuals from the senior leadership team will initially be transferred to the new headquarters, Boeing expects an additional 50 members of the defense team to be transferred over time.  The strategic decision to be in closer proximity to the Pentagon and on Capitol Hill is intended to strengthen Boeing’s relationships with its major customers and the decision makers who affect the industry.

Additionally, Boeing announced that it will reduce the production of its 777 jetliner to 5.0 aircraft per month starting in August 2017, a 40% reduction from its current rate of 8.3 aircraft per month.  The production rate is expected to drop even further in 2018 to 3.5 aircraft per month as Boeing begins to prepare for the production of the new 777X in 2020.  Thought to be a response to the slowing global sales of big jetliners, this steep cut in production is expected to slash revenue and result in significant job reductions during 2017.  However, despite this decision, Boeing plans to increase its dividend by 30% and authorized $14 billion in share repurchases over the next two years to help buoy its stock price.

Government Technology Solutions Update

Since being awarded by the Department of Homeland Security (“DHS”) in late November, the $1.5 billion Flexible Agile Support for the Homeland (“FLASH”) contract has been protested by five contractors.  The vehicle was awarded to 13 agile software companies (out of more than 100 bidders) in hopes to create a more digital government.  Awardees were selected based on qualifications across data collaboration, code development, integration support, data migration, DevOps, and metric reporting.  The award has a one-year base and two one-year options and was developed in response to the 2012 presidential memorandum “Building a 21st Century Digital Government”.  A decision on the protest is expected by March 20th, with the expectation that the number of protests could grow significantly over the coming weeks.

In Government Fiscal Year 2016 (“GFY16”), the Government Accountability Office (“GAO”) ruled in favor of companies challenging Federal procurements more often than any other year since the GAO began recording data in 2001.  The GAO sided against Federal agencies’ initial award of contracts and task orders in 139 complaints, representing ~23% of cases, up sharply from ~12% in 2015, but below the 27% high mark set in 2007.  The most common reasons the GAO ruled in protestors’ favor related to unreasonable technical capabilities, past performance, or cost and price.  GFY16 also represents the first time in more than five years that Federal agencies unanimously complied with the GAO’s recommendations.  This news comes as President Obama recently signed into law HR 5995, which permanently reinstates the GAO’s jurisdiction over protests of civilian task orders, which expired at the end of GFY16.

Big Movers

Airbus (up 6.8%) – Shares were up this week after Germany received its first tactical A400M transport plane from Airbus.

Teledyne (down 3.5%) – Shares were down this week after Teledyne announced its plans to acquire e2v technologies.

Transactions

Advanced Core Concepts acquired International Logistics Group, a provider of engineering and technical support, logistics, sustainment services, acquisition support, and IT solutions to the Department of Defense (“DoD”) and other Federal customers.  Terms of the transaction were not disclosed.

Aircraft Technical Publishers (“ATP”) has acquired CaseBank Technologies, Inc., a provider of integrated diagnostic, troubleshooting, and fault detection solutions for the aerospace and defense industries.  Terms of the deal were not disclosed.

Allcom Global Services acquired Delex Fairfax Integrated Security Systems (“DFISS”), a provider of sophisticated security software and systems as well as technology infrastructure solutions for Federal and commercial customers.  KippsDeSanto & Co. served as the exclusive financial advisor to DFISS.  Terms of the deal were not disclosed.

HDT Global, Inc. has acquired DRS Environmental Systems, Inc., a provider of rugged and transportable mobile enclosures, environmental control and decontamination units, power generators, and other ground support systems for forward deployed troops and first responders.  Terms of the deal were not disclosed.

Industrial & Financial Systems (“IFS”) AB has agreed to acquire Mxi Technologies Ltd., a provider of integrated and intelligent maintenance management software solutions for the global aviation industry.  Terms of the deal were not disclosed.

Marana Aerospace Solutions, Inc. has acquired Ascent Aviation Services Corp., a provider of heavy maintenance services, aircraft modification, transition, and refurbishment work for the aerospace industry.  Terms of the deal were not disclosed.

Teledyne Technologies, Inc. has agreed to acquire e2v technologies plc, a provider of high performance image sensors, custom camera solutions, and application specific standard products for the machine vision market.  The deal is worth an estimated $789 million.

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Industry Week in Review – December 9, 2016

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Aerospace & Defense Update

After months of culminating dissent between Defense Secretary Ash Carter and Navy Secretary Ray Mabus about naval procurement strategy, the Navy has rejected the Pentagon’s proposed $17 billion in budget cuts over the next five years.  Pentagon leaders want funding allocated more to weapon systems, aircraft and less on ship procurement.  In contrast, Secretary Mabus seeks to increase the current ship count of 273 to over 300 and argues that shipbuilding programs are “least reversible” due to the multiyear long procurement cycle and contribution of highly paid jobs to the economy.  Similar to Secretary Mabus’ goal, President Elect Trump has commented he would like to see the Navy fleet possess 350 ships.

