Industry Week in Review – October 21, 2016

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Aerospace & Defense Update

Orbital ATK successfully launched an unmanned Antares rocket into space this past week, almost two years after an engine malfunction caused the rocket to explode immediately after take-off. Orbital ATK replaced its older-designed Russian engines with more advanced Russian built engines which allow the rocket to carry transport cargo in excess of two tons. This launch was the third flight of the reengineered capsule which has a greater pressurized cargo capacity and improved solar panel arrays. The National Aeronautics and Space Administration (“NASA”) has contracted Orbital ATK to transport cargo into orbit over the next decade, as the agency has opted to rely on corporate cargo vehicles and company-built capsules to service the space station. Orbital ATK also aims to launch midsize commercial and scientific payloads for customers other than NASA.

After the November election, 70 House lawmakers are hoping to increase appropriations for F-35 purchases in the FY17 budget. Both the Marine Corps and Air Force recently declared initial operating capability, adding a sense of urgency to the production of F-35s. These lawmakers feel F-35 production must be increased in order to meet future threats and anticipate that an increase in production would help to lower unit costs. While the House bill requests 11 F-35s, the Senate bill only requests four F-35s. The Senate bill also requests an increase in the advance procurement of F-35s by $100 million to allow the Air Force to increase its F-35 production rate in 2018. The 70 House lawmakers are advocating an increase in funding so the Air Force can reach its goal of 120 U.S. aircraft per year as soon as possible.

Government Technology Solutions Update

On Monday, Engility Holdings Inc. announced that they won a five-year, $369 million award to provide a variety of professional services for the U.S. Department of Transportation’s (“DOT”) Volpe National Transportation Systems. At just under $75 million per year, this is the largest contract that Engility has won to date since it was spun off from L-3 Communications in 2012, marking a major milestone as the Company continues to shift its focus towards larger business opportunities. Engility has aggressively pursued this goal both organically and inorganically through increased bidding on larger-scale contracts as well as through its strategic acquisition of TASC Inc. in 2014, which helped to increase their average contract bid to $20 million in 2015. Given recent strategic shifts to focus on larger procurements, it is expected that this figure could double by the end of 2016. These efforts have put Engility on pace to grow the total value of submitted bids to $5 billion, up from $3 billion in 2013.

According to a recent presentation made by the Federal Risk Authorization and Management Program (“FedRAMP”), recent efforts made by the organization to streamline the authorization process for cloud services have shown considerable signs of success. Authorization for new cloud services has increased 85% since the strategy was initially announced in August, leading to the authorization of more than 75 cloud service providers, with an additional 50 providers currently in line for imminent approval. The effort aims to reduce the lead-time for authorizations without compromising on the program’s stringent security standards, with the goal of giving Federal agencies the “go-ahead” to consider these services in as little as three months. The recently launched FedRAMP Dashboard also lends additional transparency to the process by allowing the Federal community to view the available services as well as which agencies are utilizing them.

Big Movers

Leonardo – Finmeccanica (up 9.0%) – Shares were up this week after Leonardo – Finmeccanica increased its stake in Avio.

Orbital ATK (Up 3.4%) – Shares were up this week after Orbital ATK’s unmanned Antares rocket launched into space.

Transactions

Aavid Thermalloy, LLC has acquired Thermacore, Inc., a provider of high performance thermal management, electronics cooling, and materials solutions. Terms of the deal were not disclosed.

Orangewood Partners, LLC has acquired George Industries, LLC, a provider of mission critical engineered components for the aerospace, defense, and industrial end markets. Terms of the deal were not disclosed.

Saab AB has acquired Nordic Defence Industries A/S, a provider of mine disposal charge systems for the naval defense industry. Terms of the deal were not disclosed.

Space2 and Leonardo – Finmeccanica have agreed to acquire Avio Space Propulsion, a provider of advanced technologies for space launchers and missiles. The deal is worth an estimated $334 million.

xG Technology, Inc. has agreed to acquire the assets of the Vislink Communication Systems division, a provider of secure video communications and mission-critical solutions for law enforcement, defense, and homeland security applications. The deal is worth an estimated $16 million.

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Industry Week in Review – October 14, 2016

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Aerospace & Defense Update

Boeing landed an agreement with Qatar Airways for up to 100 jets, comprised of orders for 10 777s, 30 787s, and a signed letter of intent for up to 60 737s, with a combined total list price of $18.6 billion.  This sale comes after Qatar Airways CEO, Akbar Al Baker, publicly criticized Airbus over its delays with the A320neo and A350 in June.  However, due to Boeing’s widebody sales slump this year, even with this new order, the company still needs to procure ~40 more 777 sales by year end in order to maintain its production target of building 7.0 777 aircraft per month in 2017, which is already down from the current production rate of 8.3 per month.  Additionally, with Qatar Airways’ intent to buy up to 60 737s, the sale marks an important shift from the Middle East carrier’s current strategy of only using Airbus A320s for its narrowbody fleet.

Lockheed Martin disclosed its partners in its bid to design the U. S. Airforce’s next Intercontinental Ballistic Missiles (“ICBMs”), which will be put into operation in the late 2020s.  Lockheed intends to partner with General Dynamics on the weapon system command and control, Draper Laboratories on guidance navigation and control systems, Moog on cross-vector control systems, and Bechtel for launch facilities.  Additionally, Lockheed selected Aerojet and Orbital ATK for missile propulsion in hopes that competition between the two firms will allow Lockheed to procure the technology and parts at a cheaper cost.  Lockheed is not alone in its bid for designing the new ICBM; in stark contrast, both Boeing and Northrop have confirmed they are vying for the contract but have not disclosed their partners.

