Industry Week in Review – February 16, 2018

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Aerospace & Defense Update

On Monday, President Trump released his GFY2019 fiscal budget, which included $686 billion for the base defense budget, $69 billion for overseas contingency operations, as well as additional funding for the Department of Energy’s nuclear weapons programs.  Overall, the budget included a total of $716 billion for national security spending, which represents a $74 billion increase in DoD funding relative to the current amount set by the continuing resolution levels with the goal of increasing troop levels, the number of combat aircraft, and rebuilding the Navy’s fleet.  The budget request also lays out key initiatives such as the modernization of nuclear capabilities and increasing research and development efforts for cyber, electronic warfare, artificial intelligence, and space.

The Chairman of the Federal Communications Commission (“FCC”) recommended the approval of SpaceX’s plan to provide wireless broadband internet service through large arrays of satellites in low Earth orbit.  FCC approval is an important milestone for SpaceX’s project, which has ultimate plans of launching roughly 5,000 satellites by 2025 in order to create a constellation of satellites capable of beaming internet service to approximately 50 million subscribers.  The satellites are expected to be deployed by SpaceX’s Falcon Heavy rocket, which was successfully launched in its first test flight last week.

Government Technology Solutions

On Monday, President Trump unveiled his government fiscal 2019 budget, which seeks $45.8 billion for civilian IT funding, which includes $210 million for the Technology Modernization Fund (“TMF”).  The TMF will be a central fund for all agency IT upgrades, managed by the General Services Administration (“GSA”).  While the $210 million budget request is down from the $228 million requested in government fiscal 2018, the TMF is expected to be self-sustaining well beyond its initial cash infusion.  Agencies will be required to repay the TMF for any amounts transferred out, ensuring the TMF can continue to fund priority modernization projects.  An estimated $167 million is expected to go toward equipment procurement, with the rest of the funding going toward advisory services and acquiring other federal services.  The Trump administration plans for the TMF to not only help make agencies more secure, but also save money.

The Pyeongchang 2018 Winter Olympic Games were off to a chilly start, as Olympic officials recently confirmed a cyberattack infiltrated their systems.  Hackers armed with destructive malware compromised Atos, the main IT service provider for the Winter Olympics Games, several months ago and used this data to penetrate the Winter Olympics’ computers during the opening ceremony.  The official Winter Olympics website went down for several hours, causing disruption to online ticket sales and downloads.  Known as the Olympic Destroyer, the malware was programmed to act like a computer worm, scanning for and stealing user credentials to dive deeper into the infected machines.  The Olympic Destroyer used employee credentials previously taken from Atos to destroy files within the Olympics’ computers.  If the Olympic Destroyer had not been stopped sooner, there could have been significant disruptions to the games.

Big Movers

CSRA (up 31.6%) – Share prices were up this week after General Dynamics said it plans to acquire CSRA in a deal valued at $9.6 billion.

Bombardier (up 19.9%) – Share prices were up this week after the International Trade Commission voted against imposing duties on sales of Bombardier’s new jetliner.

Transactions

General Dynamics Corp. has entered into a definitive agreement to acquire CSRA, Inc, a provider of a wide variety of services to the federal government.  The deal is worth an estimated $9.6 billion.

Veritas Capital has signed a definitive agreement to acquire the U.S. public sector business of PricewaterhouseCoopers LLP, a provider of a professional services to the federal government.  Terms of the deal were not disclosed.

Arlington Capital Partners has invested in Integrity Applications Inc. (IAI), a provider of systems engineering, integrated solutions, technical analysis, and subject matter expertise to customers in the intelligence and defense communities.  Arlington Capital Partners plans to combine IAI with fellow federal market portfolio company Xebec.  Terms of the deal were not disclosed.

Clavis Capital Partners’ portfolio company Solair Group, LLC has acquired JetMac, a provider of ground support equipment products, services, and solutions.  Terms of the deal were not disclosed.

General Dynamics Corp. has acquired GPS Source, Inc., a provider of precise timing distribution, GPS, and GNSS solutions for both commercial and military markets.  The deal is worth an estimated $35 million.

Granicus Inc. has acquired Vision Internet, a provider of website development services.  Terms of the deal were not disclosed.

Magal Security Systems, Ltd. has agreed to acquire a 55% controlling interest in ESC BAZ Ltd., a provider of military-grade smart security video observation and surveillance systems.  Terms of the deal were not disclosed.