President Elect Donald Trump has nominated General John Kelly to head the Department of Homeland Security (“DHS”).  General Kelly draws on experience as Chief of the U.S. Southern Command (“USSC”) where he oversaw planning and security operations in Central and South America and the Caribbean.  This nomination marks Trump’s third military official nomination, the first being General Michael Flynn as National Security Advisory and the second being General James “Mad Dog” Mattis who will lead as Defense Secretary.  Trump has also expressed interest in appointing General David Petraeus as Secretary of State and Admiral Michael Rogers as Director of National Intelligence.

Government Technology Solutions Update

On Tuesday, it was announced that Deltek, Inc. would be acquired by Roper Technologies for $2.8 billion.  Deltek, headquartered in Herndon, VA, is a leading provider of software for project-based businesses.  The company’s primary focus is on providing software and information solutions for government contractors, who contribute just over half of Deltek’s revenue, as well as engineering and construction firms.  Roper Technologies was interested in Deltek due to its strong competitive position in what is seen as a fairly niche market, as well as its stable customer base, which has 95+% retention rates.  Deltek had originally been taken private by Thoma Bravo, a Chicago-based private equity firm, for $1.1 billion in 2012.  Since then, Thoma Bravo has helped Deltek acquire six additional companies, most of which also focused on project-based software and information management.  Deltek expects to generate roughly $535 million of revenue and $200 million of EBITDA in 2017.  According to the company, Deltek expects to be further buoyed by an anticipated ramp-up in defense, government services, and infrastructure spending under the Trump administration.

The Commission Enhancing National Cybersecurity released a report last Friday, highlighting 53 initiatives that it believes are necessary in order to strengthen cybersecurity standards across the nation.  This commission was created by President Obama in February to address concerns regarding the state of the nation’s cyber infrastructure.  According to the commission, many of its recommendations should be put into action under the new Trump administration within the first 100 days of his taking office.  Some of the recommended actions are more ambitious than others, including the implementation of a cyber training program which would produce over 150,000 new cybersecurity professionals within four years.  The report further stressed other urgent measures to be taken immediately, such as the securing of Internet of Things (“IoT”) and other public-facing systems, which may be vulnerable and pose a critical threat if exploited.  The remainder of the recommendations generally foster increased cooperation between the public and private sector, and encourages the development and implementation of new best practices surrounding cybersecurity.  While some of the report’s recommendations are more time-sensitive than others, it stressed that a strong stance must be taken on these issues in order to maintain the security of the country’s cyber infrastructure.

Big Movers

Aerojet Rocketdyne (down 9.0%) – Shares were down this week after Aerojet Rocketdyne announced its intent to offer $200 million in convertible notes.

Comtech Telecommunications (down 4.1%) – Shares were down this week after Comtech’s 1Q17 revenue fell short of expectations

Transactions

Boeing Co. has agreed to acquire Liquid Robotics, Inc., a provider of autonomous maritime systems and developer of the Wave Glider® ocean surface robot, the first wave powered, autonomous marine robot.  Terms of the deal were not disclosed.

Curtiss-Wright Corp. has agreed to acquire Teletronics Technology Corp., a provider of high-technology data acquisition and comprehensive flight test instrumentation systems for critical aerospace and defense applications.  The deal is worth an estimated $233 million and is expected to close in early 2017.

Dassault Systemes S.A. has acquired Next Limit Dynamics SL, a provider of highly dynamic fluid flow simulation software solutions used in aerospace and defense, transportation and mobility, high-tech, energy and other industries.  Terms of the deal were not disclosed.

Gores Group has agreed to acquire Triumph Air Repair, Triumph Engines – Tempe, and the Auxiliary Power Unit (APU) Overhaul Operations of Triumph Aviation Services – Asia, providers of military, commercial, and regional airline customers with a comprehensive maintenance solution for their legacy and new APU engine models.  Terms of the deal were not disclosed.

PSI Services, LLC has acquired Computer Assisted Testing Service, Inc., a provider of full service testing for licensure, certification, assessment, and educational testing programs.  Terms of the deal were not disclosed.

Roper Technologies, Inc. has acquired Deltek, Inc., a portfolio company of Thoma Bravo, a provider of software and information solutions for project-based business, primarily focused on government contracting, engineering, architecture, and construction.  The deal is worth $2.8 billion and is expected to close by the end of December.