Government Technology Solutions Update

Vectrus formally filed a bid protest this week roughly two weeks after the company lost its Kuwait Base Operations and Security Support Services (“KBOSSS 2.0”) contract to a KBR-Triple Canopy joint venture (“JV”).  KBOSSS 2.0 currently represents over a third of Vectrus’ 2016 revenue, having contributed roughly $218 million of Vectrus’ $618 million in year-to-date revenue.  Vectrus has held KBOSSS 2.0 for five years, during which time it provided logistics and engineering services at a variety of military bases and facilities in the Middle East.  This is the second major Army contract that Vectrus has lost in the second half of 2016 alone, coming after the company lost its recompete on the Army Prepositioned Stock-5 (“APS-5”) contract in early September.  Combined, the two contracts contributed more than $300 million to Vectrus’ top line in the first six months of 2016.  As a result, shares in Vectrus have fallen sharply, and are currently down over 50% since the end of August when the company was trading near its all-time high.  The Government Accountability Office (“GAO”) will make a decision on Vectrus’ APS-5 and KBOSSS 2.0 protests by the end of December and January, respectively.

According to a recent report, the Department of Homeland Security’s (“DHS”) contracting obligations will continue to expand in fiscal 2017 (“FY2017), with a particular emphasis on acquiring technology solutions such as IT and software upgrades.  The agency’s top spender, the Office of Procurement Management (“OPO”) has earmarked over $1.2 billion to be spent on a variety of cybersecurity programs, including the National Cybersecurity Protection System and National Cybersecurity and Communications Integration Center.  Other agencies within DHS will be focusing on upgrading legacy technology.  In the case of the U.S. Customs & Border Protection (“CBP”), funds will be flowing towards the procurement of updated biometrics systems and IT modernization initiatives, while the Transportation Security Administration (“TSA”) will spend roughly $200 million on upgrading baggage checking systems.  This will be the fifth straight year of growth in DHS’ contract obligations, with the agency seeing total growth of over 21% since FY2013.

Big Movers

Cubic (Down 11.3%) – Shares were down this week after Cubic lowered its profit guidance due to Department of Defense funding delays.

Magellan Aerospace (Up 4.4%) – Shares were up this week after Magellan secured multi-year 777X and 787 contracts.

Transactions

Delair-Tech has acquired Gatewing UAS, a provider of turnkey unmanned aircraft systems (UAS) for terrain mapping and surveying. Terms of the deal were not disclosed.

DigiGlobe, Inc. has agreed to acquire The Radiant Group, a provider of geospatial information analysis services to the U.S. intelligence sector.  The deal is worth an estimated $140 million.

Nammo A/S has acquired Berger Bullets, LLC, a provider of premium rifle bullets for varmint hunting, target shooting, game hunting and tactical use.  Terms of the deal were not disclosed.

Preferred Systems Solutions, a CM Equity Portfolio Company, has acquired Synaptic Solutions, Inc., a provider of cloud architecture, engineering, and other advanced technology solutions to the Intelligence Community.  Terms of the deal were not disclosed.

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Industry Week in Review – October 7, 2016

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Aerospace & Defense Update

For the year through September 27th, Boeing has garnered 357 gross orders, a sharp decrease from 499 orders last year during the same time period.  The slowdown in orders has caused the Company’s book to bill ratio to drop to 0.5 compared to 0.7 during the same period last year.  Widebody sales have been most affected, with Boeing only procuring 59 gross orders through the end of September, while receiving 158 orders during the same time last year.  In order to reach a book to bill ratio of 1.0, Boeing needs 380 new orders by year-end to match likely deliveries of about 750 jets.  Contrary to analyst opinions, Boeing CEO, Dennis Muilenburg, maintains the situation is not a pressing issue and affirms that “we continue to trend towards a book to bill of about one.”

During the Association of the US Army conference (“AUSA”), Air Force Chief of Staff General David Goldfein stated that he expects repairs of the recently grounded F-35A to be completed by December. The Air Force grounded the joint strike fighter after a problem was found in coolant line insulation, which could ultimately lead to structural damage to the aircraft if not fixed.  Even though the General believes the problems for the F-35 are short term, this new repair marks yet another issue with a project for which costs have almost doubled the original program budget of $200 billion.  The Air Force also continues to investigate an incident on September 23rd when a F-35 erupted in flames during an engine startup.

Government Technology Solutions Update

According to inside sources, Harris Corporation has begun seeking a sale of its IT services business housed within its Critical Networks division.  It is estimated that such a divestiture might be worth as much as $500 million, according to industry insiders.  This move comes roughly two months after activist hedge fund Jana Partners LLC acquired a ~2% stake in the company in August.  At that time, there had been speculation that this move was an attempt on the part of Jana Partners to unlock value by identifying and shedding non-core or otherwise underperforming assets and businesses within the Harris umbrella.  This move would be one of the largest in a string of Harris divestitures in recent years, and highlights the trend of government contractors realigning strategic priorities by carving out certain business lines that are not believed to be critical to value creation for the parent company.

