Industry Week in Review – June 12, 2015

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Aerospace & Defense Update

Colt Defense, a West Hartford, Connecticut based firearm manufacturer, appears to be headed into a showdown with its bondholders after missing a $10.9 million payment last month.  Colt’s modern sports rifles and handguns sales fell 30.0% in 2014 and its cash on hand diminished to a balance of $11.9 million as of May 22nd.  The company appears to be headed towards bankruptcy potentially prompting a transfer of ownership to its creditors.  However, given a projected sales growth of 24.0% in FY2015 and FY2016, the company’s private equity owners, Sciens Management, plan to retain ownership.  In an effort to raise sufficient capital to avoid bankruptcy, the owners have proposed issuing $450.0 of new securities for every $1,000.0 of outstanding bonds.  As of June 1st, only 5.9% of bondholders have expressed approval for this plan.  This plan will falter without unanimous consent.

Last Friday, the U.S. Navy announced the award of $4.3 billion in contracts to construct the new nuclear-powered aircraft carrier, John F. Kennedy.  After months of negotiations, Huntington Ingalls Inc., a parent corporation of Newport News Shipbuilding, received a $3.4 billion contract for the detail, design, and construction (“DD&C”) work on the carrier. The shipbuilder also obtained a $941.0 million contract for labor to complete the carrier’s component and steel fabrication, selected construction unit assemblies, and all remaining direct material.  Newport News Shipbuilding has already constructed 450 of the ship’s 1,100 structural units dating back to December 2010.

Government Technology Solutions Update

On Monday, the Federal CIO Tony Scott issued a directive mandating the use of more robust Internet protocols (“IPs”) for federal websites, following the recent Office of Personnel Management (“OPM”) hack.  The directive states that all federal websites switch from using the HTTP to HTTPS standard, which means a middleman is less likely to intercept and modify internet traffic between a website and its end user.  While it is not clear how the hackers got into the OPM database, the need for more advanced cybersecurity at the federal level is apparent.  The deadline set for adopting the new standard is the end of 2016.

Government Agencies are starting to set up infrastructure to comply with the DATA Act, which requires federal spending to be standardized, traceable, understandable, and available online.  Federal Agencies are currently spending large amounts of time and money in order to comply with this act.  The program’s efforts will make auditing each agency easier, and it will allow the government to run large scale analytics to improve government spending.  Additionally, the online standardized formatting will make it easier for private citizens to access and analyze the data.  The system set up is anticipated to provide significant contracting opportunities for the private sector.

Big Movers

Elbit Systems (Up 4.0%) – Shares were up this week in response to the company’s announcement of two new technologies, its new BrightNite helicopter visual technology and its Kollsman Enhanced Vision System-Superior Performance product for the COMAC C919 aircraft.

SAIC (Down 5.3%) – Shares were down this week following the company’s release of its 1Q15 earnings.  The company reported earnings per share (“EPS”) of $0.73, missing analysts’ expectations of $0.75 per share.

Transactions

RF Industries, Ltd. has acquired Rel-Tech Electronics, Inc., a manufacturer of cable assemblies and wiring harnesses for blue chip industrial, oilfield, instrumentation, and military customers.  The deal was valued at an estimated $3.1 million.

CoorsTek, Inc. acquired BLS Textiles, Inc., a developer and producer of hard armor systems for defense and police.  Terms of the deal were not disclosed.

Novaria Group, Inc. acquired substantially all of the assets of Sky Manufacturing, Inc., a manufacturer of fasteners, bolts, and spline heads for the aerospace industry.  Terms of the deal were not disclosed.

StoneCalibre, LLC acquired Cohu Inc.’s Broadcast Microwave Services, Inc., a manufacturer of mobile microwave communications equipment including transmitters, receivers, antennas, and accessories that enable the transmission of real-time video, audio, telemetry, and sensor data from manned aircrafts, unmanned aerial vehicles and ground platforms.  The deal is worth an estimated $8 million.

Global Defense & National Security Systems, Inc. to acquire STG Incorporated, a provider of enterprise network operations, cybersecurity, financial services, systems engineering and integration, software engineering, and linguistics and intelligence solutions.  The deal is worth $165.5 million to be paid in both cash and stock.

World Wide Technology, Inc. acquired Asynchrony, a provider of technology consulting, to include in application development, mobile computing, systems and sensor integration, enterprise architecture, and tactical collaboration.  The terms of the deal were not disclosed.

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Industry Week in Review – June 5, 2015

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Aerospace & Defense Update

As a continuation of the red-hot M&A activity that’s been occurring in the defense microwave / radio frequency (“RF”) sector, Ultra Electronics announced the acquisition of the Electronics Products Division (“EPD”) of Kratos Defense & Security Solutions for $265 million.  The purchase price represents a multiple of 10.7x LTM EBITDA.  The division produces RF and microwave integrated systems and subsystems for use in electronic warfare (“EW”).  EPD is well-positioned for opportunities on the F-35 Joint Strike Fighter, in addition to a number of other critical next-generation programs.  The acquisition establishes Ultra as a major player in the EW market, while bringing a number of long-term contracts to the table that strengthen Ultra’s order book visibility.  The transaction comes on the heels of other notable defense microwave / RF deals including the RF Micro Devices and TriQuint Semiconductor merger and Analog Devices’s acquisition of Hittite Microwave Corp.

