Aerospace & Defense Update

With the looming Continuing Resolution (“CR”), Air Force Secretary, Deborah Lee James, warned congressional members that up to 60 program budgets would be impacted.  The potential long-term CR would underfund the Air Force by an estimated $1.3 billion compared to its requested FY2017 budget.  Many new upgrade programs such as the MQ-9 Reaper unmanned system, C-130 cargo transport, and the B-52 and B-2 bomber fleets will be underfunded.  Other key programs such as the B-21 bomber and the KC-46A tanker would be capped and potentially experience timing delays.  While the CR is likely, the Air Force may be able to request additional Overseas Contingency Operation (“OCO”) funding for munitions programs.

Boeing expects to decide whether to cut its current 777 production rate of 8.3 jets per month in the next two months.  The Company has only received eight orders this year for the current 777 wide body, and must garner 40 – 50 orders per year in order to maintain its current production rate.  Other factors in this decision include Boeing’s current development of the 777-X, Airbus’ recent release of the A-350, and the current glut of wide body aircraft in the market.  Boeing executives have hinted they would rather cut production of the 777 than sell more at lower margins.

During its 2Q16 earnings call, Orbital ATK announced it will restate earnings due to accounting errors that buried operating losses of up to $450 million and overstated revenue by ~$100 million.  The losses stem from Orbital’s ten-year, $2.3 billion contract to supply small caliber ammunition to the U.S. Army.  Orbital management believes most of the financial impact will apply to FY2015 earnings, estimating operating income to change from a profit of $232 million to a loss of ~$200 million.  In reaction to this news, Orbital’s shares dropped 20.2% for the day, but have since rebounded slightly to be down 15.7% for the week.

Government Technology Solutions Update

According to a recent report, worldwide demand for cybersecurity services and solutions will continue to experience rapid growth in the near-term.  The cybersecurity services and solutions market is expected to increase from $122.45 billion in 2016 to $202.36 billion in 2021, representing a 10.6% compound annual growth rate (“CAGR”).  While the financial sector is likely to see the fastest growth rates, both the Federal government and government contractors are generating significant growth for the sector as well.  The Federal cybersecurity market has expanded 66% since 2011 to $5.5 billion in 2015.  Rapid growth in the sector, as well as an increasing push to both modernize and protect Federal technology infrastructure, has led to a string of acquisitions in the cybersecurity sector.  There have been 38 M&A transactions since the beginning of 2015 involving selling companies engaged in cybersecurity, including the recent noteworthy $4.65 billion acquisition of Blue Coat by Symantec, which closed on August 1^st of this year.

On Monday, the Office of Management and Budget (“OMB”) released a memo advising Federal agencies on how they should properly go about obtaining software solutions for their departments.  The policy set forth by the OMB lists a three-step process for software procurement, which states that agencies should first seek software solutions within the Federal government, then in the commercial market, before considering developing an internal solution.   Additionally, the OMB will require that the agencies release a minimum of 20% of proprietary code to the public in an effort to encourage collaboration between public and private sectors, and that doing so might enable “the best and brightest minds inside and outside government” to “work together to ensure that the code is reliable and effective.”  The Federal government spends approximately $6 billion on 42,000 transactions annually. The OMB hopes that, in addition to promoting transparency and interoperability between government agencies, this initiative will help reduce the amount of money spent on software.

Big Movers

Orbital ATK (Down 15.7%) – Shares were down this week after the company reported a restatement of their financials due an accounting error that obscured operating losses of ~$400 million

Smiths Group (Up 4.6%) – Shares were up this week after the company raised guidance on FY2016 revenue and operating profit

Transactions

Exchange Income Corp. has acquired CarteNav Solutions, Inc., a provider of Intelligence, Surveillance, and Reconnaissance (“ISR”) and situational awareness software solutions for the maritime, land, and air environments to defense, security, and commercial clients.  The deal is worth an estimated $12 million.