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Industry Week in Review – December 2, 2016

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Aerospace & Defense Update

The U.S. House of Representatives and Senate have agreed on a $619 billion defense budget for 2017, which will be finalized with votes over the next week.  This bill marks a $3.2 billion increase over President Obama’s budget request.  Democrats had pushed for an equal increase in domestic spending, but the provision was not accepted.  When compared to the President’s original 2017 defense budget request, highlights from the new bill include adding or retaining 36,000 total military personnel, a top military brass reduction of 110 generals and admirals, and no added acquisition plans for the F-35, Apache Helicopter, and F-18 Super Hornets.

Airbus will be cutting up to 1,164 jobs of its total workforce of 136,000 in an effort to execute the previously announced restructuring plan to streamline its organizational set up and increase its margin profile.  Also, more jobs may be under scrutiny as the a380 fails to procure significant new orders.  The cut jobs mostly center around communications and back office support roles, and the majority of the reductions will be in France and Germany, with the remainder in Britain, Spain, and India.  Airbus will start by asking for early retirements and voluntary departures, but the company may utilize forced reductions if it fails to meet targets.  The company hopes to have agreements in place with labor unions by mid-2017.

Government Technology Solutions Update

On Monday, Booz Allen Hamilton announced that it had signed an agreement to acquire Aquilent, also known as eGov Holdings, Inc., for $250 million.  Aquilent provides cloud and web-development solutions for the Federal government, with its major customers being the Department of Health and Human Services (“HHS”) and the General Services Administration (“GSA”).  This acquisition is slightly larger than acquisitions Booz Allen has made in previous years, such as its $53 million acquisition of agile development firm SPARC in 2015, but is consistent with the firm’s strategy to pivot its core focus away from pure-play consulting by investing in software development and other technical services.  Booz Allen has differentiated itself, historically, from some other government contractors by avoiding larger-scale deals. Instead, it has concentrated on acquiring strategically valuable capabilities and using its existing infrastructure to rapidly deploy them at scale.  Upon close, the acquisition of Aquilent will contribute roughly $35 million to Booz Allen’s top line during the remainder of its fiscal 2017, which ends on March 31st. The deal is also expected to add approximately 350 employees to Booz Allen’s burgeoning technology business.  Shortly after the deal was announced, Booz Allen’s equity partner, Carlyle Group LP, announced that it would sell its remaining 11% stake in the firm.  This would complete Carlyle’s draw-down of its ownership stake in Booz Allen, which it had originally acquired in 2008 for $2.54 billion.

On Wednesday, the Senate voted unanimously to pass the GAO Civilian Task and Delivery Order Protest Authority Act of 2016.  This bill grants the Government Accountability Office (“GAO”) jurisdiction to hear bid protests for all contracts with civilian agencies which are over $10 million in value.  While such jurisdiction for the GAO for defense contracts has been permanent since 2008, the same ability to hear protests on civilian contracts relied on the 2012 National Defense Authorization Act (“NDAA”).  That authority briefly ended when the sunset provision on the 2012 NDAA expired on September 30th.  Since then, the GAO has declined to hear or otherwise dismissed protests on several tasks orders, some as large as $200 million.  This had also affected task orders whose end customers were defense agencies, as long as those agencies were using civilian vehicles, such as Alliant or OASIS, to make procurements.  The new bill does not provide any mechanism to retroactively reinstate jurisdiction for the GAO over protests made during the interim period between the expiration of the 2012 NDAA and this new bill.  As of right now, it is unknown if the GAO will decide whether or not they will decide to hear any outstanding protests made since September.

 Big Movers

 Rockwell Collins (up 2.4%) – Shares were up this week after news broke that an investor activist was pressuring Rockwell Collins to reconsider the B/E Aerospace deal.

Textron (up 3.4%) – Shares were up this week after Textron was selected to supply its Advanced Architecture Phase Amplitude and Time Simulator (“A2PATS”) to support F-35 testing.

 Transactions

Blackwatch International has acquired FutureWorld Technologies Inc., a provider of IT services to state and Federal agencies.  FutureWorld holds a marquee contract with the Defense Microelectronics Activity (“DMEA”), designing and testing microprocessors for the Department of Defense (“DoD”).  Terms of the deal were not disclosed.

Booz Allen Hamilton Holding Corporation has agreed to acquire Aquilent (also known as eGov Holdings, Inc.), a provider of website and mobile development solutions, as well as cloud services for Federal government customers.  The deal is worth $250 million, and is expected to close by the end of 2016.

Cubic Corp. has acquired Vocality International Ltd., a provider of embedded technology that unifies communications platforms, enhances voice quality, and optimizes data throughput.  The deal is worth an estimated $10 million.

FLIR Systems, Inc. has acquired Prox Dynamics AS, a provider of nano-class unmanned aerial systems (UAS) for military and para-military intelligence, surveillance, and reconnaissance applications.  The deal is worth an estimated $134 million.