The U.S. Army completed 21 major upgrades to its IT infrastructure in 2016, with another 44 planned for completion within the next fiscal year.  The upgrades are a result of objectives aimed at consolidating the Army’s IT infrastructure while reducing fragmentation and unnecessary complexity in its organization.  According to officials, these upgrades were among the first modernization initiatives implemented Army-wide in over a decade.  By implementing these changes en masse, the government hopes to capture major cost saving via bulk procurement of critical IT products and services.  Future goals include the procurement of software-as-a-service (“SaaS”) solutions which would increase the mobility of soldiers, as well as the implementation of a more centralized, complete, and robust cybersecurity architecture.

Big Movers

Honeywell (Down 8.3%) – Shares were down this week after Honeywell lowered its third quarter earnings guidance.

TASER (Down 21.6%) – Shares were down this week after the New York Police Department awarded a five-year body-camera contract to a competitor.

Transactions

Accenture plc has agreed to acquire Defense Point Security, LLC, a provider of advanced cyber defense and response capabilities, cyber operations, cyber analytics, and security engineering for Federal government customers.  Terms of the deal were not disclosed.

Attain LLC has acquired ACF Solutions, a provider of cloud-based technology solutions and Salesforce customer relationship management (“CRM”) systems to education and nonprofit customers. Terms of the deal were not disclosed.

Calspan Holdings has acquired Triumph Aerospace Systems – Newport News, Inc., a provider of aerospace hardware and prototype systems for ground test and flight applications.  Terms of the deal were not disclosed.

Carlisle Companies, Inc. has acquired Star Aviation, Inc., a provider of design and engineering services, testing and certification work, and manufactured products for in-flight connectivity applications.  Terms of the deal were not disclosed.

Handy & Harman Ltd. has acquired ElectroMagnetic Enterprise, a provider of complex, custom engineered electric motors and generators, including a wide range of customized electromagnetic products.  The deal is worth $64.5 million.

L-3 Communications Corporation has acquired Aerosim Technologies, Inc., a provider of simulation-based training products for pilots as well as maintenance technicians in the aviation industry. Terms of the deal were not disclosed.

Micross Components, Inc. has acquired RTI International’s Microsystem Integration and Packaging (MIP) Group, a provider of value-added semiconductor processing services for government and commercial clients.  Terms of the deal were not disclosed.

MilDef AB has acquired The Rugged Computer Product Lines of American Reliance, Inc., a provider of rugged computers, providing COTS, modified COTS, and customized rugged solutions to the defense, industrial, and public safety sectors.  Terms of the deal were not disclosed.

MRO Holdings has acquired Flightstar Aircraft Services, a provider of heavy aircraft MRO services, including heavy maintenance and inspection services, as well as modification services for narrow body air transport aircraft. Terms of the deal were not disclosed.

QTS Realty Trust has acquired the government cloud business of VMware, an infrastructure-as-a-service, FedRAMP-compliant platform for the implementation of cloud storage solutions.  Terms of the deal were not disclosed.

Winchester Electronics Corporation has acquired Tekna Seal, LLC, a provider of hermetically sealed connectors, glass-to-metal feedthroughs, lithium battery seals and ceramic-to-metal seals.  The deal is worth $10.5 million.

 

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Industry Week in Review – September 30, 2016

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Aerospace & Defense Update

Safran, a French engine manufacturer, recently announced it has entered into exclusive talks with private equity firm Advent International Corp. about the sale of its Morpho identity and security business for $2.7 billion.  Advent plans to combine Safran’s identity and security business with Oberthur Technologies, which was acquired by Advent back in 2011.  This proposed deal allows Safran to be focused exclusively on aerospace and defense, as it sold off its explosives detection business earlier this year.  The identity and security business, currently located in France, employs 7,800 workers and generated revenues of ~$1.7 billion during 2015.  The deal is expected to close next year, pending regulatory approvals in the U.S. and Europe.

Congress passed a Continuing Resolution (“CR”) this past week funding the government and military through December 9th.  The CR keeps military spending at its current levels and does not implement the 2017 defense budget increase that was targeted to begin at the end of this week.  The House of Representatives (“House”) and Senate strongly disagree over the proposed $18 billion increase in spending proposed in the 2017 defense budget.  The House believes a spending hike will allow the military to be prepared for an immediate crisis and to purchase new aircraft and ships.  The Senate opposes the increase because they feel it will take funding away from the overseas war fund causing it to run out of money in April. Because of the inability of Congress to pass a budget, the Department of Defense has had difficulty developing long-term planning projections and goals.  Congress plans to resume negotiating the 2017 defense budget after the November election.

Government Technology Solutions Update

Microsoft’s Customer Relationship Manager Online received a provisional authority to operate via the Federal Risk and Authorization Management Program’s (“FedRAMP”) new accelerated system.  It took Microsoft only 15 weeks for its cloud services to be reviewed and approved, which is roughly seven times faster than the average time it took to gain approval under the old system.  According to FedRAMP Director, Matt Goodrich, the accelerated approval process focuses on taking a more iterative and efficient approach, with a much heavier emphasis on a review of capabilities compared to documentation review, which had been the main area of focus of the older system.  The accelerated process was created in an attempt to reduce the length of time and resources spent on authorizing new cloud services.  Ideally, the accelerated FedRAMP process will reduce the average authorization timeline for new proposals to six months, compared to the current average of nine to eighteen months.

