Aerospace & Defense Update

The Pentagon and Lockheed Martin are closing in on a deal for the 11^th lot of F-35s, which includes more than 130 jets.  The deal was initially planned to close by the end of 2017, but negotiations between the two parties stalled delaying finalization.  Negotiations for the F-35’s Lot 9 reached an impasse in November 2016 until the government ultimately forced Lockheed into a $6.1 billion deal by imposing a unilateral contract agreement.  All three F-35 variants for Lot 11 are expected to be cheaper than previous procurements.

On Thursday, the House passed its version of the annual defense appropriations bill, which budgets $675 billion to the Defense Department.  The bill plans for the dual purchase of two aircraft carriers, CVN-80 and CVN-81, but does not include the purchase of additional submarines.  Compared to the Senate Appropriations Committee, the House approved four more F-35 fighter jets, one more littoral combat ship, and the Advanced Battle Management System to replace the JSTARS recapitalization plan.  The dual purchase of the aircraft carriers is expected to save up to $2.5 billion in construction costs.  Despite the savings, each carrier is anticipated to cost $10 billion, which could create problems with budget caps.  These concerns ultimately led to the exclusion of three Virginia-class submarines per year starting in 2022.  The Senate Appropriations Committee advanced its version of the bill on Thursday as well, but it is still unclear as to when the full Senate will vote on it.

Government Technology Solutions

With the 2020 Census quickly approaching, officials have noted concerns around protecting its inherent data, given growing fears about the lack of cyberattack preparedness among many federal agencies.  A recent report by the Office of the Management and Budget (“OMB”) points out 71 of the 96 federal agencies reviewed were “at risk” or “at high risk” of a cyberattack.  Department of Commerce Chief Information Officer (“CIO”) Rod Turk said Tuesday that he hopes that the intelligence community (“IC”) will help monitor potential cyberattacks, particularly given that the 2020 census plans to utilize more technology systems than any previous decennial census.  Turk mentioned that protecting the census’ networks will be critical, as the census is not only used to collect information, but also to help determine federal funding levels for a variety of infrastructure systems.  The 2020 Census will utilize more than 40 IT systems, including new online response and mobile assist functions, increasing the vulnerabilities of the survey and opportunities for a cyberattack.  Turk suggested that the IC could use artificial intelligence and machine learning to identify threats and added that the Commerce Department has already sought out “private sector intelligence gathering services” to help it track threat indicators on the dark web.

The strategy of integrating a federal agency’s engineering and operations (“DevOps”) to perform large-scale cloud migration might soon be replaced by a new strategy, No Operations (“NoOps”).  The concept of NoOps centers around expanding the role of cloud companies to provide infrastructure management services normally overseen by an agency’s IT department.  This shift in federal cloud migration management comes as cloud companies are increasingly providing cloud services where they not only code and update, but also manage the IT infrastructure in the background.  Although NoOps would increase an agency’s dependence on outside cloud providers, it would provide cost savings and allow customer’s engineering teams to focus their efforts on developing mission critical systems.

Big Movers

Safran (up 4.7%) – Share prices were up this week after the company announced a planned collaboration with Bell Helicopter to develop an electric air taxi.

American Outdoor Brands (down 5.0%) – Stock prices continued to slide this week after blaming social activists for its poor performance.

Transactions

Imenco AS has acquired Kongsberg Maritime AS’s Camera Division, a provider of subsea cameras and harsh environments CCTV systems. Terms of the deal were not disclosed.

Zivaro, Inc. (formerly Global Technology Resources, Inc. (GTRI)) has agreed to acquired Network Professionals Group, LLC (NPG), a provider of value-managed service offerings supporting hybrid information technology systems. Terms of the deal were not disclosed.

Goshawk Aviation Limited has agreed to acquire SKY Aviation Leasing International, a provider of full-service leases for premier aircraft. Terms of the deal were not disclosed.