Trelleborg AB Business Unit Trelleborg Sealing Solutions has acquired CoorsTek, Inc. Subsidiary Tetrafluor, a provider of high-precision seals and bearings produced from high performance polymers and metals.  Terms of the deal were not disclosed.

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Industry Week in Review – November 25, 2016

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Aerospace & Defense Update

Boeing recently announced it has hired Kevin McAllister, former chief of GE Aviation services, to run its commercial aircraft business.  McAllister is the first outsider to lead Boeing’s commercial jet division and the most senior external company hire since 2005.  McAllister had been employed by GE since 1980, initially working as a product engineer developing commercial and military engines and moving into GE’s customer support operation in 1998.   Boeing CEO Dennis Muilenburg views McAllister’s hire as a concrete step towards Boeing’s goal of tripling service revenues over the next decade to $50 billion per year and growing Boeing’s share of the commercial market from 7% today. McAllister had a long working relationship with Boeing in his prior role at GE, and more than half of Boeing’s impressive backlog of 5,600 jetliners are powered by GE engines.  Boeing also announced its plans to merge the service arms of its commercial and defense and space operations into a new Dallas-based business unit with 20,000 employees.

Lockheed Martin and the U.S. Air Force announced they have successfully repaired 13 of the 15 F-35s that had been grounded in September due to an issue with the coolant tubes inside the aircraft fuel tanks.  Lockheed contractors and Air Force maintainers began work on the aircraft on October 7th and removed and replaced all deficient insulation.  Another 42 F-35s that are currently in production have the faulty insulation, but will be repaired and delivered by the end of 2017.  Lockheed is unsure how many more aircraft will be delivered during 2016.

Government Technology Solutions Update

According to Representative Will Hurd, there is a possibility that the Modernizing Government Technology (“MGT”) Act could pass through the Senate before the end of 2016.  The MGT Act was originally passed in the House of Representatives back in September, and was briefly put on hold prior because of the Presidential election.  Mr. Hurd, who was instrumental in pushing both the MGT Act and its predecessor act, the Modernizing Outdated and Vulnerable Equipment and Information Technology (“MOVE IT”) Act, was recently re-elected to the House and has continued to push the passing of this bill.  Mr. Hurd thinks that the Trump administration will be amendable towards a more efficient, streamlined, and updated policy for upgrading the Federal IT infrastructure.  If the Senate passes the MGT Act, it would make it easier for individual agencies to both upgrade their technology and to repurpose funds to do so. It also would lay the foundation for a centralized, government-wide fund, which could be used to finance larger IT projects.  However, many have noted that Congress has been preoccupied with issues surrounding the continuing budget resolution and as a result, time for other initiatives has been limited.  While it is possible that the MGT Act could slip into next year, Hurd still believes that there is both enough time and support for the bill to be passed in the next several weeks.

The Department of Defense (“DoD”) will soon decide on what changes to make to its procurement process for IT solutions.  According to Jane Rathburn, deputy director for Defense business systems, the DoD wants to make IT procurement as streamlined as the system the agency uses for weapons acquisition.  According to insiders, the DoD is being urged to make increased use of commercial, off-the-shelf solutions.  One of the issues that the agency runs into is high costs of customized software and IT systems which are then tailored specifically to each individual agency and application.  Such made-to-order solutions are more expensive to both acquire and maintain, relative to commercial solutions.  In order to update its processes, according to insiders, the DoD is focusing on increased cooperation between functional leaders and acquisition officers in each agency.  Doing that would enable the agency to first find problems and gaps that need fixing, identify what the ideal solution would be, and determine how IT can be used and procured to address those problems. This would allow the agencies to find commercial, and potentially cheaper, solutions.

Big Movers

Airbus (up 9.4%) – Shares were up this week after the U.S. issued a second license to Airbus for the sale of commercial aircraft to Iran.

Boeing (up 2.5%) – Shares were up this week after Boeing named Kevin McAllister the new CEO of the commercial aircraft division.

Transactions

Abaco Systems, Inc. has acquired 4DSP, LLC, a provider of commercial off-the-shelf (“COTS”) high speed digital signal processing and data acquisition solutions for the aerospace industry.  Terms of the deal were not disclosed.

L-3 Communications has acquired MacDonald Humfrey (Automation) Ltd., a provider of automated airport-checkpoint security scanners.  The deal is worth an estimated $280 million.

Industry Week in Review – November 18, 2016

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Aerospace & Defense Update

Congress has decided to extend the Continuing Resolution (‘CR”), which was set to expire on December 9th, causing government and military budgets to be delayed until at least April 2017.  This marks the eighth consecutive year where the Department of Defense will not have received an appropriations bill by year end.  Many important military programs, such as Northrop Grumman’s B-21 Long Range Strike Bomber, are anticipated to be negatively impacted as a result of the uncertainty of getting long-term funding.  Additionally, it is unclear whether the CR will include funding for the Pentagon’s recent supplemental request for additional spending in the Middle East and Afghanistan.