Oracle Corporation recently made the decision to leave the General Services Administration’s (“GSA”) schedule program for third-party reselling opportunities within the Federal government.  This decision was based, in part, on what Oracle and many other industry insiders view as inefficiencies in the GSA’s schedule program, and that the litigation risk of doing business through GSA schedules outweighs the benefits of using them.  The Department of Justice (“DoJ”) has recovered over $26 billion through the False Claims Act, with Oracle alone paying $350 million in settlements over the past 10 years.  As a result, Federal contractors have been attempting to reduce their exposure to business being done through GSA schedules, instead pursuing other contract opportunities and vehicles which they see as less litigious.  Oracle’s decision to leave the GSA schedule program makes it one of the most high-profile contractors to do so, with some in the industry fearing that an increasing number of businesses may follow suit.

Big Movers

Vectrus Inc. (Down 46.9%) – Shares were down significantly this week after Vectrus announced that the U.S. Army did not renew its contract to provide support services in Kuwait.

Mercury Systems (Up 4.5%) – Shares were up this week after Mercury Systems received $11.7 million in follow-on orders from an unnamed defense prime contractor.

Transactions

Acorn Growth Companies has acquired Raisbeck Engineering, Inc., a provider of systems that increase productivity and safety for aircraft through the infusion of advanced technology into in-service and new production aircraft.  Terms of the deal were not disclosed.

Vista Equity Partners has acquired GovDelivery, Inc., a provider of digital marketing and professional solutions, including digital engagement, training, and open data services for government organizations.  The deal is worth $153 million.

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Industry Week in Review – September 23, 2016

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Aerospace & Defense Update

While the United Nations Assembly was meeting in New York, Airbus and Boeing announced that each company has received permission from the U.S. government to sell commercial aircraft to Iran.  Boeing plans to sell 80 new aircraft and lease an additional 29 Boeing 737s to Iran for ~$25 billion.  Airbus, on the other hand, only received approval from the U.S. Treasury on one of the two licenses it requested, allowing it to sell 17 aircraft to Iran for ~$1.8 billion, rather than the 112 aircraft requested.  Airbus is hoping to receive approval for the second license making the total agreement with Airbus and Boeing worth ~$50 billion.  Even though Airbus is internationally based, it was required to seek approval from the U.S. Treasury because at least 10% of the plane’s components will be manufactured in America.  Many believe that the upcoming U.S. presidential election may affect the execution of the proposed sales agreement, since Republican Presidential candidate Donald Trump has threatened to revoke the recent nuclear deal with Iran which allowed for these sales to be made.

U.S. Defense Secretary Ash Carter believes the lack of cohesiveness and stability among Congressional members when negotiating budget deals are the most prominent threats to the Department of Defense (“DoD”).  Last week, Carter encouraged lawmakers to work together on a defense budget deal stating that it is a national security risk not to fund the DoD requests.  He stated that the inability to conduct stable planning results is an inefficient use of taxpayers’ dollars and creates inefficiencies for our defense industry partners.  Senator McCain emphasized that the military is being forced to confront a myriad of global threats with insufficient budgets, equipment and readiness.  Many Republicans expressed frustration over Democrats strategically blocking DoD appropriations in an attempt to force Republicans to pass non-defense spending bills.  If a budget is not agreed upon by September 30th, the government is expected to institute a stopgap measure to continue operating.  If the stopgap measure extends into 2017, the U.S. will not be able to fund the European Defense Initiative, which helps NATO allies deter Russian aggression.  Carter also expressed concern about the inability of Congress to fund military research programs saying that it is not prudent to starve new and future oriented defense investments in a rapidly changing and competitive world.

Government Technology Solutions Update

Last Friday, two joint venture (“JV”) organizations filed motions in court with the intention of shutting down Leidos’ protest of the National Nuclear Security Administration’s (“NNSA”) decision to rescind a 10-year, $5 billion contract for the management and operation of the Nevada National Security Site.  The contract was originally taken from Nevada Site Science Support and Technologies Corp. (“NVS3T”) due to NVS3T’s failure to disclose the fact that its ownership would change as a result of Leidos’ acquisition of Lockheed Martin’s Information Systems and Global Solutions business.  Leidos lodged a protest on September 9th, with CEO Roger Krone stating that a clause in the NVS3T contract made a potential change of ownership known to NNSA.  However, “the protest was filed under seal, shielding Leidos’ grounds for protest from the eyes of the public.”  The two JVs which protested, the Northrop Grumman-led Nuclear Security and Technology LLC and the Honeywell-led Mission Support and Technologies Corp., did so in attempt to discover Leidos’ legal rationale for their protest and therefore determine their ability to pursue further legal action.

Representative Martha McSally introduced the IDENT Fingerprint Digitalization Completion Act of 2016 on Tuesday as a result of a September 16th report which revealed that the United States Customs and Immigration Service (“USCIS”) mistakenly granted citizenship to over 800 people who had actually been ordered to be deported.  The mistake occurred because fingerprint databases hosted by the Department of Homeland Security (“DHS”) and the Federal Bureau of Investigation (“FBI”) were incomplete.  As a result, the two systems could not be correctly matched, which resulted in people with deportation orders and fraudulent identities to successfully apply for naturalization. The report also found that close to 150,000 fingerprints of people who have been ordered to be deported have not yet been added to any digital database.  The act proposed by Ms. McSally would require the DHS to create a fully digitized fingerprint record within three months if the bill were to become law.

Big Movers

DigitalGlobe (Up 9.8%) – Shares were up this week after DigitalGlobe announced its delivery program under the EnhancedView contract was renewed.

Oshkosh (Down 9.0%) – Shares were down this week after Oshkosh lowered its earnings expectations for 2017.