KBR, Inc. has acquired Honeywell Technology Solutions, Inc., a provider of satellite mission lifecycle support services, military equipment prepositioning and logistics services, and cybersecurity solutions primarily to Federal government clients.  The deal is worth an estimated $266 million, after adjustments worth $34 million for acquired tax benefits.

LightPath Technologies has agreed to acquire ISP Optics Corporation, a manufacturer and provider of advanced infrared optical components, coatings and subsystems.  The deal is worth an estimated $18 million. KippsDeSanto & Co. served as the exclusive financial advisor to ISP Optics.

PlanetRisk, Inc. has acquired Analytic Strategies LLC, a provider of data analytics solutions and consulting services for commercial and government clients.  Terms of the deal were not disclosed.

Tribalco, LLC has acquired Intelligent Decisions, Inc.’s U.S. Army Communications and Transmissions Systems business, a provider of a wide range of transmissions and communications solutions as well as ancillary support services.  Terms of the deal were not disclosed.

Trident Maritime Systems has agreed to acquire Callenburg Technology, a designer and supplier for heating, ventilation, and air-conditioning to the passenger, offshore and navy markets.  The net sale price was approximately $ 64 million.

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Aerospace & Defense Update

Boeing announced it may end production of its 747 aircraft if it continues to experience a decline in orders and an increase in pricing pressure.  For the time being, Boeing has decided to continue with the plan of halving the production rate to 6 aircraft per year starting in September. That being said, Boeing’s CEO, Dennis Muilenburg, still believes there is tremendous value for the 747 over the long run despite challenges in the current air cargo market.  Boeing had strong performances in its passenger jet and defense businesses this past quarter, which helped offset troubles with the 747 program.

Many of the industry’s largest players reported earnings this week.  Both Raytheon and Textron reported positive 2Q16 earnings, while Airbus experienced financial charges on its A400M program.  Raytheon raised its full-year profit guidance as military budgets have increased in the U.S. and overseas. Additionally, military conflicts in the Middle East have increased the demand for more bombs, missiles, and intelligence services.  Textron profits and revenues also surpassed expectations in 2Q16.  The company’s aviation segment increased revenues 6.4% to $1.2 billion, driven by strong Citation jets deliveries.  However, Airbus reported $1.1 billion of additional financial charges for the A400M, adding on to the ~$5 billion of charges already incurred.   In the announcement, Airbus warned of potential future charges as it works on fixing technical problems on the fuselage and engine.

Government Technology Solutions Update

The Information Technology and Innovation Foundation (“ITIF”) released a report on Monday regarding adoption of the Internet of Things (“IoT”) by Federal agencies.  The ITIF identified several key obstacles preventing widespread usage of the technology.  Among these are issues with a lack of technical skills, leadership, funding, as well as procurement challenges and a low tolerance for risk.  In order to address these issues, the ITIF recommends that the Federal Chief Information Officer (“CIO”) set up an IoT taskforce, that agencies themselves prepare plans and goals for IoT implementation, and that the Federal government reach out to both the public and private sectors to “encourage improvements in privacy, security and interoperability.”  The Federal government spent $8.8 billion on IoT in 2015, a 20% year-over-year increase compared to 2014.  The technology is also one of the primary areas of focus in the $50 billion Alliant 2 Government-Wide Acquisition Contract (“GWAC”), for which proposals are due in August.

Industry leaders met at the ATARC Federal Cloud Computing Summit on Tuesday to discuss the Federal Data Center Optimization Initiative (“DCOI”).  Those in attendance were urged to think of the DCOI as an opportunity to replace or eliminate certain legacy data centers through the use of cloud computing technology.  The objectives of the DCOI are to streamline how the government addresses the data center marketplace, with the end goal of “cost reduction through efficiency gains, cost reduction through elimination of facilities, and sustainability.”  Currently, 75% of the Federal IT budget is earmarked for Operations and Maintenance (“O&M”) of legacy systems, representing over $63.1 billion in the 2017 budget.  Widespread adoption of the cloud – if achieved – by Federal agencies could facilitate the transfer of information and make steps towards a modernized, less maintenance-intensive Federal IT infrastructure.