SemiConductor Devices, owned by Rafael Advanced Defense Systems and Elbit Systems, has acquired Quantum Imaging, Inc., a provider of camera solutions for high-performance imaging applications for a range of military, industrial, and scientific industries.  Terms of the deal were not disclosed

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Industry Week in Review – February 9, 2018

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Aerospace & Defense Update

On Friday, President Trump signed a budget deal passed by both Houses of Congress, placing a quick end to an overnight government shutdown.  The new budget deal sets defense spending levels at $700 billion for GFY2018 and $716 billion for GFY2019, representing a roughly 17% and 20% increase over 2017 levels, respectively.  However, the budget is still unclear on how the new defense spending will be allocated between the base defense budget and overseas contingency operations (“OCO”).  With budget caps still in place, restrictions could be applied to the base budget, but OCO funding is exempt from budget caps.  This ramp-up in defense spending is seen as a key step to increasing operational readiness, maintenance backlog, and manpower for the military.

Government Technology Solutions

In a letter to the chairman of the House Foreign Affairs Committee, Secretary of State Rex Tillerson detailed his plan to create a new “cyber bureau” within the State Department.  The bureau would focus on creating coordinated international cybersecurity priorities.  When Tillerson took office, he removed the Obama administration’s Office of the Cyber Security Coordinator, which had an independent staff and structure, and instead wrapped the State Department’s cyber diplomacy mission into the Bureau of Economic Affairs’ Office of International Communications and Information Policy.  Tillerson’s proposal would combine elements of both the old and new systems to introduce a new “Bureau for Cyberspace and the Digital Economy” and would require the selection and congressional confirmation of a new position titled “Assistant Secretary for Cyberspace and the Digital Economy”.  The plan would ultimately result in a dedicated and singular effort to engage with foreign governments on topics including international norms for cyberspace and the export and import of cyberweapons.

A series of two separate analyses revealed that the Department of Veterans Affairs (“VA”) wasted nearly $2 billion on three attempts to modernize its electronic health records system.  A recent audit by the Government Accountability Office (“GAO”) identified $1.1 billion in wasted spending on two separate projects from 2011 – 2016.  Nextgov also identified an additional $600 million in wasted spending that the VA spent on a third project, the HealtheVet initiative, that began in 2001 and was later deemed a “failed” project and canceled in 2010.  The spending trail on failed IT projects is important as the VA embarks on its fourth attempt to modernize its health IT and records system, this time through a $10 billion sole-source contract to Cerner Corp.  Cerner is also partnering with Leidos to build the Department of Defense’s next-gen health records system, which will be interoperable with the VA’s system upon completion.

Big Movers

United Technologies (down 7.1%) – Share prices were down this week after Airbus warned of new problems with the Pratt & Whitney engines on its A320neo planes, leading European officials to issue emergency restrictions that will ground certain Airbus planes.

Viasat (down 10.9%) – Share prices were down this week after increased expenses with the company’s new high-speed satellite caused a fiscal third-quarter loss of 4 cents per share after reporting earnings of 29 cents in the same period last year.

Transactions

CopaSAT, LLC has acquired Eclipse Composite Engineering, LLC, a provider of lightweight military-grade SATCOM antenna technology.  Terms of the deal were not disclosed.

Domaille Engineering, LLC and Thompson Street Capital Partners’ portfolio company Onward Capital has acquired Tech Manufacturing, LLC, a provider of complex five-axis structural aerospace parts and specializes in CNC precision machining.  Terms of the deal were not disclosed.

First Israel Mezzanine Investors (FIMI) has agreed to acquire Aitech Rugged Group, Inc., a provider of embedded computing subsystems and modules for defense, aerospace, and space electronic markets.  KippsDeSanto acted as the exclusive financial advisor to Aitech on this transaction.  The deal is worth an estimated $30 million.

Fulcrum IT Services, LLC, a portfolio company of Boyne Capital and Grindstone Partners, has acquired The PTR Group, Inc., a provider of engineering services specializing in embedded, real-time, and distributed system technologies.  Terms of the deal were not disclosed.

Holder Family Investments, LLC has acquired Air Transport Components, LLC, a provider of repair and overhaul services for components and accessories for commercial and military air transport aircraft.  Terms of the deal were not disclosed.