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Aerospace & Defense Update

Embraer’s stock saw its largest increase in two months after its joint venture with Boeing received a major endorsement this past week.  Brazilian President Michel Temer endorsed the partnership, which is essential given the government’s “golden share” in Embraer, which gives it veto power over strategic decisions around its military programs and any change in control.  The commercial joint venture between Embraer and Boeing would combine their marketing, manufacturing, and engineering capabilities.  Boeing would control the joint venture, but Embraer’s defense unit would remain a separate entity.  Embraer provides Boeing with the necessary resources and a lower-cost manufacturing center outside the U.S. as Boeing begins plans for a new mid-range airliner.

Raytheon won a major contract with Lockheed Martin’s F-35 joint strike fighter to provide a new distributed aperture system (“DAS”), which is one of its signature capabilities.  Northrop Grumman previously supplied the DAS but chose not to compete for the new contract.  The DAS allows fighter pilots to see through the bottom of the aircraft onto the ground below with advanced sensory technology.  Northrop decided the DAS production was no longer a successful business venture, which led to its decision to drop the project.  However, Northrop will remain a part of the F-35 program through production of the APG-81 radar and sustaining the legacy DAS.  Raytheon’s system was an attractive fit for the F-35 due to its affordability, as cost reductions continue to be a key focus of the F-35 program.

Government Technology Solutions

Looking to automate its mobile device management, the Defense Information Systems Agency (“DISA”) has issued a request for information (“RFI”) for an automated provisioning tool to support classified mobile access for devices used in the Department of Defense Mobility Classified Capability (“DMCC”) program.  The antiquated infrastructure currently used to access the Secret Internet Protocol Router Network (“SIPRNet”) poses a substantial risk to mission readiness and creates gaps in mobile security and communication with its rigid, manual processes. The RFI outlines DISA’s search for an existing commercial tool that can automate the installation and management of user certificates for key infrastructure and set up.  The new automated provisioning tool will mitigate security risks by using a virtual private network and setting device passwords.  The Senate version of the 2019 National Defense Authorization Act (“NDAA”) criticized the department’s failure to have infrastructure in place with automated device management capabilities.  In order to comply with the NDAA’s request, DISA intends to move quickly with this acquisition, anticipating a period of performance beginning in July 2018.

The Department of Veterans Affairs (“VA”) is seeking industry input on new technology solutions to support its operations centered around network security and efficiency.  The VA’s RFI issued last Thursday seeks industry input on how blockchain ledger technology can be leveraged to bring efficiency to contract closeouts, including retroactively applying them to all pending contract closeouts.  Blockchain solutions will be able to streamline the repetitive contract closeout processes and eliminate almost all labor involved in government contract close-out procedures.  The second RFI, issued Tuesday, calls for a cloud-based endpoint protection system to centralize the VA’s anti-virus capabilities and protect its network of approximately 575,000 workstations and 32,000 servers.  The VA calls for a solution that will be able to isolate ransomware and detect advanced threats before they infect the system, utilizing machine-learning to create an automated process.

Big Movers

Rolls Royce (up 12.8%) – Share prices were up this week after the company announced that it was “well-placed” to reach its target 1 billion pounds in free cashflow by 2020.

NIC (up 4.5%) – Share prices were up this week after the company announced a partnership with Grand Canyon National Park to offer electronic entrance passes.

Transactions

Viasat, Inc. has acquired Horsebridge Defence and Security, a provider of design, system integration, and support of deployable secure networks. Terms of the deal were not disclosed.

TGP Investments II, LLC has agreed to acquire Mid-America Precision Products, LLC,  a provider of highly-engineered, precision-machined components for missiles, aerospace, and maritime products. Terms of the deal were not disclosed.

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Aerospace & Defense Update

On Friday, the Trump administration announced the enactment of tariffs on steel and aluminum imports from Europe, Mexico, and Canada.  Though the American defense industry buys the majority of its steel and aluminum from domestic suppliers, the tariffs are expected to allow those suppliers to raise prices unhindered by foreign competition.  Because of retaliatory tariffs, defense firms may face weaker demand from abroad and rising prices at home.  For products with no European competition, such as heavy-lift helicopters or C-130J cargo aircraft, European customers will still purchase from U.S. suppliers.   Alternatively, other reports speculate that the interdependence of NATO allies will prevail against a trade war since many European countries rely on U.S. suppliers.