Boeing’s share price dropped after United Continental Holdings announced a deferral of orders valued at $5 billion as part of a cost-saving initiative.  United originally planned to convert orders for 61 Boeing 737 jetliners into the newer 737 MAX model over the next two years, but is now unsure which size MAX planes to order and when those jetliners will be delivered.  However, Boeing has stated that it will not alter its planned increase to 737 production rates as its large backlog gives it flexibility to meet the order revisions.   Boeing also recently announced plans to consolidate its defense and space business over the next four years, resulting in the closure of several facilities.  The decision will ultimately result in the elimination of 500 jobs.

Government Technology Solutions Update

On Monday, Arlington Capital Partners announced the formation of a new government services contractor, Polaris Alpha, through the merger of EOIR Technologies, PROTEUS Technologies, and Intelligent Software Solutions (“ISS”).  While the acquisition of EOIR Technologies was announced in June, according to Managing Partner Michael Lustbader, all three companies were being actively and concurrently pursued as part of an overarching strategy to create a niche player in the technology solutions market which has strong foundational relationships with customers in the Department of Defense (“DoD”) and Intelligence Community (“IC”).  By combining the capabilities of EOIR, ISS, and PROTEUS, Polaris Alpha will be able to offer a full range of cybersecurity, big data analytics, and software development solutions, as well as some additional research and development work, for its DoD and IC clients.  The new company will employ roughly 1,100 people and is expected to generate revenue of approximately $250 million next year.  According to Michael Lustbader, Polaris Alpha will pursue double digit growth through both organic and inorganic means as it continues to enhance its suite of high-end technology service offerings.

On Wednesday, the Professional Services Council (“PSC”) held its Vision Federal Market Forecast, during which it discussed future growth drivers and opportunities within the Federal marketplace.  While roughly 80% of the Federal IT budget is earmarked for maintenance and sustainment of legacy IT systems, according to PSC, new initiatives and government IT modernization legislation may reduce that amount slightly.  PSC also noted that the annual growth rate of the civilian IT budget from 2017-2022 will be roughly half of what it was between 2012 and 2017.  However, despite the slowdown in overall growth in the Federal IT budget, PSC estimates that there will be several areas in which spending and growth will likely remain strong.  Most of these areas are related to IT modernization.  The overhaul, upgrade, and replacement of legacy IT systems represents an ideal opportunity for Federal contractors according to PSC.  Cybersecurity will continue to remain a critical focus of the government, while the use of cloud computing and “X-as-a-service” is becoming increasingly ubiquitous in Federal agencies.  On the defense side, PSC estimates that Health IT, data analytics, and automation are going to be the key growth drivers in the near-term.

Big Movers

TransDigm (down 8.2%) – Shares were down this week after TransDigm’s guidance for FY17 seemed to question whether major commercial aerospace manufacturers will be able to continue their cyclical strength.

AAR (up 7.4%) – Shares were up this week after AAR announced its partnership with Air New Zealand to provide cost-per-flight-hour inventory support to the airline.

Transactions

American Industrial Acquisition Corp. has acquired Bradford Engineering B.V., a provider of equipment for satellites and spacecraft, including attitude and orbit control systems (“AOCS”), propulsion, avionics, and thermal solutions.  The deal is worth an estimated $1.0 million.

Arlington Capital Partners has acquired Intelligent Software Solutions, Inc. and PROTEUS Technologies., a developer of a suite of data analytics solutions for Federal, international, and commercial clients, and a provider of cybersecurity research, remediation, and response services for a variety of Federal customers, respectively.  Terms of the deal were not disclosed.

Chengdu Aerospace Superalloy Technology has agreed to acquire Gardner Aerospace Ltd., a provider of metallic aerostructure details, equipment, and engine components.  The deal is worth an estimated $405.0 million.

Sysorex Global Holdings Corporation has agreed to acquire the assets of Integrio Technologies LLC, a provider of IT network integration and engineering, application lifecycle, and acquisition services for DoD, IC, and State and Local government clients.  The deal is worth an estimated $6.1 million.