On Tuesday, the House of Appropriations Committee approved a bill that proposes $578.6 billion in defense spending for government fiscal year (“GFY”) 2016, $24.4 billion above the amount enacted in GFY 2015.  Notably, the bill includes an $88.4 billion overseas contingency operations (“OCO”) account and $116.7 billion for weapons procurement, approximately $3 billion more than the White House’s request.  Specifically, the bill fully funds most major weapons programs, with $8.4 billion provided for 65 F-35 Joint Strike Fighters, $16.9 billion for nine Navy ships, $1.2 billion for 64 AH-64 helicopters, and $3.0 billion for 16 P-8A Poseidon aircraft.

Government Technology Solutions Update

The Mobile Technology Tiger Team, a group under the Federal CIO Council, released a standardized protection profile for Federal agency application development in response to the Digital Government Strategy (“DGS”), a government initiative to enhance federal digital services.  The profile creates a baseline for security and acts as a set of common standards for the evaluation and validation of mobile application security.  Mobile security has become especially important as more and more Federal employees use their mobile devices for work and hackers are focusing more of their efforts on mobile operating systems.  Already gaining traction, the Department of Defense (“DoD”) and Department of Homeland Security (“DHS”) have agreed to adopt the standards for future application development.

The General Services Administration (“GSA”) is looking to add two new special item numbers (“SIN”) on IT Schedule 70 for Health IT (“HIT”) and cybersecurity.  The Office of Integrated Technology Services (“ITS”) is expected to issue a request for information (“RFI”) within the next two weeks asking industry players and Federal agencies to comment on the requirements for a HIT SIN.  The SIN seeks to create a central location to procure HIT needs making it easier for agencies to classify work, compare costs, and compare capabilities.  Still in its infancy, the RFI for a cybersecurity SIN is expected to be released by ITS before the end of the year.

Big Movers

Esterline Technologies Corp. (Down 12.8%) – Shares were down this week after the company announced second quarter FY 2015 earnings.  The company reported earnings per share (“EPS”) of $1.20 for the period, missing analysts’ estimates of $1.33 and declining from $1.28 for the same period last year.

Transactions

AE Industrial Partners to acquire Belcan Corporation, a provider of engineering services and technical staffing in the aerospace, power generation, and industrial markets.  Terms of the deal were not disclosed.

PPG Industries, Inc. acquired Cuming Microwave Corp, a provider of specialty coatings and materials that absorb microwaves and radio waves in military aircrafts. Terms of the deal were not disclosed.

Apollo Global Management, LLC acquired the OM Group, a diversified industrial company serving the automotive systems, electronic devices, aerospace and defense, industrial, and medical markets. Terms of the deal were not disclosed.

Ultra Electronics acquired the Electronics Products Division of Kratos Defense & Security Solutions, a provider of radio frequencies and microwave integrated systems for use in electronic warfare, radar, communication, missile, and flight test and simulation applications. The deal is valued at $265 million.

Tech Data Corp. to acquire select assets of Signature Technology Group, a provider of data center and professional services to both the public and private sector.  Signature Technology Group generated 2014 revenue of $17.5 million.

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Industry Week in Review – May 29, 2015

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Aerospace & Defense Update

On Tuesday, the U.S. Air Force announced that SpaceX received certification for military space launch, making it only the second provider approved to launch military payloads into orbit.  The Air Force’s certification of SpaceX’s Falcon 9 rocket effectively ends the service’s decade long sole reliance on United Launch Alliance (“ULA”) for military launch services.  SpaceX will have its first opportunity to compete with ULA, the Lockheed Martin and Boeing joint venture, in June, when the Air Force is expected to release a Request for Proposal (“RFP”) for the launch of its next-generation GPS III navigation spacecraft.  The Falcon 9 certification, which is the result of a certification process that began in June 2013, sets the stage for the rocket to lift the Air Force’s GPS navigation satellites, missile warning platforms, weather satellites, and orbiting spy payloads.  The opportunity for the Air Force to compete launch services is expected to drive down costs related to space missions moving forward.

Sikorsky’s S-97 Raider successfully made its maiden flight last Friday, nearly one year after the rotorcraft was made public.  The S-97’s first flight included three take-offs and landings, as well as basic maneuvers to test its hover and low-speed capabilities.  More advanced test flights are scheduled to take place over the course of the next year.  The S-97, which is based on Sikorsky’s X-2 technology, features coaxial counter-rotating main rotors that enable flight at greater speeds than conventional aircraft.  Ultimately, pending successful testing, the S-97 platform positions Sikorsky as a top contender for the U.S. Army’s future vertical lift – light concept and armed aerial scout requirement.

Government Technology Solutions Update

The U.S. Army has released a draft solicitation for its Information Technology Enterprise Solutions-3 Services (“ITES-3S”) contract and extended the deadline for industry day questions.  The $12.1 billion contract, with a five-year base and one four-year option period, is open to both the Department of Defense (“DoD”) and civilian agencies.  However, the Army intends for the contract to meet specific branch needs including a single security architecture, network normalization, identity and access management, enterprise services, cloud computing, and data center consolidation.  The ITES-3S Industry Day is scheduled for June 10th and the final RFP is expected to be released in September 2015.  As a result of ITES-3S procurement delays, the Army extended ITES-2S through April 2018.