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Industry Week in Review – February 2, 2018

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Aerospace & Defense Update

Large U.S. defense primes, such as Lockheed Martin, Northrop Grumman, and Raytheon, have all specified that they view the windfall from the new tax reform as a mechanism to stimulate investment in R&D and technology.  On Lockheed Martin’s 4Q17 earnings call, the company announced it expects its tax rate to fall by roughly one-third to below 18%. With this tax windfall, the company plans to increase its investments in new weapons and training and increase spending allocation to its venture capital arm.  Raytheon announced plans to increase its capital expenditures by 50% in 2018, and Northrop plans to increase capital spending to $1 billion, an 11% increase over 2017 levels.  As a result of the tax reform, defense primes have signaled that they will use the increased funds to maintain technological advantages over possible adversaries, such as China and Russia.

On Thursday, Brazilian news media reported that Boeing and Embraer have formed a partnership that will create a new company focused on commercial aviation.  The newly formed partnership will not include Embraer’s defense business, which the Brazilian government has expressed firm objections to relinquishing control over.  With the formation of the new partnership, both Boeing and Airbus will have entered into the single-aisle jet market.  Airbus entered into the single-aisle market through acquiring a majority stake in the Bombardier C-Series jet, which received a huge victory in late January when the U.S. International Trade Commission voted against tariffs on C-Series imports.  However, Boeing’s new partnership with Embraer, the third largest planemaker in the world, will give Boeing the leading share of the single-aisle market.

Government Technology Solutions

The Department of Homeland Security (“DHS”) is partnering with private technology companies to identify and reduce the web content that terrorist organizations publish to recruit attackers.  Due to free speech protections, the DHS has limited powers to eliminate on-line terrorist publications, which typically occur on social media platforms, but by partnering with commercial companies, the agency is hoping that it will be able to increase its awareness of such content.  The challenge is further complicated by the sheer amount of content that is uploaded daily.  For instance, global internet users upload more than 400 hours of video content each minute, meaning social media companies are limited in how quickly they can filter content through automation alone.  As a result, technology companies and the DHS are partnering to create better monitoring techniques and increase threat sharing to help reduce the number of channels that terrorists use to attract followers.  While in-process solutions include tools that automatically detect and flag terrorist content as well as the creation of public-private information-sharing networks to track terrorist propaganda efforts, DHS is committed to finding new ways to combat this growing problem.

The Government Accountability Office (“GAO”) is adding the government’s process of conducting background checks and issuing security clearances to a congressional watchdog’s list of high-risk programs in need of major reform.  The GAO came to this conclusion because agencies have done little to improve upon the time in which it takes to process security clearances.  As of September 2017, there was an investigation backlog of 709,000 pending clearances.  IT security also played a role in the GAO’s decision, particularly as the National Background Investigations Bureau (“NBIB”), the division of the Office of Personal Management (“OPM”) that conducts most security clearance investigations, is saddled with antiquated IT systems.  The addition of the clearance process to the high-risk list follows two GAO reports in November and December 2017, which found that the NBIB did not have adequate plans in place to improve its investigation process.  The high-risk list was updated in 2017 and typically receives updates every two years. However, the GAO director thought it was important to highlight this issue in an off-cycle year to minimize unauthorized disclosures of classified information.

Big Movers

Elbit Systems (up 7.1%) – Share prices were up this week after the U.S. Customs and Border Protection certified its in-fill radar system and tower for operational use.

Bombardier (down 7.1%) – Share prices were down this week after it was announced that Boeing and Embraer are likely to formalize a commercial aerospace partnership, posing a threat to Bombardier’s current market position.

Transactions

AMETEK, Inc. has acquired FMH Aerospace Corp., a provider of complex, highly-engineered solutions for the aerospace, defense and space industries.  The deal is worth an estimated $235 million.

Charlesbank Capital Partners has acquired CI Capital Partners’ portfolio company Galls, LLC, a provider of uniforms and equipment to law enforcement and military markets.  Terms of the deal were not disclosed.

Kaneka Aerospace has acquired Henkel Corporation’s Composites Portfolio, a provider of high performance benzoxazine-based composites for aerospace applications.  Terms of the deal were not disclosed.

Mercury Systems has acquired Themis Computer, a provider of commercial, Size, Weight, and Power-optimized rugged servers, computers and storage systems for U.S. and international defense programs.  The deal is worth an estimated $180 million.  KippsDeSanto & Co. served as the exclusive advisor to Themis Computer on this transaction.

On Assignment, Inc. has agreed to acquire ECS Federal, Inc., a provider of technology services and solutions to U.S. federal agencies.  The deal is worth an estimated $775 million.

USfalcon, Inc. has acquired RGS Associates, a provider of management consulting services for the U.S. Federal Government.  Terms of the deal were not disclosed.  KippsDeSanto & Co. served as the exclusive advisor to RGS on this transaction.