The U.S. military has held early talks about implementing a Terminal High Altitude Area Defense (“THAAD”) system in Germany to boost European missile defenses.  European allies and the U.S. are weary of potential adversaries developing ballistic missiles capable of reaching southern Europe.  In particular, the German defense ministry has been looking to bolster its short and medium-range missile defenses.  The U.S. withdrawal from the Iran nuclear accord has accelerated the efforts to install the THAAD system in Europe.  In early June, the Pentagon is expected to further acknowledge the issue in a new missile defense review.  Additionally, Germany plans to review its territorial defense needs later this year, specifically looking at the THAAD system and the Arrow 3 anti-missile system.

Government Technology Solutions

The White House is against the idea of shuttering the Defense Information Systems Agency (“DISA”), as was proposed in the House version of the fiscal 2019 National Defense Authorization Act (“NDAA”).  The proposal would shift Pentagon IT acquisition services from DISA to other Department of Defense (“DoD”) components and eliminate the agency by 2021 in an effort to promote efficiency, reduce redundancy, and streamline bureaucracy across the DoD’s 28 4th Estate support agencies.  The White House responded by pledging its support for keeping DISA as the DoD’s centralized IT acquisition arm.  The Executive Office of the President stated in a memo that closing and transferring DISA’s responsibilities elsewhere would increase the cost of acquiring IT, weaken the DoD’s ability to secure its cyber networks, and inhibit DISA’s mission to provide seamless communication to warfighters and senior leaders.  Under the House proposal, all DISA functions and personnel not transferred elsewhere by 2021 would be eliminated.

As the U.S. and North Korea engage in peace talks, North Korean hackers have continued, or even ramped up, cyberattacks across Asia, Europe, and the U.S., focusing on financial and digital theft.  The Department of Homeland Security (“DHS”) and Federal Bureau of Investigation (“FBI”) released a joint alert Tuesday regarding the spread of a particular malware variant linked to North Korea.  The alert served as a reminder that North Korea remains highly dependent on cybercrime for both financial and geopolitical gain.  For example, in South Korea, hackers have targeted select victims, using phishing lures to glean information relevant to the current peace process.  As peace talks move forward, experts are unsure whether North Korea will reduce its hacking activities due to their decentralized nature.  North Korean and U.S. officials met Wednesday to organize the potential summit between Kim Jong-un and President Donald Trump, although cybersecurity was not discussed.

Big Movers

Bombardier (up 10.8%) – Share prices were up this week after the company announced its plans to build two new private planes in response to growing demand for large-cabin business jets

Booz Allen Hamilton (up 7.3%) – Share prices were up this week after the company reported strong fiscal fourth quarter and fiscal 2018 results.

Transactions

BBA Aviation has agreed to acquire EPIC Aviation, LLC, a provider of fuels and services to FBOs, commercial airlines, airports, ground fueling operators, the U.S. Defense Logistics Agency (DLA) and other government agencies.  Terms of the deal were not disclosed.

Cache Creek Industries, LLC has acquired Mountain Secure Systems, a provider of proprietary, ruggedized and highly engineered electronic solutions to defense contractors.  Terms of the deal were not disclosed.

Madison Dearborn Partners and CoVant Management have jointly acquired LinQuest Corp., a provider of space systems technology solutions to the U.S. defense and intelligence communities.  Terms of the deal were not disclosed.

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Aerospace & Defense Update

President Trump’s decision to withdraw from the Iranian nuclear deal announced on May 8^th has significant implications for the commercial aircraft landscape and sales volume.  The U.S. Treasury Department is revoking all formal licenses that Airbus, Boeing, and other original equipment manufacturers (“OEMs”) needed to sell commercial aircraft to Iran.  After the original Iranian nuclear accord was reached in 2015, OEMs eagerly lined up sales to Iranian airlines for hundreds of large civil aircraft in deals that totaled tens of billions of dollars.  While notable for the potential long-term ramifications, the loss of Iranian orders is not expected to have a material, detrimental impact on Boeing and Airbus’s backlog, representing under 2% of the companies’ combined order backlogs.