The General Services Administration (“GSA”) recently launched CALC.gov, a tool for agencies to conduct market research on professional service labor categories.  The website allows agencies to see the awarded hourly rate ceilings across eight GSA professional service schedules.  Though geared toward use by contracting officers and specialists to negotiate more effectively, the GSA also anticipates use by program managers to estimate program costs.  Users have the option of filtering by qualifications such as skill level, education, experience, and business size to find comparable labor rates.  CALC.gov was created by the GSA to facilitate smarter labor category pricing for more informed contracting decisions within the Federal Government.

Big Movers

B/E Aerospace (Down 5.2%) – Shares were down this week after the company revised its earnings guidance for FY 2015.  The company provided earnings per share guidance of $3.03 for the period, compared to consensus estimates of $3.09 per share.

Transactions

Veritas Capital to acquire StandardAero, a provider of services including engine and airframe maintenance, repair, and overhaul, engine component repair, engineering services, interior completions, and paint applications.  Terms of the deal were not disclosed.

L-3 Communications Corp. acquired CTC Aviation Group Ltd., a provider of high-quality, global airline pilot training and crew resourcing services.  The deal is worth an estimated $220 million.

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Industry Week in Review – May 22, 2015

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Aerospace & Defense Update

The annual Special Operations Forces Industry Conference (“SOFIC”) kicked off this past week in Tampa, FL bringing together military, government, and industry stakeholders alike.  This year, defense giants such as Boeing, General Dynamics, and Polaris showed off a range of new ultralight vehicle offerings in response to the U.S. Army’s pre-solicitation for new ultralight combat vehicles (“ULCV”) that can take advantage of tactical lift.  The U.S. Special Operations Command has also voiced a request for 68 lighter, more expeditionary vehicles that can fit inside a CV-22 Osprey.  This spark in demand appears to stem from a growing capability gap in land transportation vehicles as the military focused on more heavily armored options during the past two wars.

Boeing, Lockheed Martin, and Textron have been rumored to be among the most interested potential buyers, according to various industry reports, for United Technologies Corp.’s Sikorsky helicopter unit.  All three are considering structures to avoid potential negative tax consequences to United Technologies and its shareholders.  The unit may also be spun-off as a stand-alone entity.

Government Technology Solutions Update

A House of Representatives panel approved the $51 million spending measure to provide the National Aeronautics and Space Administration (“NASA”) and Justice Department with modest budget increases.  Under the bill, NASA would receive additional funding for space exploration and fighting cybercrime.  The Justice Department measure would establish a $50 million fund with $15 million allocated toward body-worn police cameras; this proposed budget falls short of President Obama’s request.  The White House has issued a letter in response deeming the budget to be insufficient for improving relations between communities and the police.  The bill, one of the 12 annual spending measures passed through Congress, will be sent for a House floor vote next month; however, it is expected to be vetoed by President Obama, a continuation of his vow to veto bills until domestic programs receive greater funding.

The Technology Business Management (“TBM”) Council is bringing together Federal and private sector Chief Information Officers (“CIOs”) to improve reporting on Federal IT spending.  Federal agencies collectively spend ~$80 billion a year on IT solutions and services, but tracking where the money is spent is often difficult.  The TBM Council is creating a Commission on IT Cost, Opportunity, Strategy, and Transparency (“IT COST”) to focus on increased IT spending transparency / visibility and to develop a set of recommendations for the Federal Government.  Furthermore, one of the main goals will be to develop a taxonomy system to standardize reporting across agencies and departments and increase accuracy of self-reporting.

Big Movers

Booz Allen Hamilton (Down 11.4%) – Shares were down this week following the Company’s recent earnings announcement for the period ending March 31, 2015.  Revenue fell 4.3% to $1.34 billion for the quarter due to a reduction in billable hours and lower than expected margins.

Transactions

Magellan Aerospace Corp. acquired Euravia Engineering & Supply Co. Ltd., a provider of maintenance, repair, and overhaul (“MRO”) solutions for a wide range of aircraft and helicopter gas turbine engines.  The deal is worth an estimated $56.5 million.

Portfolio Company of Trive Capital, Valence Surface Technologies acquired Flextronics San Carlos, a provider of a full range of surface treatments for the semiconductor, aerospace, laser, microwave, and medical device industries.  Terms of the deal were not disclosed.

Zentech Manufacturing, Inc. acquired Colonial Assembly & Design, LLC, a provider of circuit design and layout, systems level design, machining and sheet metal, and complex cable assembly / wire harness manufacturing.  Terms of the deal were not disclosed.

JLL Partners received FTC approval to acquire Sun Capital Partners V, L.P.’s portfolio company, Point Blank Holding Corp., a manufacturer of high performance protective solutions, including bullet, fragmentation and stab resistant apparel and related accessories.  Terms of the deal have not yet been released.

CYBERBIT LTD, a subsidiary of Elbit Systems, to acquire NICE Systems’ cyber and intelligence division, a provider of tools for generating intelligence from communications for law enforcement agencies and intelligence organizations.  The deal is worth an estimated $157.9 million with $117.9 million paid at close and $40 million subject to the business’ future performance.

Computer Sciences Corporation officially announced a spin-off its U.S. public sector business, a provider of IT and professional services and solutions to Federal, state, and defense customers.  The U.S. public sector generated $4.1 billion of revenue and $591 million of operating income in FY2015. 