ViaSat, Inc. has acquired Arconics Ltd., a provider of wireless In-flight Entertainment (“IFE”), Electronic Flight Bag (“EFB”), Airline Document Management, and Cabin Management solutions.  Terms of the deal were not disclosed

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Industry Week in Review – November 11, 2016

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Aerospace & Defense Update

After President Elect Donald Trump’s unexpected win on Tuesday, U.S. defense firms such as Raytheon, Northrop Grumman, and General Dynamics saw significant stock gains on Wednesday.  The gains are likely attributed to expectations that President Elect Trump will seek to increase U.S. defense spending over current levels.  Byron Callan of Capital Alpha Partners, a strategic policy research firm, believes spending will be “at least $18 billion more for GFY17 than the [Obama] Administration’s request.”  Additionally, foreign defense stocks like BAE, Thales, Tokyo Keiki, and Korea Aerospace Industries all had significant gains Wednesday.  These foreign gains can be sourced to Mr. Trump’s past criticisms of the U.S. providing excessive foreign military aid and industry expectation that foreign governments will have to increase military spending with its own respective domestic contractors to compensate.

On Monday, November 7, Arconic announced a $1 billion multi-year contract to provide proprietary aluminum alloys to Airbus jetliners.  The contract begins in January 2017, and Arconic will be the sole supplier of some wing, fuselage and structural components for Airbus.  After formally separating from Alcoa on November 1, 2016, this win marks the first major contract for Arconic and the first use of Arconic’s industry leading metal stretching technology, which allows Arconic to produce some of the strongest and largest aircraft wing ribs.  With roughly $1.6 trillion in order backlogs between Airbus and Boeing,  Arconic is hopeful for more aerospace contracts in the future.

Government Technology Solutions Update

According to industry experts, now that the 2016 Presidential and Congressional elections have taken place, we have some enhanced visibility into likely near-term policy changes that could impact government IT priorities and initiatives.  Republican Will Hurd of Texas and Senator Ron Johnson were both re-elected on Tuesday night.  Hurd, who introduced the Modernizing Outdated and Vulnerable Equipment and Information Technology (“MOVE-IT”) Act and its successor, the Modernizing Government Technology Act (“MGT”), and Johnson are expected to provide crucial support to IT modernization initiatives moving forward.  There is less certainty surrounding President-elect Donald Trump.  Trump did not make IT initiatives a key part of his campaign and there is disagreement regarding the level of importance the Trump administration will put into upgrading or otherwise overhauling IT systems across the Federal government. However, we will have more insight into his likely pursuits after his first 100 days in office once he has made key cabinet selections.  Industry experts are also carefully watching to see if the Trump administration will increase outsourcing of certain government functions under Circular A-76, the use of which had been mostly prohibited in President Obama’s administration.  Many believe that with the new Republican-majority government in place, there could be an increased desire to seek private-sector solutions to government issues.

CSRA held its Emerging Technology Day last week, during which the Company heard from, and held meetings with, eight different technology companies in order to discuss potential partnership efforts.  The companies showcased a variety of capabilities, from cloud infrastructure and search engine technology, to machine learning and cybersecurity.  CSRA used the time to better understand the potential uses of these capabilities and how they could potentially use their own experience and resources to leverage the skills and technology of smaller, commercial companies across the Federal marketplace.   According to CSRA’s Chief Technology Officer (“CTO”), Yogesh Khanna, innovation is becoming an increasingly crucial component of government contracting.  CSRA hopes that, by meeting with and speaking to companies closer to the forefront of innovation, it can better understand how to create unique and innovative solutions for the Federal marketplace.

Big Movers

Astronics (down 4.3%) – Shares were down this week after Astronics reported 3Q16 revenue of $155 million, down from 3Q15 revenue of $200 million.

General Dynamics (up 12.5%) – Shares were up this week after industry expectations suggest President Elect Trump will increase U.S. defense spending over current levels.

Transactions

ESCO Technologies, Inc. has acquired Mayday Manufacturing Co., Inc. and its affiliate, Hi-Tech Metal Finishing, Inc.  Mayday Manufacturing provides mission-critical bushings, pins, sleeves, and precise-tolerance machined components while Hi-Tech provides full service metal processing to aerospace OEM’s and Tier 1 suppliers.  Terms of the deal were not disclosed.

Med-Eng Holdings ULC has agreed to acquire Pacific Safety Products, a provider of body armor to protect against ballistic, stab and fragmentation threats, ballistic blankets to reduce blast effects, tactical clothing, and protective products against chemical and biological hazards.  The deal is worth an estimated $15.4 million.

National Response Corp. has acquired Boom Technology, Inc., a provider of environmental and emergency response solutions for marine and land oil spills.  Terms of the deal were not disclosed.

Ontic Engineering and Manufacturing, Inc. has agreed to acquire a portfolio of legacy avionics products from GE Aviation, which provides legacy avionics parts servicing the military and commercial aviation markets, including electro mechanical, barometric, gyroscopes and electronics products.  The deal is worth an estimated $61.5 million.