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Industry Week in Review – September 16, 2016

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Aerospace & Defense Update

The constant dynamic of Continuing Resolutions (“CR”) and looming budget sequestration over the last eight years hinders the U.S. military by shifting focus from modernization efforts to fulfilling current combat needs.  Ironically, spending caps and budget requirements under CRs increase cost inefficiencies and waste for the Armed Forces.  For example, the Air Force has resorted to repairing airframes instead of acquiring new frames in order to keep short term costs down; however, this increases long-term repair costs.  Similarly, the military has been making smaller total dollar purchases of parts at higher prices to satisfy spending caps.  To properly fund Department of Defense (“DoD”) future operations, Senate Armed Services Committee Chairman John McCain stated the country needs to fill a $250 billion budget shortfall.  With only two weeks until the start of the new Government Fiscal Year and an administration change in January, it seems unlikely any substantial budgetary change will occur in the near-term.

Boeing plans to militarize its 737-700 jet to replace the Air Force’s current aging Airborne Warning and Control System (“AWACS”) fleet of E-3 AWACS, EC-130H, and RC-135 aircraft.  The company sees a fit due to the 737’s increased weight and power capabilities.  While the Air Force has not officially requested a replacement aircraft and is currently assessing prospects of eliminating the aircraft system all together, Boeing believes a manned aircraft will continue to be an integral part of the future iteration of AWACS.  Brigadier General Alexus Grynkewich noted the future AWACS product may be a “more survivable airborne platform” or another platform completely.  The Air Force will decide on how to move forward and estimates a clear outline of its needs released in the early 2020s.

Government Technology Solutions Update

The House Oversight and Government Reform Committee has passed legislation which combines the IT Modernization Act and the MOVE-IT Act under one bill, to be called the Modernizing Government Technology Act.  Under the original IT Modernization Act, the General Services Administration (“GSA”) would house a $3.1 billion revolving fund to be used for the purchase of critical IT systems without having to face the constraints of Federal budgetary uncertainty.  However, this new bill would not require any up-front costs, and instead would be financed by working capital funds set up within government agencies wishing to purchase IT solutions.  Spending under these various agency funds – which would have a three-year lifespan – will be mainly limited to the retirement of legacy systems and transitioning of current systems to the cloud.

The Internal Revenue Service (“IRS”) has come under increased scrutiny recently for failing to implement the EINSTEIN cybersecurity platform to protect its networks.  EINSTEIN, which is made available via the Department of Homeland Security (“DHS”), was mandated for implementation in the wake of critical data breaches of the Office of Personnel Management (“OPM”) in 2015.  Agencies have until December of this year to implement Einstein, but due to the sensitive nature of information collected by the IRS, there has been mounting pressure for that agency to make the transformation sooner.  Such criticism comes at a volatile time for the IRS.  Commissioner John Koskinen has been facing efforts aimed towards his impeachment, with a vote on the matter potentially taking place after the Presidential election.

Big Movers

Airbus (Down 6.0%) – Shares are down this week after Singapore Airlines, the launch customer of the A380, declined to renew its superjumbo leases.

SAAB AB (Up 4.0%) – Shares were up this week after SAAB and Boeing unveiled their entry for the T-X trainer program.

Transactions

CALIBRE Systems, Inc. has acquired Fusion Technology, LLC, a provider of instructional systems design, application development services, and strategic consulting solutions for intelligence community clients.  Terms of the deal were not disclosed.  KippsDeSanto & Co. acted as exclusive financial advisor to Fusion Technology.

Golden Gate Capital has acquired Tronair Parent, Inc., a provider of designing, manufacturing, and distributing of aircraft ground support equipment for the aerospace industry. Terms of the deal were not disclosed.

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Industry Week in Review – September 9, 2016

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Aerospace & Defense Update

According to Breaking Defense, Under Secretary of Defense for Acquisition, Frank Kendall, firmly believes Congress will be unable to implement a new defense funding bill before October 1st.  With the Senate failing to pass the bill for the third time earlier this week, the real question has changed to whether the Continuing Resolution (“CR”) will last for three or six months.  Todd Harrison, from the Center for Strategic & International Studies, believes a three-month CR is more probable because President Obama will not want a budgetary decision to span administrations.  However, much of the process is out of President Obama’s hands as the House and the Senate’s bills still need to be reconciled.  In an act Kendall has condemned, the House seeks to shift $18 billion from current combat readiness to administrative operations.

With General Electric’s (“GE”) pending $1.4 billion aggregate purchase of Arcam AB and SLM Solutions Group, the company seeks to combine 3-D printing capabilities with its jet engine production and power turbine businesses.  According to David Joyce, CEO of GE Aviation, the technology will allow engines to be built cheaper and with hundreds of fewer parts, saving weight.  The company expected to purchase ~1,000 new 3-D printing machines in the next 12 years, but now hopes to realize cost synergies totaling $3 – 5 billion.  In addition to these cost benefits, GE hopes to expand the two company’s current $140M aggregate revenue by over $1 billion before 2020.  Even in light of these proposed synergies, analysts believe GE paid a substantial premium; when news of these two acquisitions become public, Arcam and SLM shares rose by 54% and 38%, respectively.