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Industry Week in Review – May 15, 2015

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Aerospace & Defense Update

The U.S. Air Force released a Justification and Approval notice this past week on FedBizOpps, which indicates its plans to award Northrop Grumman $4 billion in contracts between 2016 and 2020 to sustain and develop the RQ-4 Global Hawk Unmanned Aerial Vehicle.  This step solidifies support for the program and ends its tumultuous acquisition history.  Before the RQ-4 Global Hawk received its milestone C approval from the Pentagon, there was debate over whether Lockheed Martin’s U-2 Dragon Lady should replace it, causing customers to rethink investment in the program.  However, the recent milestone C and justification notice, which argues that it would take four years and about $300 million to $500 million to qualify another prime contractor for the role, provides a positive signal to Global Hawk customers that the U.S. Air Force is committed to the program.

The U.S. Army and U.S. Navy will have new leadership if President Obama’s nominations are confirmed.  On Wednesday, May 13th, President Obama nominated General Mark Milley and Admiral John Richardson to replace current Army chief of staff, General Ray Odierno, and current chief of naval operations, Admiral Jon Greenert.  Milley will leave his position as commander of Army Forces Command and Richardson will leave his position as head of Naval Reactors. These nominations follow the appointment of a new chairman, Marine General Joe Dunford, and vice chairman, Air Force General Paul Selva, to the Joint Chiefs of Staff, and will round out the committee that will lead the Pentagon past Obama’s final term in office.

Government Technology Solutions Update

Computer Sciences Corporation (NYSE: CSC), a provider of IT and professional services and solutions, is expected to separate its Government business from its commercial IT business unit.  A formal announcement is anticipated to be made as early as May 19th, when the Company releases its FY2015 earnings.  CSC’s North America public sector division generated $998 million in revenue between 1Q15 and 3Q15 (ending January 2, 2015) and serves the Department of Defense (“DoD”), Federal civilian agencies, foreign governments, and state and local governments.  The division has been in the process of a cost-cutting campaign spurred by Federal budget pressures and sequestration; however, it is still expected to draw attractive potential buyers as the Government market which faces high barriers of entry.  CSC shares ended the trading day up 4.3% after the split was reported on May 14th.

The Program Management Improvement and Accountability Act of 2015, introduced in the House of Representatives, seeks to improve Federal program and project management and cut wasteful spending.  Third party organizations have estimated that Government organizations spend an unnecessary $119 million for every $1 billion spent as a result of poor project performance.  The Act proposes a formal job path for program managers within the Federal Government and would designate a senior executive as the “Program Management Improvement Officer” for each Federal agency.  Additionally, the bill would require the Office of Management and Budget (“OMB”) to develop and adopt government-wide standards and policies for program management and review agency projects on an annual basis.

Big Movers

Ametek Inc. (Up 4.7%) – Shares were up this week following the Company’s recent announcement that it will acquire Global Tubes from The Watermill Group for approximately $200 million.

Transactions

H-D Advanced Manufacturing Co. acquired Precision Aero Corporation, a manufacturer of machined products for aerospace wheel and brake assemblies.  Terms of the deal were not disclosed.

Emerging Markets Communications, LLC signed a definitive agreement to acquire MTN Satellite Communications, Inc., provider of communications and content services for remote locations around the world.  Terms of the deal were not disclosed.

Danaher Corporation entered into a definitive merger agreement to acquire all the outstanding shares of Pall Corporation, a provider of filtration, separation, and purification solutions that remove contaminants or separate substances from a variety of solids, liquids, and gases.  The deal is worth an estimated $13.8 billion.

Genstar Capital has acquired Boyd Corp. from Snow Phipps Group, LLC, a provider of precision-engineered, specialty material-based energy management and environmental sealing solutions.  Terms of the deal were not disclosed.

The Watermill Group’s portfolio company, Tenere, Inc., has acquired Mountain Molding, LLC, a provider of plastics injection molding services including new mold design and development, transfer of existing molds, assembly, contract manufacturing, inventory management, and full product life cycle support.  Terms of the deal were not disclosed.

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Industry Week in Review – May 8, 2015

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Aerospace & Defense Update

Commercial applications of unmanned aerial vehicles (“UAVs” or “drones”) were among the highlights at this past week’s annual AUVSI conference in Atlanta, Georgia.  Venture investors continue to plow money into commercial UAVs businesses (noted by Accel Ventures’ investment this week of $75 million into Chinese drone firm DJI, valuing DJI at ~$8 billion).  These commercial enterprises have a variety of business models, from the sale of airframes, to maintenance / training / support, to an end-to-end solutions that offer data-as-a-service.  Meanwhile, larger, established UAV players that heretofore have focused on the military end market (Boeing, Aerovironment, many others) have made a notable effort to leverage their existing technologies to address demand in other industry verticals, from infrastructure to mineral exploration to agriculture.  All of this investment and attention have placed greater focus on the gatekeeper to the National Airspace System – the FAA – to both implement and execute upon a strategy for the safe and efficient deployment of UAVs.