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Industry Week in Review – November 4, 2016

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Aerospace & Defense Update

The National Business Aviation Association (“NBAA”) hosted its annual Business Aviation and Convention Exhibition in Orlando from November 1st through the 3rd.  During the week, roughly 27,000 visitors from executive management, flight department personnel, sales and marketing, and finance / legal firms visited over 1,100 exhibitors to network, view the newest products, and keep up with the latest trends.  In advance of the conference, Honeywell had released a fairly pessimistic business jet forecast where the Company lowered its 10-year total jet delivery forecast from 9,200 jets to 8,600 jets.  However, the atmosphere at the NBAA conference was still filled with high energy and excitement.

After more than a year of negotiations with Lockheed Martin concerning the ninth lot of Low Rate Initial Production (“LRIP”) for the F-35, the Pentagon has given a unilateral price ultimatum of $6.1 billion to the aircraft manufacturer for production of 57 F-35 aircraft.  The $6.1 billion contract value equates to a price of $107 million per F-35, a 3.7% average decrease over the lot eight price per plane in 2014.  The decision to end negotiations would mark the largest unilateral action in the Department of Defense (“DoD”) history.  F-35 spokesman, Joe DellaVedova, explained the unilateral action saying, “[the Pentagon] believed further negotiations would not result in the government and Lockheed coming to an agreement on total price.”  At this stage, Lockheed must either accept the $6.1 billion dollar terms or appeal the contract.

Government Technology Solutions Update

On Monday, the Court of Federal Claims issued an oral ruling in favor of Palantir Technologies Inc. in a lawsuit the company filed against the U.S. Army.  Palantir claimed that the Army was in violation of the 1994 Federal Acquisition Streamlining Act when it decided to bypass pre-existing commercial solutions in building out the latest phase of its Distributed Common Ground System (“DCGS”).  DCGS is an Army platform which collects and analyzes surveillance and other intelligence in order to promote situational awareness and support the decision-making capabilities of battlefield leaders.  Palantir, which specializes in big data analytics and data mining, claimed that its Gotham platform was robust, proven, and versatile enough to be used by the Army for DCGS, and tried unsuccessfully to compete for the contract.  The ruling from the Court of Federal Claims is one of the first upholding the Acquisition Streamlining Act, which compels Federal agencies to seek existing commercial solutions before attempting to proprietarily develop them. If this decision is upheld and more strictly enforced, it could prove to be a momentous shift in the manner through which Federal agencies procure future solutions.

During its third-quarter earnings call on Thursday, Leidos announced that it had already met its 2016 cost savings target after its $4.6 billion acquisition of Lockheed Martin’s Information Systems & Global Solutions segment, which closed earlier this year.  Leidos had originally estimated that it would likely recognize approximately $25 million in cost synergies in 2016 alone, but it is now on pace to surpass this figure.  The company further projects that the total cost savings in future years could be worth as much as $350 million.  A large portion of identified savings comes from the upgrade and integration of IT systems and back office accounting and finance systems, a reduction in pension costs, and the paring down of real estate assets, all of which Leidos hopes will increase efficiency and eliminate redundancy in the newly merged entity. Leidos attributes the timely recognition of these synergies to the effective pursuit and execution of diligence and integration preparation efforts against an aggressive timeline.

Big Movers

Leidos (up 5.7%) – Shares were up this week after Leidos raised its revenue and earnings per share guidance and announced it had already met its 2016 cost saving targets resulting from the acquisition of Lockheed Martin’s Information Systems & Global Solutions segment.

Spirit AeroSystems (up 6.4%) – Shares were up this week after Spirit AeroSystems announced share repurchases worth $600 million

Transactions

Altamira Technologies Corp. has acquired APG Technologies, Inc., a provider of advanced data management, private cloud engineering, as well as information assurance and cybersecurity services for a variety of DoD and IC clients.  Terms of the deal were not disclosed.

 EDAC Technologies Group has acquired Flanagan Industries, a provider of precision machined and fabricated aerospace engine components and assemblies.  Terms of the deal were not disclosed.

EQT Partners AB has agreed to acquire CHEP Aerospace Solutions, a provider of lightweight pooling solutions and a range of ULDs that include aluminum and lightweight containers, standard and heavy-duty pallets, as well as specialty ULDs.  The deal is worth an estimated $130.0 million.

Ferro Corporation has acquired Electro-Science Laboratories, Inc., a provider of thick-film pastes and ceramic tape systems that enable important functionality in a wide variety of industrial and consumer applications.  The deal is worth an estimated $75.0 million.

Global Aviation Services, LLC has acquired D&D GSE, a provider of leading ground support equipment maintenance.  Terms of the deal were not disclosed.

Huntington Ingalls Industries Inc. has agreed to acquire Camber Corporation, a provider of engineering and technical solutions, including agile software development and cybersecurity, to Department of Defense (“DoD”), Intelligence Community (“IC”), and Civilian customers within the Federal government.  The deal is worth $380 million and is expected to close this quarter.