Big Movers

Triumph Group (Down 21.8%) – Shares were down this week after the company reported a 20% decline in profits during its 1Q16 earnings announcement            .

Crane Co. (Up 6.3%) – Shares were up this week after the company announced it expects to reach ~$2.7 billion in revenue for 2016

Transactions

Belcan, LLC has acquired Intercom Consulting and Federal Systems Corp., a provider of secure, enterprise-level IT and cybersecurity solutions for commercial and government clients.  Terms of the deal were not disclosed.

Dynamis, Inc. has acquired Defense Group Inc.’s (DGI) Emergency and Security Management Solutions business, a provider of enterprise emergency and security management software solutions.  Terms of the deal were not disclosed.

Infinite RF Holdings has acquired L-com Inc., a provider of wireless components, cable assemblies, antennas, specialized military and aeronautics connectivity solutions, and wireless sensors.  Terms of the deal were not disclosed.

Odyssey Investment Partners has agreed to acquire Aero Precision Industries, LLC, DAC International, Inc., and NASAM, Inc. Aero Precision is a provider of aftermarket original equipment manufacturer (“OEM”) parts.  DAC International is a provider of avionics upgrade solutions for military and airlines.  NASAM is a provider of military / defense high tech electronics.  Terms of the deal were not disclosed.

Platte River Equity has acquired CTS Engines, a provider of full spectrum maintenance, repair, and overhaul (“MRO”) services for established engine platforms.  Terms of the deal were not disclosed.

Smith & Wesson Holding Corp. has agreed to acquire Crimson Trace Corp., a provider of laser sighting products and tactical lights for military, law enforcement, and civilian applications.  The deal is worth an estimated $95 million.

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Aerospace & Defense Update

Airbus and Boeing had a modest showing at this year’s Farnborough Air Show with a combined $62 billion in deals, especially in comparison to last year’s historic $116 billion in orders.  The Farnborough Air Show is typically a high point for aircraft orders and the commercial-aviation industry as a whole.  During the air show, Airbus outpaced Boeing, with $35 billion in orders, bringing its YTD total orders to 380 aircraft.  Boeing, on the other hand, secured $27 billion in orders at the Air Show, increasing its total orders to 321 aircraft for the year.  Although Airbus received more orders than Boeing, it announced plans to slash production of its A380 jumbo jet from 27 aircraft in 2015 to just 12 aircraft per year starting in 2018.  The highly ambitious project is turning out to be too costly for Airbus and may generate a loss after breaking even last year.  However, both Airbus and Boeing are looking to have a strong second half of the year in order to attain their year-end sales goals of 650 orders and 740 orders, respectively.

Lockheed Martin, along with its subcontractors for the F-35, Northrop Grumman and BAE, announced at the Farnborough Air Show new initiatives designed to significantly cut procurement and sustainment costs for the F-35 by billions of dollars.  One of the initiatives will include a $170 million investment to expand the two-year-old “Blueprint for Affordability” program, which is anticipated to decrease the unit cost of the F-35A to $85 million by 2019 and save more than $4 billion over the lifecycle of the program.  Additionally, the three companies are also creating a “sustainment cost reduction initiative” with a $250 million investment designed to cut operations and maintenance costs by 10% from 2018 through 2022.  This initiative is expected to lead to over $1 billion in savings over five years.

Government Technology Solutions Update

The Centers for Medicaid and Medicare Services’ (“CMS”) $25 billion Strategic Partners Acquisition Readiness Contract (“SPARC”) is again making headlines, as a new set of four companies has joined the fight over the heavily disputed vehicle.   LRA-ISI Joint Venture, SGT Inc., SparkSoft Corp., and Syneren Technologies Corp. are the latest companies to protest the contract award; in total there are 19 companies that have filed a protest.  All four of the new protestors are small businesses.  Originally awarded to 81 companies, 54 of which are small businesses, the CMS contract has an expected period of performance of ten years.  The Government Accountability Office (“GAO”) is expected to reach a decision on the protests by mid-October of this year.