PAE, Inc. has acquired MacFadden & Associates, Inc., a provider of international disaster response operational support services.  Terms of the deal were not disclosed.

Viavi Solutions, Inc. has agreed to acquire Cobham’s Test and Measurement Business, a provider of land-mobile radio and avionics test solutions for military, public safety, and aviation markets.  The deal is worth an estimated $455 million.

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Industry Week in Review – January 26, 2018

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Aerospace & Defense Update

After a three-day government shutdown, Congress finalized a new budget extension and passed a continuing resolution (“CR”), reopening the government on Tuesday. The new CR will fund the federal government through February 8th, giving Congress more time to settle a long-term spending deal for the remainder of GFY2018. The government has been under a CR since the beginning of GFY2018, forcing the Pentagon to operate at the previous year’s spending levels. However, the ending of the three-day shutdown is seen as a crucial step towards increasing the Pentagon’s budget as Congress becomes closer to passing a GFY2018 federal budget.

Numerous companies announced 4Q17 earnings this past week with strong results overall. Northrop Grumman exhibited strong performance in 4Q17, beating its earnings per share (“EPS”) estimates by 2.9% and revenue estimates by 4.2% after increasing its revenue by 5.3% year-over-year (“YoY”). The company also forecasted strong 2018 revenue and earnings growth as the company begins the integration of Orbital ATK. Raytheon beat consensus EPS estimates by $0.01 and reported revenue growth of 8.0% in 4Q17, and 5.1% YoY. The company also reported a strong book-to-bill ratio of 1.26 in 4Q17 and 1.09 for full-year 2017, increasing its total backlog by $1.5 billion YoY. General Dynamics beat consensus EPS estimates by 5.0% and reported an 8.2% growth in 4Q17 revenue. The company reported strong growth out of its Gulfstream business with net orders up over 20% YoY and net large cabin orders up by ~30%.

On Tuesday, Boeing announced the formation of a joint venture (“JV”) with Adient, the auto parts business divested by Johnson Controls in 2016.  The JV will create seats for commercial aircraft, providing an alternative to the traditional commercial aircraft supply chain players such as Rockwell Collins and Safran.  Per Boeing, the JV is in response to delays in aircraft seat production as well as restraints on capacity for its key suppliers.  Boeing has been making efforts to vertically integrate its business and develop in-house capabilities such as aviation electronics, specialty manufacturing, and engine components, making the company less dependent on those historical key suppliers.  The commercial aircraft supply chain has undergone large-scale changes such as Boeing and Airbus breaking into the higher-margin aftermarket services business, and continued industry consolidation through transformational deals including the acquisitions of Orbital ATK and Rockwell Collins.

Emirates Airlines has purchased 36 Airbus A380 superjumbos, providing a key lifeline to the fledgling program that was at risk of shutting down production.  The 36 double decker jets were purchased for an estimated $16 billion in a deal that was originally going to be signed at the Dubai Air Show until Emirates Airlines walked away from the deal over concerns about Airbus’ commitment to the program.  This agreement will ensure that Airbus continues production of the A380 for the next 10 years per Airbus’ Chief Sales Officer, John Leahy.  Overall, this brings Emirates Airlines’ total A380 commitment to 178 planes, of which 101 are currently in operation.

Government Technology Solutions

The government’s struggle to pass a 2018 budget is now expected to have an impact on current and future government IT operations. As it relates to the central IT fund, which was established by the Modernizing Government Technology Act, government agencies will not be able to allocate the funding. Until Congress reaches an agreement on the budget, government agencies must shift their focus to managing daily operations and delay future planning for IT systems. Moreover, agencies will be reluctant to establish working capital funds, further delaying agencies’ investments into modernizing government technology. As such, agencies have diverted attention to protecting existing strategic plans and implementation timelines against another government shutdown when the continuing resolution ends on February 8th.

At some point this summer, the Government Accountability Office will launch an investigation into the high number of fraudulent identities used to create and broadcast fictional public comments on proposed federal regulations and other government activities. The issue of fake comments in the federal rulemaking process first came to light last year during the Federal Communications Commission’s (“FCC”) vote to repeal net neutrality rules that were put in place during the Obama administration. Surveys show that 57% of comments submitted to the FCC used temporary or duplicate email addresses, and therefore could likely be fictitious. Additionally, the Wall Street Journal reported approximately 7,800 individuals told reporters that comments posted in their names were fake. These comments were posted in response to net neutrality along with other regulations by different agencies, such as the Consumer Financial Protection Bureau and the Department of Labor. As a result, it became difficult to decipher which comments were authentic and which were false, making it impossible for agencies to accurately perceive public opinion.