Mercury Systems, Inc. has agreed to acquire CES Creative Electronic Systems, SA, a provider of subsystems solutions including primary flight control units, flight test computers, mission computers, and command / control processors.  The deal is worth an estimated $38.0 million

Satcom Direct, Inc. has agreed to acquire TrueNorth, Inc., a provider of satellite communications solutions for business jets and avionics OEMs.  Terms of the deal were not disclosed.

Industry Week in Review – October 28, 2016

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Aerospace & Defense Update

Rockwell Collins announced that it inked a deal to buy B/E Aerospace for ~$8.3 billion, valuing B/E at $62 / share, a 22.5% premium over the prior Friday’s closing share price. The proposed deal would consolidate two of the biggest aircraft systems manufacturers, increasing their ability to cross-sell electronics and plane fittings, as well as position Rockwell to lead the development of the “smart” aircraft. This acquisition will allow Rockwell to improve its content on aircraft, as well as give it more direct exposure to commercial airlines.

GE recently abandoned its bid to purchase the German 3D printer maker SLM Solutions for $745 million, and instead purchased a privately held German 3D printing firm, Concept Laser, for $599 million. Elliot Advisors, which acquired a blocking stake of 20% of SLM, rejected GE’s bid blocking GE from meeting its 75% minimum acceptance threshold. GE also raised its bid to purchase Arcam to $696 million. Arcam, Concept Laser, and SLM are three of the world’s top makers of machines for metals-based 3D printing. GE’s recent investment in 3D printing allows it to produce parts more efficiently than traditional production methods used by competitors.

Government Technology Solutions Update

The Defense Logistics Agency (“DLA”) recently made public the Government Accountability Office’s (“GAO”) ruling which rejected Oakland Consulting Group’s protest on the $6 billion J6 Enterprise Technology Services (“JETS”) contract. Oakland had originally filed a protest against DLA when the agency eliminated the company from competition on JETS. DLA cited a lack of detail from Oakland on its original proposal, and that the thoroughness of the original proposal was inadequate to sufficiently address the requirements DLA was seeking. GAO’s decision to deny the protest was made, in part, because in its protest Oakland was “repeating – essentially verbatim – the statements made in its initial protest.” With the GAO’s decision, DLA is now free to begin making awards on JETS, expecting to make awards to bidders in three different levels of competition – 8(a), small business, and full & open – and across 21 various IT task areas.

The General Services Administration (“GSA”) kicked off the next phase of its “Making it Easier” initiative which aims to reduce barriers to entry which have historically prevented or significantly dissuaded some small businesses from engaging with the Federal government. One of the initiatives rolled out was a quick start guide for the IT Schedule 70 Roadmap. The GSA hopes that this can be used as a reliable resource for potential contractors to use to guide them through the process of winning Federal business. Recently, the GSA has also placed emphasis on making the contracting processes faster and more efficient, especially for smaller startup companies, which they believe can bring crucial and innovative solutions to the Federal marketplace. According to numbers released by the GSA alongside the announcement of these new initiatives, the average time it takes for a small business to get on a Federal schedule is only 31 days – and two days for a contract modification – as a result of efforts made in the past year to increase engagement with smaller businesses.

Big Movers

B/E Aerospace (up 17.6%) – Shares were up this week after Rockwell Collins announced it has entered into a definitive agreement to acquire B/E Aerospace.

Curtiss-Wright (up 6.9%) – Shares were up this week after Curtiss-Wright announced its profit increased 36% since 3Q15.

Transactions 

Cognosante, LLC has acquired Business Information Technology Solutions, Inc. (BITS), a provider of IT consulting, health solutions, enterprise resource planning, and business analytics primarily to healthcare clients in the Department of Defense (“DoD”), Department of Health and Human Services (“HHS”), and the Department of Veterans Affairs (“VA”). Terms of the deal were not disclosed.

General Electric Co. has agreed to acquire a 75% stake in Concept Laser GmbH, a provider of powder-bed based laser additive manufacturing machines. The deal is worth an estimated $599 million.

Hearst Corp. has agreed to acquire CAMP Systems International, Inc., a provider of software-as-a-service (“SaaS”) solutions that manage and track the maintenance of jets, turbo prop aircraft, and helicopters. Terms of the deal were not disclosed.

Precision Castparts Corp. has acquired Atlantic Precision, Inc., a provider of 3D metal printing and additive manufacturing technologies for customers in the aerospace and defense industries. Terms of the deal were not disclosed.

Rockwell Collins, Inc. has agreed to acquire B/E Aerospace, Inc., a provider of cabin interior products for commercial aircraft and business jets. The deal is worth an estimated $8.3 billion.