According to a report from Govini, a Big Data and analytics firm, the departments of Veterans Affairs (“VA”) and Health and Human Services (“HHS”) are investing heavily in new health IT and technology services.  The report adds that despite the Federal government’s recent budget sequestration, the fiscal year 2017 budget outlook for the two agencies is strong.  63% of HHS’ IT and professional services spending is driven by CMS, while the Transformation Twenty-One Total Technology (“T4”) contract vehicle is driving investment for the VA.  The continued investment in technology geared toward systems modernization, networks, and cybersecurity infrastructure on behalf of both agencies is a reflection of the growing concern over cyber-attacks on Federal agencies.

Big Movers

Airbus Group SE (Up 7.6%) – Shares were up this week after Airbus outpaced Boeing and secured $35 billion aircraft orders at the Farnborough Air Show.

Booz Allen Hamilton, Inc. (Up 9.2%) – Shares were up this week after the company announced that it had been awarded an unmanned aerial system demonstration contract worth $41 million.

Transactions

AE Industrial Partners, LLC has acquired Moeller Manufacturing Company, LLC, a provider of precision machined turbine engine components for the gas turbine aircraft engine and power generation industries.  Terms of the deal were not disclosed.

AGC AeroComposites, Inc. has acquired North Coast Composites, a provider of advanced composites for the aerospace industry.  Terms of the deal were not disclosed.

AGC AeroComposites, Inc. has acquired North Coast Tool and Mold Corp., a provider of molds and tools for the aerospace industry, including resin transfer molds, lay-up molds, compression molds, and plastic injection molds.  Terms of the deal were not disclosed.

Gooch & Housego has acquired Alfalight, Inc., a provider of high reliability, laser based, electro-optic systems for defense and security applications.  The deal is worth an estimated $1 million.

Gooch & Housego has acquired Kent Periscopes Ltd., a provider of periscopes, vehicle sights and related equipment for land based Armored Fighting Vehicles (“AFVs”).  The deal is worth an estimated $12 million.

Halvik Corporation has acquired SP Systems, Inc., a provider of scientific research, engineering data analysis, real-time satellite data processing, and algorithm development solutions to support the Federal government. Terms of the deal were not disclosed.

HNA Aviation Group Co. to acquire an 80% stake in SR Technics Ltd., a provider of integrated airline solutions, including maintenance on aircraft, engines, and components.

MB Aerospace has acquired Vac-Aero, Poland, a provider of protective and performance enhancing coatings for aero-engine and industrial gas turbine components.  Terms of the deal were not disclosed.

Rolls Royce Holdings plc to acquire a 53% stake in Industria de Turbo Propulsores S.A., a provider of engineering, research and development, manufacturing and casting, assembly, and testing of aeronautical engines and gas turbines.  The deal is worth an estimated $795 million.

Thales Alenia Space, a joint venture of Thales S.A. and Finmeccanica SpA, to acquire RUAG Holding AG’s Opto-Electronics and Instruments Product Unit, a provider of scientific satellite instruments and equipment for optical communications in space.  Terms of the deal were not disclosed.

Xator Corporation has acquired Paragon Communications Solutions, Inc., a provider of tactical communications security, networking, and electronic countermeasures solutions. Terms of the deal were not disclosed.

 

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Aerospace & Defense Update

After months of discussion, Airbus and Safran have reached an agreement to create Airbus Safran Launchers, a European rocket joint venture.  The two companies have been working together since 2014 to build the Ariane 5 space launcher and are establishing the new joint venture in order to develop the next generation rocket, the Ariane 6, which is expected to complete its first flight in 2020.  The Ariane 6 aims to lower costs and gain market share, particularly in light of the increasing competition from SpaceX.  To further solidify its market reach, Airbus Safran Launchers is in talks to acquire Arianespace, a European rocket-launch company.  However, the potential deal may lead to issues with the European Commission over anti-trust regulations.