Big Movers

Bombardier (up 14.3%) – Share prices were up this week after the U.S. International Trade Commission (“ITC”) dismissed a complaint by Boeing of alleged dumping in the case of 75 C Series jets sold to Delta, allowing Bombardier to avoid punitive import tariffs while pursuing other orders in the U.S.

Honeywell (up 4.0%) – Share prices were up this week after the company beat earnings estimates and grew quarterly revenue by 9% YoY, largely driven by a 6% sales growth from the previous quarter in its aerospace unit.

Transactions

Amazon Web Services has acquired Sqrrl, a provider of advanced cybersecurity threat detection services.  Terms of the deal were not disclosed.

 Celestica, Inc. has agreed to acquire Atrenne Integrated Solutions, a provider of ruggedized electromechanical solutions serving military and commercial aerospace applications.  The deal is worth an estimated $139.0 million.

GTCR, LLC has agreed to acquire EaglePicher Technologies, a provider of specialized batteries and advanced power management systems power solutions for customers in the defense, aerospace, and medical end markets.  Terms of the deal were not disclosed.

Vectrus, Inc. has acquired SENTEL Corp., a mission-focused business with expertise in logistics and supply chain management, engineering and advanced technology solutions, and intelligence mission support.  The deal is worth an estimated $36 million.

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Industry Week in Review – January 19, 2018

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Aerospace & Defense Update

On Tuesday, Boeing announced the formation of a joint venture (“JV”) with Adient, the auto parts business divested by Johnson Controls in 2016.  The JV will create seats for commercial aircraft, providing an alternative to the traditional commercial aircraft supply chain players such as Rockwell Collins and Safran.  Per Boeing, the JV is in response to delays in aircraft seat production as well as restraints on capacity for its key suppliers.  Boeing has been making efforts to vertically integrate its business and develop in-house capabilities such as aviation electronics, specialty manufacturing, and engine components, making the company less dependent on those historical key suppliers.  The commercial aircraft supply chain has undergone large-scale changes such as Boeing and Airbus breaking into the higher-margin aftermarket services business, and continued industry consolidation through transformational deals including the acquisitions of Orbital ATK and Rockwell Collins.

Emirates Airlines has purchased 36 Airbus A380 superjumbos, providing a key lifeline to the fledgling program that was at risk of shutting down production.  The 36 double decker jets were purchased for an estimated $16 billion in a deal that was originally going to be signed at the Dubai Air Show until Emirates Airlines walked away from the deal over concerns about Airbus’ commitment to the program.  This agreement will ensure that Airbus continues production of the A380 for the next 10 years per Airbus’ Chief Sales Officer, John Leahy.  Overall, this brings Emirates Airlines’ total A380 commitment to 178 planes, of which 101 are currently in operation.

Government Technology Solutions

The Office of Financial Innovation and Transformation (“FIT”) at Treasury’s Fiscal Service, led by John Hill, FIT assistant commissioner, is working on a pilot program using blockchain technology to track agency-owned physical assets, such as computers and phones.  Hill is hoping that the pilot will familiarize his office with the transformational blockchain technology and how it could improve their operations.  Currently, FIT’s asset management process involves manual, via spreadsheet or even pen-and-paper, reconciliation of physical asset inventory.  Throughout the government, there are upwards of thousands of employees that are tasked with reconciling inventory lists with physical assets each quarter, so incorporating technology enhancements would provide significant efficiencies, savings, and improved accuracy.  The pilot program is testing whether blockchain technology can make the process more efficient, transparent, and provide real-time assessments of critical assets.  The project began in September 2017 and is scheduled to run through February 2018, when Hill will examine the efficiency of blockchain technology in replacing manual efforts and its associated costs.

On Thursday, the Senate voted 65-34 to approve a six-year extension of Section 702 of the Foreign Intelligence Surveillance Act (“FISA”).  The Intelligence Community (“IC”) considers Section 702 to be its key national security surveillance tool as it allows the National Security Agency (“NSA”) to collect emails, phone records, and other communications of foreign targets located outside of the U.S. without a warrant.  With the program’s statutory authority set to expire on January 19, the extension faced resistance from several senators who argued Section 702 allows U.S. agencies to incidentally monitor U.S. citizens through their communications with non-U.S. citizens outside of the country.  The House also passed the bill last week with a 256-164 vote and President Trump signed the measure into law Friday.