Remington Outdoor, a U.S. based weapons manufacturer, announced on Thursday that it had emerged from Chapter 11 bankruptcy.  The company now has less debt and more stable financing, which will help it maintain course under a market that has slowed for firearms sales under the current administration, driven in part by major headline risk.  Under the Chapter 11 Reorganization Plan, J.P. Morgan Chase and Franklin Advisors will forgive more than $775 million of debt in exchange for equity ownership stakes in the company.  Seven banks, including Bank of America, have also provided Remington with a $193 million revolving credit facility, which will refinance its prior asset-based loan facility along with a new $55 million last-in, first-out term loan and a new $100 million term loan.

Government Technology Solutions

President Donald Trump signed an executive order on Tuesday that will require agency Chief Information Officers (“CIOs”) to report directly to their agency head and will also make them voting members of the bureau-level IT governance board.  The executive order is designed to empower CIOs by both increasing their enterprise awareness and giving them increased hiring powers.  Senior administration officials said they were compelled to make this move after meeting last June with private sector tech CEOs, who described the empowerment of the CIO as a major difference between the private and public sectors.  Giving CIOs more influence has long been a popular idea, and the 2014 Federal Information Technology Reform Act (“FITARA”) was designed to give CIOs responsibility for agency spending.  However, only half of the agencies subject to FITARA have managed to make this happen, often drawing lawmakers’ frustrations.  Administration officials believe the executive order will ultimately prove more effective and allow agencies to build the capacity to conduct change on an ongoing basis.

The House of Representatives introduced a measure this week that would direct the Department of Homeland Security (“DHS”) to give lawmakers more information on potential cybersecurity threats posed by Chinese telecommunications firm ZTE.  The resolution would ask DHS to provide the House Homeland Security Committee with any documentation that the agency has on cyber risks introduced by the use of ZTE products on federal, state, and local government networks.  U.S. intelligence officials have warned of ZTE’s alleged links to the Chinese government, and the Pentagon earlier this month told vendors on military bases to stop selling devices from ZTE.  The House measure comes as President Trump attempts to reach a U.S.-China trade deal with Chinese President Xi Jinping, potentially complicating the House’s move.  Still, the resolution has the support of many in the intelligence community, including FBI director Christopher Wray, who affirmed his belief on Tuesday that state-linked firms, like ZTE, pose a cyber-espionage threat.

Big Movers

Aerojet Rocketdyne (up 5.0%) – Share prices were up this week after United Launch Alliance announced it will use an Aerojet Rocketdyne engine for the upper stage of its new Vulcan rocket.

AeroVironment (down 6.3%) – Share prices were down this week after the company was accused of trying to conceal that employees transported a drone rigged with explosives on a commercial flight and firing the manager who told the government.

Transactions

Aerostructures Long Island, Inc. has acquired Triumph Structures – Long Island, LLC, a subsidiary of the Triumph Group, Inc., a provider of aircraft structural components and dynamic parts and assemblies for commercial and military aerospace programs.  Terms of the deal were not disclosed.

Spell Capital Partners, LLC has acquired 3P Processing, Inc., a provider of metal finishing, testing, and inspection process services to the aerospace & defense sector, specializing in complex geometric and high-precision parts.  Terms of the deal were not disclosed.

Trive Capital’s portfolio company, Valence Surface Technologies, LLC, has acquired Triumph Structures – Los Angeles, Inc. and Triumph Processing, Inc., providers of manufacturing and assembly of large structural components and non-destructive testing, chemical processing, and paint services to the global aerospace industry, respectively.  Terms of the deal were not disclosed.

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Aerospace & Defense Update

On Tuesday, Boeing announced its intention to acquire KLX, Inc., a provider of aerospace fasteners, consumables, and logistics services to customers worldwide for $4.2 billion.  The acquisition will include KLX’s Aerospace Solutions Group, but will not include KLX’s Energy Services Group, which Boeing plans to divest.  KLX Aerospace will be integrated as a subsidiary of Aviall, which manufactures aerospace parts within Boeing’s Global Services business unit.  The Global Services unit was launched last year as part of Boeing’s broader strategy of expanding into the higher-margin aviation aftermarket business by providing maintenance, spare parts, and other services.  Boeing’s CEO, Dennis Muilenberg, has set the goal of tripling the division’s sales to $50 billion over the next decade, which will likely fuel consolidation amongst the current aviation aftermarket providers.