The U.S. and Japan agreed upon new military guidelines to strengthen ties between the two countries and build Japan’s global presence.  The update outlines major changes to Japan’s military structure in order to fortify its defense and protect itself and its neighboring allies against potential aggression from North Korea and China.  This suggests that Japan will be able to deploy missile defense systems with the sole purpose of protecting allies including the U.S. if weapons are launched with the intent of injuring those countries.  As a follow-up to the agreement, the U.S. State Department approved a multi-billion dollar weapon sale to Japan for 17 V-22B Block C Osprey and a package of accessories.  The island nation has already agreed to purchase the Global Hawk unmanned system and may consider additional anti-missile systems going forward.

Government Technology Solutions Update

The Office of Management and Budget (“OMB”) released guidance to agencies this week for the GFY2017 Federal budget.  The report suggests Federal agencies should plan for a 5% cut from their discretionary budget compared to levels laid out in the President’s GFY2016 budget proposal.  However, the OMB also detailed priority areas for investment despite the anticipated decline in the broader budget.  Included in these categories were: (i) data-driven management reviews; (ii) digital service teams; (iii) solutions to reduce the Federal real property footprint; and (iv) shared service capabilities migration.  The OMB continues to push for an end to sequestration and cost cutting in more “commonsense” ways, such as the closing of tax loopholes, to fund priority areas.

The U.S. Navy announced a five-year cyber strategic plan this week to build up defenses and in-house skills within the Fleet Cyber Command.  The plan is centered around five priorities to turn the U.S. Navy cyber network into a more offensive “warfighting” platform with intelligence and remediation capabilities by 2020.  In the categories of leadership, operational excellence, agility, transparency, accountability, and partnership, the Fleet Cyber Command has set 18 month milestones for each.  These benchmarks will be used to provide quantifiable markers of progress in evolving cyber capabilities to become both a weapons and defense system.  The Fleet Cyber Command’s plan also focuses on building the cyber workforce as the U.S. Navy is responsible for creating 40 of the 133 teams that will ultimately make up the U.S. Cyber Command’s Cyber Mission Force.

Big Movers

Huntington Ingalls Industries, Inc. (Down 11.4%) – Shares were down this week after the Company released earnings for the first quarter of 2015.  Profit dropped as oil and gas companies cancelled or deferred projects and the Company announced it will lay off 30% of its workforce.

Triumph Group Inc.  (Up 11.5%) – Shares were up this week after the company reported first quarter revenue of $1,080.3 billion, up 15.4% from the same period last year.

Transactions

Pacific Architects and Engineers Incorporated has entered into a definitive agreement to acquire A-T Solutions, Inc., a provider of training and identity operations solutions, full lifecycle forensic and biometric support, and identification and analysis of asymmetric threats.  Terms of the deal were not disclosed.

Seabury Enterprise Solutions, LLC acquired Aero Transport Engineering Consulting S.A., a provider of integrated and flexible maintenance, repair, and overhaul software solutions for the aerospace industry.  Terms of the deal were not disclosed.

Industrial Growth Partners acquired FMH Aerospace Corp., a producer of highly-engineered components and assemblies for the commercial aerospace, defense, space, and industrial sectors.  Terms of the deal were not disclosed.

Information Innovators Inc. (“Triple-I”) acquired Creative Computing Solutions, Inc. (“CCSi”), a provider of cyber security, health services, and program management support to Federal agencies.  Terms of the deal were not disclosed.

Constellis Group to merge with Olive Group, a provider of innovative risk management solutions, which include security, program management, life support, and technology solutions, to blue chip commercial customers operating primarily in the energy, aviation, and infrastructure sectors.  Terms of the deal were not disclosed.

Transom Capital Group acquired Critigen, a full-lifecycle geospatial systems integrator driving business performance through spatial IT solutions.  Terms of the deal were not disclosed.

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Industry Week in Review – May 1, 2015

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Aerospace & Defense Update

Northrop Grumman and General Dynamics, in their earnings calls earlier this week, reiterated that their stock buyback programs will remain preferred methods of cash deployment.  Recently, each of the two contractors has participated in extensive share repurchases.  Northrop Grumman has bought back roughly a quarter of its shares between 2013 and 2015, and returned nearly $1 billion to shareholders through repurchases and dividends in the first quarter of 2015.  Meanwhile, General Dynamics spent $826 million on share repurchases, or 1.3x free cash flow from operations, during the first quarter of 2015.  According to the companies, an absence of highly attractive acquisition targets and strong operating performance continue to prompt share repurchase initiatives, rather than M&A transactions.

Early Thursday morning, the House Armed Services Committee (“HASC”) approved its version of the national defense authorization act (“NDAA”).  The bill provides the Pentagon a $495.9 billion base budget and an additional $89.2 billion in the overseas contingency operations (“OCO”) account.  Notably, the HASC legislation provides the Navy with $1.15 billion to buy twelve additional F/A-18 Super Hornets, while setting aside $1 billion for the Marine Corps to purchase six F-35Bs, in addition to the nine it had already requested.  Moreover, for the second year in a row, the bill rejects the Air Force’s attempt to retire its fleet of A-10 attack planes, instead adding $682.7 million beyond what the Obama administration had requested for the program.  Ultimately, the HASC authorized legislation is viewed as largely favorable to the Department of Defense and industry, with funds allocated beyond requested levels for a number of programs.