The British vote to leave the EU as a result of the referendum (“Brexit”) was not the outcome desired by the British aerospace and defense market, which employs roughly 300,000 individuals.  Large British industry leaders, such as Airbus and Rolls Royce, had lobbied to remain in the EU and are now hoping for a deal that grants both maximum access to the European single market and has minimum restrictions on the mobility of labor from the region.  To address the short term, Rolls Royce released a statement after the referendum result, stating that there will be no immediate impact on day-to-day operations.  However, the CEO of ADS Group, a UK trade organization representing the aerospace, defense, security, and space sectors, said that the Brexit vote could lead to a future decline in incremental competitiveness for the aerospace and defense sector.  Despite the Brexit, recent financial data released by ADS displays strong industry growth and good financial health for the aerospace and defense market.

Government Technology Solutions Update

The Space and Naval Warfare (“SPAWAR”) Systems Center Atlantic recently made awards on a $750 million Commercial-Off-the-Shelf (“COTS”) Command and Control (“C2”) contract to a group of 21 companies, 17 of which are small businesses.  Under the contract, companies will provide COTS C2 equipment and support services primarily to the Navy, as well as other defense and civilian agencies.  The C2 equipment stipulated in the contract will include video, imagery, and telecom systems, global positioning system equipment, intelligence support systems, as well as tactical displays processors, and workstations. The contract has an expected period of performance that runs through June 2021.

Both Donald Trump and Hillary Clinton’s proposed plans for the Department of Veterans Affairs (“VA”) would increase spending by at least tens of billions of dollars over 10 years.  According to the Committee for a Responsible Federal Budget, a nonpartisan group advocating for fiscal responsibility, Trump’s plan, which would provide all veterans with immediate healthcare from any doctor who accepts Medicare, comes with a much steeper price.  However, Trump contends that giving veterans the option to choose their own healthcare provider will “stop the wait time backlogs and force the VA to improve and compete.”  Clinton’s proposal includes ending the disability compensation backlog, recreating the department’s employee performance evaluation system, and creating a permanent tax credit to boost veteran hiring.

Big Movers

KEYW (Up 12.4%) – Shares were up this week after the company announced that it has closed the previously announced sale of the HawkEye G Product Line Business of Hexis Cyber Solutions to WatchGuard Technologies, Inc.

Safran (Up 5.0%) – Shares were up this week after the company announced that it has concluded months of talks with Airbus to establish a European rocket joint venture and build Europe’s next major rocket, the Ariane 6.

Transactions

FLIR Systems, Inc. acquired Armasight, Inc., a provider of thermal imaging, visible-light imaging systems, locater systems, measurement and diagnostic systems, and threat-detection solutions.  The deal is worth an estimate $41 million.

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Aerospace & Defense Update

On Tuesday, the Senate approved the 2017 National Defense Authorization Act, which allocates $602 billion in base defense and war spending.  The bill proposes aggressive acquisition reforms, which include reduced spending on cost-plus contracts and inclusion of more contractors outside the D.C., Maryland, and Virginia area (“DMV”) on Federal contracts.  Additionally, it includes language to close the chief weapons buyer’s office in the Pentagon and transition the responsibilities to two new defense undersecretaries for innovation and acquisitions management.  The Senate’s version of the bill is different from the version of the bill passed by the House in May primarily in its treatment of defense acquisitions reform and defense funding.  After debate in conference, a finalized version of the bill will be sent to the White House for approval by the end of the government fiscal year on September 30^th.