Government Technology Solutions Update

Members of the House Committee on Oversight and Government Reform (“HCOGR”) released a report on Wednesday harshly criticizing the Office of Personnel Management’s (“OPM”) cybersecurity habits, placing blame on OPM’s leadership and culture for a series of major data breaches.  These breaches led to the hacking of more than 20 million U.S. citizens’ personal information records.  According to the report, OPM leadership ignored early warnings about critical infrastructure vulnerabilities.  Furthermore, the agency failed to detect system breaches or the presence of malware in a timely manner.  Democrats on the HCOGR want to hold contractors, such as KeyPoint, partially responsible for these incidents due to what they claim were poor practices contributing to the data breaches, while HCOGR Republicans want to push legislation requiring the certification of websites containing sensitive information.

The Defense Information Systems Agency (“DISA”) released a revised request for proposal (“RFP”) for the 10-year, $17.5 billion ENCORE-III indefinite delivery / indefinite quantity (“IDIQ”) contract, roughly one month after the Government Accountability Office (“GAO”) found that DISA’s original contracting process was flawed.  DISA still plans to award the contract on a lowest price technically acceptable (“LPTA”) basis, despite that point being a major component of the bid protests made by CACI and Booz Allen Hamilton. However, the revised RFP has been amended to address GAO’s main concerns that bidders must now propose rates for both the fixed-price and cost-plus portions of the contract, whereas the previous iteration of the bids only required rates for the fixed-price portion of the contract.  DISA will make 40 total awards – with 20 being awarded full and open (“F&O”) and 20 awarded to small businesses (“SB”).

Big Movers

Bombardier (Down 5.2%) – Shares were down this week after Bombardier lowered its CSeries delivery guidance.

Rolls Royce (Down 7.6%) – Shares were down this week after reports surfaced of ANA’s plans to claim compensation for replacement of all turbine blades across its 787 fleet.

Transactions

Aviation Technical Services has acquired Texas Pneumatics, a provider of repair and overhaul services for commercial airlines.  Terms of the deal were not disclosed.

Broadcast Microwave Services has acquired Data911, a provider of modular information systems for military and law enforcement agencies.  Terms of the deal were not disclosed.

Cybraics, Inc. has acquired Caerus Analytics, a provider of big data analytics and cybersecurity for intelligence fusion, campaign assessments, systems analysis, and monitoring and evaluation.  Terms of the deal were not disclosed.

ESCO Technologies has acquired Westland Technologies, a provider of custom-molded rubber parts for vibration and sound dampening, thermal insulation, and shock absorption in industrial and defense applications.  Terms of the deal were not disclosed.

GE Aviation has agreed to acquire SLM solutions, a provider of metal-based additive manufacturing technology solutions.  The deal is worth an estimated $761.4 million.

GE Aviation has agreed to acquire Arcam AB, a provider of additive manufacturing solutions for the production of metal components.  The deal is worth an estimated $697.5 million.

InfoTek Corp., has acquired SilverRhino LLC, a provider of cybersecurity and IT services for Federal agencies such as the Department of Defense (“DoD”), Transportation Security Administration (“TSA”), and the Department of Homeland Security (“DHS”).  Terms of the deal were not disclosed.

L-3 Communications Corp. has agreed to acquire Micreo, Ltd., a provider of solutions for high-performance microwave, millimeter wave and photonic technology.  Terms of the deal were not disclosed.

MAG Aerospace Corp. has agreed to acquire Discovery Air Fire Services, Inc., a provider of forest fire detection, aerial infrared detection, birddog, and aerial transportation services. The deal is worth an estimated $15.4 million.

TransDigm Group, Inc. has acquired Young & Franklin, a provider for turbine controls for the energy, oil and gas, and aerospace markets.  The deal is worth an estimated $260.0 million.

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Industry Week in Review – September 2, 2016

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Aerospace & Defense Update

This past week, Boeing announced that it will not raise commercial aircraft list prices for the first time in seven years.  The Company typically raises prices annually (2.9% and 3.1% in 2015 and 2014, respectively) to account for increases in cost of materials, services, and labor.  The last two times Boeing did not raise its prices were following the 2009 financial crisis and following the 9/11 attacks in 2001.  This year, the Brexit vote, a commodities market crash in Latin America, and fluctuating oils prices all are major factors for the recent sharp decline in aircraft demand.  The Company’s commercial aircraft list prices range from $81 million for its smallest narrow-body aircraft to $400 million for its largest twin-engine jetliner.  Though it is normal course for airlines to negotiate steep discounts from list prices, Boeing’s move to continue to quote the same prices are largely symbolic and indicative of the slowdown in the overall market.  However, decreased demand will have less meaningful effect on Boeing’s short-term financial results as it boasts an impressive ~$470 billion worth, or seven to eight years, of production backlog.

The Chinese government has established a new state-owned aircraft engine maker as an attempt to have a major presence in the global aircraft market.  The creation of Aero Engine Corp. of China (“AECC”) is seen as a strategic move to boost China’s national prestige and military prowess.  Announced in March, AECC is the result of AVIC Aviation Engine Corp., AVIC Aero-Engine Controls Co., and Sichuan Chengfa Aero-Science & Technology Co. merging to become a single entity.  The new company currently has approximately 96,000 employees and 7.5 billion in capital.  In the past, Chinese engineers have struggled to produce reliable turbofan engines for commercial use and China now hopes to create a homegrown self-sufficient aerospace sector to replace foreign manufacturers currently used for most of its military jets.  In addition to aerospace, China is also revamping its state-owned manufacturing sectors in robotics and nuclear power.