Government Technology Solutions Update

The House of Representatives adopted a non-binding budget plan this Thursday by a 226-197 margin, which will be passed to the Senate for a vote next week.  The plan aims to balance the budget in nine years and proposes more than $5 trillion in spending cuts during this time, primarily through reduced spending on social welfare programs such as ObamaCare.  However, it would give the Pentagon an additional $38 billion of funding in GFY2016 and an additional $90 billion boost to defense spending through an off-the-books war fund.  President Obama is expected to block the defense spending boost unless Congress agrees to relief for domestic programs.

The Federal Bureau of Investigation (“FBI”) has announced a cyber solicitation seeking contractors with the ability to recruit, retain, and replace operational cyber subject matter experts (“SME”).  The FBI is looking to build a base of cleared cyber contractors to pull from on an as-needed basis for tasks of varying scope and complexity.  SMEs would work directly with the FBI on consultations, data collection and analysis, intelligence interviewing, training, policy development, and project implementation and management.  The request for proposal (“RFP”) is expected before May 6th and awards are anticipated between August and September.

Big Movers

General Dynamics (Up 4.5%) – Shares were up this week after the company released earnings for the first quarter of 2015.  Earnings per share increased 25.1% to $2.14 and beat analysts’ estimates of $1.94.

BAE Systems plc (Up 1.9%) – Shares were down this week after the company reported first quarter revenue of $2.7 billion, down 8.3% from the same period last year and missing analysts’ estimates of $2.79 billion.

Transactions

TransDigm Group, Inc. to acquire the assets of the aerospace business of Pexco LLC, a manufacturer of extruded plastic interior parts for use in the commercial aerospace industry.  The deal is valued at $496 million.

Special Aerospace Services (“SAS”) acquired C&C Manufacturing Corp., a provider of precision machining solutions in plastics, non-ferrous, and ferrous metals for aerospace, aviation, and commercial customers.  Terms of the deal were not disclosed.

Hava Elektronick Sanayii (Havelsan) to acquire Quantum3D, Inc., a provider of commercial-off-the-shelf open-architecture real-time simulation and ruggedized embedded computing solutions for government and commercial applications.  Terms of the deal were not disclosed.

British Engines Limited to acquire Michell Bearings business of Rolls-Royce plc, a manufacturer of hydrodynamic bearings for a wide range of marine and industrial applications.  The deal is valued at $19.1 million.

American Securities, LLC acquired Royal Adhesives and Sealants, LLC, a provider of proprietary, high-performance adhesives, sealants, and specialty formulated products designed to solve complex bonding, laminating, and sealing applications.  Terms of the deal were not disclosed.

Universal Manufacturing Company, Inc. acquired Ultra Machine & Fabrication, Inc., a provider of precision cutting, bending, welding, coatings services, as well as a manufacturer of precision armor parts and weldments.  Terms of the deal were not disclosed.

ManTech acquired Welkin Associates, Ltd, a provider of mission-centric services in high-end systems engineering and advanced national security technology and business services.  Welkin was formerly a wholly-owned subsidiary of CSC.  The deal is valued at $34 million and Welkin generated 2014 revenue of $33 million.

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Industry Week in Review – April 24, 2015

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Aerospace & Defense Update

The House Armed Services Committee (“HASC”) began its markup of the National Defense Authorization Act this week to be completed by April 29th.  The HASC is in the process of marking up the following four sections; tactical air and land forces, military personnel, seapower and projection forces, and strategic forces, in that order.  There has already been word that the seapower and projection forces section has distinct verbiage demanding oversight of the Air Force’s Long Range Strike-Bomber (“LRS-B”) program.  A detailed review of the overall acquisition strategy, technology design, development and testing status, cost and schedule implications, and more is set to be due by March 1, 2016.  This oversight, led by the comptroller general’s office, will attempt to ensure the Pentagon follows through with its promise of affordability as it is projecting a $550 million per-unit cost in 2010 dollars for the LRS-B.

Following a period marred with profit uncertainty, a failed acquisition, and layoffs, Rolls-Royce has announced yet another executive shift with the retirement of Chief Executive Officer, John Rishton, to be replaced by Warren East, prior chief of ARM Holdings.  East lead the microchip supplier from 2001 to 2013 where exhibited an ability to drive growth for the Company and has also held a position on the board of Rolls-Royce serving as a nonexecutive director and chairman of the Science & Technology Committee.   This shift follows the retirement of Mark Morris, Chief Financial Officer, and James Guyette, head of the North American division.  Guyette will be replaced next month by Marion Blakey, former U.S. Federal Aviation Administration chief.  To round out these moves, the Company also appointed Tom Wood, a relative veteran within the Company to head the Aerospace unit.

Government Technology Solutions Update

The House of Representatives passed the Protecting Cyber Networks Act (“PCNA”) by a 307-116 vote on Wednesday, which will strengthen digital defenses of American consumers and businesses.  The PCBA is the first of three bills to pass related to cyber information sharing laws.  The goal of these laws is to increase the flow of cybersecurity information between public and private sectors.  Government officials and most industry groups believe the exchange of data will be beneficial to both sides in order to understand attacks and strengthen network defenses.  However, privacy advocates and some lawmakers have voiced concern over the sharing of sensitive information.  To ease these concerns, the House also adopted an amendment to the PCNA requiring the inspector general to report how personal information is removed from shared data.