MBDA Missile Systems, a European missile manufacturer, is scheduled to conduct firings of its Brimstone 2 missile from a Boeing AH-64E to persuade the British Army to purchase the weaponry for a new helicopter fleet it is planning to acquire.  Around the time of the Farnborough International Airshow, the British Army will announce whether it plans to buy the AH-64D under its foreign military sales or have Leonardo rebuild AH1’s to match the specifications of the AH-64E.  MBDA is partially owned by three parent companies: Airbus Group, BAE Systems, and Leonardo (F.K.A. Finmeccanica).  Currently, the British Army Air Corps uses Lockheed Martin’s Hellfire missile on its 49 AH1’s.  While Hellfire missiles could potentially be in use until 2040, Lockheed is under a contract with the Department of Defense (“DoD”) to replace the Hellfire on Army Apaches and Black Hawks with the Joint Air-to-Ground Missile (“JAGM”).

Government Technology Solutions Update

The $900 million SOCOM Wide Mission Support (“SWMS”) contract has managed to make headlines again.  Just a week after being awarded to six new companies as a result of bid protests the SWMS award is being protested again, this time by Alion Science and Technology.  More bid protests are expected to come the Government Accountability Office’s way, as 17 companies submitted bids on the contract.  The contract was awarded to Booz Allen Hamilton, CACI International, Raytheon Blackbird Technologies, and MacAulay-Brown in July of 2015 and subsequently awarded to ACADEMI Training Center, AECOM, ARMA Global Corp., Fulcrum IT Services, Jacobs Technology, and Raytheon Technical Services.  The contract has a current period of performance extending through July 2020.

Symantec has agreed to acquire Blue Coat Inc. for approximately $4.65 billion in cash in order to better protect government and enterprise customers from cybersecurity attacks.  Based in Silicon Valley, Blue Coat is a leading network technology, cloud, and security provider.  As a result of the transaction, Symantec “will have the scale, portfolio, and resources necessary to usher in a new era of innovation designed to help protect large customers and individual consumers against insider threats and sophisticated cybercriminals,” explained Symantec chairman Dan Schulman.  With the acquisition, Symantec will enhance its leadership position to define the future of cybersecurity.  It will continue to set the pace for industry innovation.  Blue Coat CEO Greg Clark will take the reins as Symantec’s CEO, as well as join the company’s board of directors.  The combined company is projected to generate $4.4 billion in revenue for fiscal year 2016.

Big Movers

Comtech Telecommunications (Down 31.0%) – Shares were down this week after the company released the pricing for its previously announced public offering at $14 per share, well below the $16.11 share price before the announcement.

Safran (Down 6.5%) – Shares declined this week after the engine manufacturer announced its plans to bid for fellow French aerospace supplier, Zodiac Aerospace SA.

Transactions

Alpha Sintered Metals acquired Precision Products, LLC, a provider of metal injection moldings, serving the aerospace and firearms markets.  Terms of the deal were not disclosed.

Carlisle Interconnect Technologies, Inc. acquired Micro-Coax, Inc., a provider of radio-frequency and microwave solutions for defense, satellite, test and measurement, and other industrial customers.  Terms of the deal were not disclosed.

HGH Infrared Systems, Inc. acquired Electro Optical Industries, LLC, a provider of optronic and infrared systems for security, industrial, and civil applications.  Terms of the deal were not disclosed.

ManTech International Corp. acquired Oceans Edge Cyber, the cyber business of Reston, Virginia-based Oceans Edge Inc. Oceans Edge Cyber focuses primarily on vulnerability research, development, and analysis. Terms of the deal were not disclosed.

Symantec to acquire Blue Coat Inc., a premier network technology and security provider based in Sunnyvale, California. Symantec will pay roughly $4.65 billion in cash for the transaction, which is expected to close in the third quarter of fiscal year 2016.

Xator acquired TSM Corporation, a Reston, Virginia-based national security solutions company which provides training, engineering and logistics services to Special Operations as well as Defense and Law Enforcement communities. Terms of the deal were not disclosed.

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