Government Technology Solutions Update

A set of new Federal Aviation Administration (“FAA”) rules allowing small unmanned aircraft (“drones”) to operate without waivers came into effect on Monday.  The FAA expects up to 600,000 commercial drones to be operating in the U.S. by year-end. The new rules still prohibit flying drones over 400 feet, at night, over crowds of people, or beyond the pilot’s line of sight without a waiver.  According to Transportation Secretary Anthony Foxx, the integration of drones in the U.S. Economy can add an additional $82 billion to GDP and support 100,000 jobs within 10 years.  Drones have practical use outside the commercial or consumer markets.  The Department of the Interior awarded a contract to 3DR to supply 40 small drones in order to conduct a variety of tasks, such as wildlife and vegetation surveys or search and rescue.  Drones can also be used to monitor the conditions around construction or infrastructure projects in a more cost-effective manner.

The Federal government has been taking several steps recently to bolster the nation’s cyber capabilities.  On Thursday, the Department of Homeland Security (“DHS”) issued a Request for Information (“RFI”), asking for expert input on measures necessary to operate a cybersecurity laboratory, which it has named the Cyber Experimentation for the Future (“CEF”).  DHS officials want the CEF to be able to have a variety of complex capabilities, such as: models which work in real and simulated environments, the ability to operate 24/7, and outreach to researchers outside of the Federal government. The DHS plans to use the proposed facility for “modeling human behavior in cyberspace, more open standard interfaces, and new tools for experimentation management.”  On the Defense side of the government, the US Army launched the Rapid Capabilities Office (“RCO”) on Wednesday. The RCO will be tasked with quickly and efficiently developing or procuring cyber and electronic warfare solutions as fast as possible once a need is recognized, and that it will “help the U.S. Army keep up with other technological improvements now benefitting adversarial armed forces.”

Big Movers

B/E Aerospace (Up 4.0%) – Shares were up this week after B/E Aerospace was awarded a contract worth as much as $450 million to outfit the new Boeing 777 with first-class suites

AECOM (Down 3.9%) – Shares were down this week after a law firm announced that a class action lawsuit was filed against AECOM concerning possible violations of federal securities laws

Transactions

Logistics Management Institute, Inc. (“LMI”) has acquired FourWinds Limited Company, a provider of performance management, business analytics, and strategy communications services to intelligence and national security agencies.  Terms of the deal were not disclosed.

SOCOMORE S.A. has agreed to acquire LORD Corporation’s Aeroglaze and Chemglaze product lines, providers of absorptive polyurethane coatings designed for applications on substrates used in aerospace and other markets.  Terms of the deal were not disclosed.

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Industry Week in Review – August 26, 2016

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Aerospace & Defense Update

The Department of Defense (“DoD”) announced Lockheed Martin has been awarded an indefinite delivery / indefinite quantity (“IDIQ”) contract with the U.S. Air Force for the production of the Super Hercules C-130J transport plane.  The decade long contract covers production of an estimated 100 aircraft for domestic and foreign military sales through August 2026 and has a ceiling value of $10 billion.  The C-130 is a versatile four-engine aircraft which has transported troops and cargo of up to 44,000 pounds for over 60 years.  The U.S. Air Force has purchased over 150 C-130s since 2003 and ~15 countries currently use the C-130 to provide military transport as well as aeromedical evacuation and firefighting.  The flexible aircraft continues to evolve to meet new operational requirements and the growing worldwide need for airlift.

Reports have revealed that Boeing has revised its internal sales forecast and plans to sell 535 jetliners this year, a target well below its initial forecast of 740 – 745 aircraft.  Wide-body aircraft sales have been hit the hardest this year, with current net orders of less than 20% of its revised FY16 sales goal of 215.  Of the wide-body aircraft, the 747 has struggled significantly with only four new orders this year, signaling a possible end to production unless there is an increase in new orders during 4Q16.  Additionally, the Company aims to book 88 orders each for its 777 and 787 aircraft, yet has only sold 19 and 8 aircraft so far this year.  Boeing maintains that it will not lower prices in order to win orders and instead is focusing on securing orders through active sales campaigns around the world.  The slowdown in demand for new aircraft has been caused by weak global growth and low oil prices causing some airlines to choose to fly older planes longer rather than upgrading to new fuel-efficient models.

Government Technology Solutions Update

According to recent research released on Tuesday, government contract spending is likely to see an increase in fiscal 2017 after having declined for the past seven years.  The Federal government has typically directed 60% of its spending towards services, a trend that is believed to continue in the near-term. The “knowledge-based services,” such as professional, engineering, and administrative support, are the leading sub-category with $69.8 billion in annual spending.  The Department of Defense (“DoD”) continues to be a major catalyst for spending in that sector; the Army, Navy, and Air Force combined for over 40% of all Federal spending on knowledge-based services with the large defense primes, such as Boeing, Raytheon, Lockheed Martin, and Northrop Grumman receiving the largest portion of those contract dollars.  Another large, and growing, portion of the Federal budget is funding for technology services and technological equipment, which combine for over $60 billion in annual procurements, and grew at a rate of over 1.5% in 2015 despite the overall decline in spending.