The Defense Information Systems Agency’s (“DISA”) reorganization at the beginning of the year focused on transformational efforts around the “five C’s” – cyber, cloud, collaboration, command, and control.  Much of the emphasis on cybersecurity is now being led by the Infrastructure Development Directorate, a component of the Development and Business Center.  The directorate oversees DISA’s most prominent cyber initiatives and investments, and also houses active opportunities for cybersecurity vendors.  Within the directorate, the Infrastructure Software Services Division is responsible for cloud services, the Cyber Security Division focuses on end point security and configuration management, and the Cyber Situational Awareness and Analytics Division addresses the need to maintain and improve network awareness.

Big Movers

Zodiac Aerospace (Up 13.3%) – Shares were up this week after the Company released earnings for the first half of its 2014 / 2015 fiscal year.  Revenue increased by 16.3% to €2,324.1, driven by 19.8% growth in its aircraft interiors segment.

BAE Systems plc (Up 1.9%) – Shares were up this week after the Company announced that it is considering exiting some of its U.S. based information technology businesses including its U.S. manpower and services IT business which has generated external interest.

Transactions

Sierra Nevada Corporation acquired Kutta Technologies, Inc., a provider of high reliability mission-critical software and systems.  KippsDeSanto & Co. advised Kutta Technologies, Inc. on the deal of which terms were not disclosed.

G/Force. Inc. acquired Tri Star Engineering, Inc., provider of technical support services to NSWC Crane and other Department of Defense agencies.  Terms of the deal were not disclosed.

Amphenol Corporation acquired RG Industries LLP’s Invotec Group Ltd., a manufacturer of time-critical and technologically complex HDI, Flex and Flex-Rigid printed circuit boards for the defense, aerospace, industrial, security, and transportation markets.  Terms of the deal were not disclosed.

Raytheon to acquire Websense Inc., a provider of cybersecurity solutions to protect data and users from cyber threats, malware attacks, information leaks, legal liability, and productivity loss worldwide.  Websense is a portfolio company of Vista Equity Partners LLC.  The deal is valued at $1.9 billion, net of cash, and will be combined with Raytheon’s’ cybersecurity unit.

KPMG acquired Triad Technology Partners’ ServiceNow Professional Services Organization, a provider of enterprise IT cloud tools to Federal and Intelligence clients.  Terms of the deal were not disclosed.

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Industry Week in Review – April 17, 2015

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Aerospace & Defense Update

Earlier this week, the 2015 MRO Americas conference took place in Miami, FL.  The conference, which is the aerospace industry’s pre-eminent conference covering all topics related to maintenance, repair, and overhaul (“MRO”), featured Embraer’s Chief Operating Officer, Luis Carlos Affonso, as its opening keynote speaker.  A generally positive attitude around the current MRO environment permeated the conference, as robust airline traffic, favorable macroeconomic conditions, and low oil prices have propped up the industry.  Various deal announcements during the conference, such as Azalea Capital’s acquisition of InTech Aerospace and AE Industrial Partners’ acquisition of Kellstrom Commercial Aerospace, highlighted continued interest among strategic players and capital providers to consolidate a fragmented industry.

SpaceX indicated that it hopes the next attempted landing of its Falcon 9 reusable launch vehicle will take place on solid ground, rather than over water like all previous tests.  The most recent of these landing attempts took place on Tuesday, with the rocket touching down safely on the target shortly before toppling over.  The company is optimistic that the added stability from a ground-based landing platform would contribute to a safe, successful landing.  Meanwhile, United Launch Alliance (“ULA”) unveiled its next generation launch vehicle, the Vulcan, in an announcement at the National Space Symposium on Monday.  Notably, the vehicle will feature a reusable main engine in an attempt to reduce booster propulsion costs.  Both of these announcements indicate a growing trend towards reusability among space systems.

Government Technology Solutions Update

The Department of Homeland Security (“DHS”) approached the Senate Appropriations subcommittee this week to request budget increases for its cybersecurity programs in GFY2016.  The proposed cyber budget would provide funding in four key areas: (i) $812 million to sustain funding for cybercrime and cyber-criminal investigations; (ii) $480 million to protect government wide networks; (iii) $103 million for continuous diagnostic monitoring programs; and (iv) $5 million to develop and sustain its cybersecurity workforce.  This proposal includes increased spending over GFY2016 in all categories except cybercrime and cyber-criminal investigations.  DHS’s request makes up $1.4 billion, or 10%, of the total White House cyber program budget request for GFY2016.

The Army’s Computer Hardware Enterprise Software and Solutions (“CHESS”) component seeks to attract more small businesses (“SB”) and increase the scope on its Information Technology Enterprise Solutions-3 Services (“ITES-3S”) contract.  ITES-3S’s Request for Proposal (“RFP”) has yet to be released; however, the $11 – $15 billion contract is expected to have a five-year base period with one four-year option.  CHESS believes the structure of the contract will encourage SB companies to submit proposals and intends to classify SB as companies with annual revenue of less than $27.5 million.  The scope of work will be expanded from the current generation of the contract (“ITES-2S”) to enable the Department of Defense (“DoD”) to fulfill cyber and cloud mission requirements.

Big Movers

Precision Castparts (Down 5.6%) – Shares were down this week after the Company announced that earnings in its fiscal quarter ended in March are expected to fall to a range of $2.90 – $2.95 per share, compared to analysts’ estimates of $3.21 per share.