Spirit AeroSystems has agreed to acquire the parent company of aerospace-components maker, Asco Industries, for $650 million.  The Belgian-based company is a supplier of high-lift wing structures, mechanical assemblies, and major functional components to original equipment manufacturers and Tier-1 suppliers within global commercial aerospace and military markets.  The acquisition is in line with Spirit AeroSystems’ strategy of diversifying its main focus away from aerostructures manufacturing.  Asco will help Spirit AeroSystems expand into parts manufacturing for the Airbus A320 and A350, as well as Lockheed Martin’s F-35 fighter jet, and provide greater access to commercial customers to expand its fabrication business.

Government Technology Solutions

The White House’s National Security Council is pushing to rescind the Presidential Policy Directive 20 (“PPD-20”), a memorandum that guides the approval process for government-backed cyberattacks, with a more streamlined channel for military leaders to get their offensive cyber operations greenlit.  The move comes as lawmakers openly question whether the U.S. Cyber Command, the nation’s premier cyber warfare unit, is hamstrung from responding to Russian meddling due to bureaucratic red tape.  Currently, PPD-20 requires government agencies to run approvals for offensive operations through a chain of command that stretches across the Federal Government, even requiring the direct blessing of the President for operations of “significant consequence”.  However, the move faces resistance from the Intelligence Community (“IC”) and several federal agencies, particularly as intelligence officials express concern over whether rescinding the directive will affect their own active missions.  It remains unclear whether giving military leaders more leeway to conduct hacking operations will lead to more effective missions.

As the Department of Homeland Security (“DHS”) prepares a new cybersecurity strategy, lawmakers have called on the DHS to improve its information-sharing program.  DHS has worked to quicken the pace at which it shares information with the private sector, touting its Automated Indicator Sharing program.  However, Rep. Dutch Ruppersberger argued in a report released Monday that U.S. networks can no longer rely solely on such reactive, indicator-based sharing programs.  President Trump’s fiscal 2019 budget includes $1.7 billion for cybersecurity at DHS, which Ruppersberger hopes will be put towards investing in information-sharing.  The report comes as DHS awaits congressional approval of a reorganization that would change the National Protection and Programs Directorate, its bureau for protecting the cyber and physical security of critical infrastructure, into a dedicated cybersecurity bureau renamed the Cybersecurity and Infrastructure Security Agency.  The focus of DHS’ new strategy will be to curb the “systemic” cyber risk of the nation’s infrastructure by using private and public sector collaboration to better connect the dots on threats.

Big Movers 

Fluor (down 24.0%) – Share prices were down this week after the company reported a net loss per share in the first quarter and reduced its full-year EPS guidance range from $3.10 – $3.50 to $2.10 – $2.50 per share.

Spirit AeroSystems (up 4.4%) – Share prices were up this week after the company agreed to acquire Asco Industries for $650 million.

Transactions

American Industrial Partners has agreed to acquire L3 Technologies’ subsidiary, Vertex Aerospace, a provider of sustainment & support and aviation & aerospace technical services for the DoD, government agencies and foreign governments.  The deal is worth an estimated $540 million.

Boeing Co. has agreed to acquire KLX, Inc., a provider of aerospace fasteners, consumables, and logistics services worldwide through its Aerospace Solutions Group.  The deal is worth an estimated $4.2 billion.

Ontario Systems, LLC, a portfolio company of Arlington Capital Partners, has acquired Justice Systems, Inc., a provider of court case management, prosecutor and public defender case management, and electronic payments software for state and municipal court systems.  Terms of the deal were not disclosed.

Pinewell Capital, LLC has acquired Avon Engineered Fabrications, Inc., a provider of military-grade performance inflatable products to various DoD and US military branches, as well as the other commercial clients worldwide.  Terms of the deal were not disclosed.

Spirit AeroSystems Holdings, Inc. has agreed to acquire Asco Industries N.V., a provider of high lift wing structures, mechanical assemblies, and components to OEMs and Tier-1 suppliers.  The deal is worth an estimated $650 million. 

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