The annual Lowering the Cost of Government with IT Summit was held Thursday, during which industry insiders commented on what they felt were constraints placed on cybersecurity planning by the Federal budgeting process.  According to Thomas McDermott, acting deputy assistant secretary for cyber policy at the Department of Homeland Security (“DHS”), the current one-year budgeting process makes it difficult to plan and acquire upgrades to legacy technology, forcing agencies “to patch old, sometimes indefensible IT systems.”  As a result, there have been recent efforts to address these concerns.  The Obama administration is trying to set up a $3.1 billion revolving fund “outside the appropriations process to help agencies upgrade their legacy IT.”  Additionally, DHS has created the Continuous Diagnostics and Mitigation (“CDM”) program, which has saved at least $46 million by allowing agencies to take better advantage of bulk savings.  With these efforts, the government is making a more concerted attempt to maximize the efficiency of the procurement process, as well as increase the flexibility of government agencies’ ability to plan long-term improvements to critical IT infrastructure.

Big Movers

Boeing (Down 1.6%) – Shares were down this week after there were reports that Boeing revised its internal sales forecast negatively; however, the Company rebounded after Qantas Airways announced it may add more of Boeing’s 787 in 2017

Thales (Down 2.7%) – Shares were down this week after DCNS (Thales owns a 35% stake) was investigated by India for a submarine data leak

Transactions

Brixey & Meyer Capital has acquired Stillwater Technologies, Inc., a provider of precision machining and resistance welding solutions for the aerospace, defense, and energy sectors.  Terms of the deal were not disclosed.

J.F. Lehman & Co. has agreed to acquire Oldenburg Group, Inc.’s Heavy Equipment Group, a provider of heavy equipment systems that meet mission critical requirements in harsh operating environments.  The new company, which consists of the defensive and mining business units, will be named Lake Shore Systems, Inc.  Terms of the deal were not disclosed.

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Industry Week in Review – August 19, 2016

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Aerospace & Defense Update

Top military officials addressed the increasing threat of hypersonic glider weapons at the Space and Missile Defense Symposium this week.  The development of hypersonic gliders strain current missile defense systems due to the gliders’ increased speed, lower travel altitude, and unpredictable trajectory compared to traditional intercontinental ballistic missiles (“ICBMs”).  Army Acquisition Chief Katrina McFarland stressed how the Army has engaged in intensive research and development to increase the overall detection capabilities against this new weapon.  McFarland stated that it is imperative for the U.S. to remain dominant in its hypersonic capabilities; however, she also noted that Russia, China, and India also heavily investing resources to develop their own glider weapons and defense technologies.

After complaints about increasingly long wait times for Air Force Foreign Military Sales (“FMS”), service secretary Deborah Lee James announced new time saving measures that can cut total time to delivery by up to a month.  As part of this measure, the Air Force plans to enhance training programs for Security Cooperation Officers, which will decrease negotiation times of definitive purchase agreements with foreign governments.  Additionally, the Air Force plans to hire more personnel to help handle administrative work. James wishes to implement these changes quickly and will meet for a progress report this October.  Even though the Air Force plans to implement these enhancements, any major changes to the FMS process will have to be enacted by congress and most likely will occur after the presidential election.

Government Technology Solutions Update

On Tuesday, Leidos announced that it completed its $4.6 billion acquisition of Lockheed Martin’s Information Systems and Global Services business, seven months after it was originally announced in January.  The transaction will add roughly $5.0 billion to Leidos’ top line, creating a company with more than $10 billion in annual revenue and a $200 billion addressable market, making it the largest player within the federal information technology marketplace.  The acquisition provides Leidos with critical access to new civilian agencies, such as the National Aeronautics and Space Administration (“NASA”), the Department of Energy (“DOE”), the Federal Aviation Administration (“FAA”), and the Social Security Administration (“SSA”), among others, greatly diversifying the Company’s revenue, which has historically been ~75% dependent on defense and intelligence customers.  This transaction highlights one of the most recent and prolific examples of government contractors divesting non-core capabilities in an effort to refocus on core operational capabilities and hopefully counterbalance ongoing uncertainties associated with the Federal budgetary environment.

According to a recent Bloomberg Government report, nine of the top 20 Federal contract opportunities in fiscal 2017 will be professional services-related, with those nine contracts representing a combined ceiling value of nearly $142 billion.  The largest of these contract vehicles, OASIS and Seaport-NG, together account for more than $110 billion in potential spending.  The report noted that there should be at least one more set-aside on-ramp expected for OASIS in 2017, and that the General Services Administration (“GSA”) “will likely face pressure to allow more small businesses into the program.”  These contracts will be used to procure a variety of Federal support services, including consulting, logistics, engineering, and financial services.

Big Movers

CACI International (Up 4.0%) – Shares were up this week after the company beat consensus EPS benchmarks

Lockheed Martin (Down 3.8%) – Shares were down this week after the company completed the sale of its IT services group to Leidos

Transactions

AGI Holdings LLC, has acquired Aircraft Appliances and Equipment Limited, a provider of proprietary naval filtration systems, marine valves and tachometer generators for the U.S and other global defense departments.  Terms of the deal were not disclosed.

Apollo Global Management, along with the management of Constellis Group, has acquired Constellis Group, a provider of operational support, risk management, security, logistics, and training services to government and commercial clients.  Terms of the deal were not disclosed.

ASRC Federal, a subsidiary of Arctic Slope Regional Corporation, has acquired Vistronix Intelligence & Technology Solutions LLC, a provider of software design and development as well as platforms for signals processing, cloud computing, advanced analytics, and large-scale data management.  Terms of the deal were not disclosed.

The Hewlett Packard Enterprise Company has acquired Silicon Graphics International Corporation, a provider of big data analytics, enterprise-class storage hardware, and high-performance computing solutions to Federal and commercial clients.  The deal is worth an estimated $275 million.

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