Smith & Wesson (Up 18.1%) – Shares were up this week after the Company raised its fiscal fourth quarter ending in April sales and earnings guidance given stronger than expected order volume.  Sales for the quarter are now expected to be $175 million to $179 million, up from the previous guidance of $162 million to $166 million.

Transactions

IXI Technology acquired RioTech Corp., a provider of turnkey solutions to the aerospace market for electronic and software engineering, functional automated test, electronic systems, and build-to-print services.  Terms of the deal were not disclosed.

AE Industrial Partners LLC acquired Kellstrom Commercial Aerospace Inc., a provider of aftermarket parts, repairs, logistics, and supply chain management solutions for the commercial aerospace market.  Terms of the deal were not disclosed.

AGC Aerospace and Defense acquired Aerospheres (UK) Ltd., a provider of chemical and composite repair services to the commercial airline and MRO market.  Terms of the deal were not disclosed.

Sparton Corporation acquired Hunter Technologies Corp., a provider of electronic contract manufacturing services specializing in military and aerospace applications.  The deal is worth an estimated $50 million.

SolAero Technologies Corp. acquired Alliance Spacesystems, LLC, a provider of composite structures for spacecraft and other high-tech applications.  Terms of the deal were not disclosed.

Ranger Aerosystems, an Azalea Capital portfolio company, acquired InTech Aerospace, an MRO company specializing in commercial and military airplace interiors and components.  Terms of the deal were not disclosed.

Assured Information Security, Inc. acquired Information Security Solutions, Inc., a provider of cybersecurity consulting services and specializing in the areas of cybersecurity, IT security and cyber intelligence analysis.  Terms of the deal were not disclosed.

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Industry Week in Review – April 10, 2015

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Aerospace & Defense Update

Bombardier’s new Chief Executive Officer, Allain Bellemare, led the next stage in the company makeover with a refresh of the executive team.  Pierre Alary, the current Senior Vice President and Chief Financial Officer, will retire while Mike Arcamone, the current head of the commercial aircraft division will depart to pursue other opportunities.  Bellemare has identified Fred Cromer, the previous president of International Lease Finance Corp., to head the commercial aircraft unit.  Cromer has a long history in the commercial aerospace industry having held various senior positions at a range of airlines.  Bellemare has also chosen Henri Courpron, the Chairman and Founder of Plane View Partners, an aviation advisory company, and former Chief Executive Officer of Airbus, North America, to come onboard as a strategic adviser to the firm.  This revamp in the executive team highlights Bellemare’s urgency to transform the ailing company and to realign with customer taste in order sell the CS3000.

Government Technology Solutions Update

A memorandum regarding the appropriate use of Lowest Priced, Technically Acceptable (“LPTA”) source selection processes was issued within the Department of Defense (“DoD”) this week in an effort to narrow the use of LPTA procurements.  When used correctly, LPTA is an effective method to drive down costs; however, agencies are realizing that solutions originally procured as LPTA often must be replaced or recreated, eliminating the cost savings and creating a need for additional funds. The memorandum, circulated by Frank Kendall, the Under Secretary of Defense for Acquisition, Technology, and Logistics, defines four conditions that are all to be met for the use of LPTA: (i) contract requirements must be well defined; (ii) risk of poor contract performance is minimal; (iii) price is a driving factor in the source selection; and (iv) there is no value, need, or willingness to pay for higher performance.  With these stipulations, the DoD signals a shift away from LPTA procurements for technical or professional service and solution bids.

Over the next six months the General Services Administration (“GSA”) will continue to work with professional service vendors to launch the first consolidated GSA schedule.  The schedule seeks to increase efficiencies for and spending by Federal agencies, as well as simplify contracting requirements for vendors.  Under the consolidated schedule, the GSA hopes to increase its share of the professional services addressable spending to 31% of the market by 2017 – more than $7 billion in contractor spending.  The GSA will be consolidating 4,400 of its current schedules, which will effectively migrate approximately 440 professional services vendors.  Once migrated, each vendor will receive a new 20-year contract for the new, consolidated schedule.

Big Movers

Triumph Group Inc. (Up 5.8%) – Shares were up this week after the Company announced that Chairman Richard Ill will temporarily replace the existing CEO, Jeffry Frisby while the Company searches for a new CEO.

Astronics Corporation (Up 4.8%) – Shares were up this week after the Company won a $36.4 million indefinite delivery / indefinite quantity contract to manufacture, test, and deliver the Radio Frequency Distribution and Control System and parts for its submarines.

Transactions

Wencor Group acquired PHS / MWA Aviation Services, a certified FAA / EASA repair station and provider of aircraft repair solutions.  Terms of the deal were not disclosed.

Landmark Aviation to acquire Era Group Inc. Fixed Based Operation in Alaska, a provider of fixed based operation services at Ted Stevens Anchorage International Airport.  Terms of the deal were not disclosed.

Charterhouse Capital Partners, LLP acquired Mirion Technologies, Inc., a provider of radiation detection, measurement, analysis, and monitoring products and services.  The deal is worth an estimated $750 million.

Boeing Co. acquired 2d3 Sensing, Inc., a provider of motion imagery processing of critical intelligence, surveillance, and reconnaissance data generated from aerial platforms.  Terms of the deal were not disclosed.

Lindsay Goldberg made a minority stake investment in ECS Federal, LLS, a provider of technology solutions and engineering services to the U.S. Federal Government.  ECS Federal generated $300 million in revenue for FY2014.

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