Big Movers

Rolls Royce (up 4.9%) – Share prices were up this week after the company announced it is considering the sale of its commercial marine business.

Fluor (up 5.9%) – Share prices were up this week after the company signed a contract with Royal Dutch Shell plc for the engineering, procurement, and fabrication of Shell’s Penguins floating production storage and offloading vessel in the North Sea.

Transactions

APCT Holdings has acquired Cartel Electronics, Inc., a provider of prototype and quick turn rigid printed circuit boards for commercial and military applications.  Terms of the deal were not disclosed.

George Industries, LLC has acquired Numerical Precision, a provider of close-tolerance, high reliability components for satellites, aircraft and other aerospace and defense programs.  Terms of the deal were not disclosed.

Goff Capital, Inc. has acquired Omega Research, Inc., a provider of engineering and testing serving the metal finishing and processing for aircraft and aerospace related plating processes.  Terms of the deal were not disclosed.

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Industry Week in Review – January 12, 2018

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Aerospace & Defense Update

On Friday, GKN Plc, a British manufacturer of aerospace and auto parts, announced its intentions to split its aerospace and automotive businesses after rejecting a takeover bid from Melrose Industries.  Melrose, a turnaround specialist firm, made an unsolicited offer of £4.05 ($5.47) per share, giving GKN a total valuation of $9.5 billion, a figure which GKN said fundamentally undervalued the company.  GKN’s aerospace business is a key supplier to Airbus and Boeing, providing airframe and engine structures.  The company has expanded its aerospace business through acquiring Volvo’s aircraft engine group in 2012 and Fokker Technologies Group in 2015, making it the second largest aerostructures supplier behind Spirit AeroSystems.  The Company is currently evaluating several alternatives, including a possible sale, related to splitting the business, noting that an attractive purchase offer may accelerate the planned separation.

Boeing has unveiled the first details of a new, reusable Mach-5 plus demonstrator vehicle that could be critical to the development of future high-speed strike and reconnaissance aircraft.  The Boeing design will compete with Lockheed Martin’s SR-72 concept as a hypersonic successor to the SR-71 Blackbird reconnaissance aircraft originally built by Lockheed.  Development of Boeing’s hypersonic vehicle concept is occurring through Defense Advanced Research Projects Agency’s (“DARPA”) Advanced Full Range Engine initiative run by the U.S. Air Force Research Laboratory.  Hypersonic research and development has been identified as part of the “third offset” by the Pentagon, placing it in a category of technologies that the U.S. military sees as imperative to maintaining its edge over potential adversaries.

Government Technology Solutions

The General Services Administration (“GSA”) is working towards implementing a provision from the 2018 National Defense Authorization Act (“NDAA”) that provides government buyers the autonomy to purchase items from commercial e-commerce companies.  The law calls for online portals, such as Amazon, Wal-Mart, and Staples, to be available for acquisitions that are below $250,000.  On January 9th, the GSA held a town hall-style meeting with industry leaders and stakeholders to help shape the new program ahead of its ninety day deadline.  Speakers at the meeting focused most of the discussion on regulatory oversight of buyers and sellers.  The objection is to create a portal that promotes a competitive marketplace that is easy to navigate for commercial sellers, but at the same time remains compliant with federal laws and regulations.  Although disagreements arose around the level of regulation that should be enforced, all parties agreed on the potential efficiencies from a well-designed portal.

The government continues to favor, and increase its reliance on, large government wide acquisition contracts (“GWACs”) that grant a limited universe of players with the ability to perform a greater piece of the overall $95 billion federal contracting market.  In 2012, the federal government procured $6 billion on IT products and services through GWACs, as compared to more than $13 billion in 2017.  As a result, this has enabled selected companies, that are able to obtain highly-coveted spots on GWACs, such as Alliant, OASIS, and Encore, to grow at rates that often exceed companies that rely on smaller and more traditional contract vehicles.  In addition, this trend has supported small businesses as set-aside spending through GWACs has increased by approximately 137% since 2012.  GWACs are becoming popular acquisition strategies for government agencies as they ensure limited competition while providing greatly simplified acquisition processes for follow-on tasking.

Big Movers

 Boeing (up 8.9%) – Share prices were up this week as investors view the potential acquisition of Embraer with a higher probability of occurring.

KeyW (up 7.2%) – Share prices were up this week after the company was awarded an IDIQ contract to provide tagging, tracking, and locating electronic equipment and support services to support joint commands within the DoD.

Transactions

BlueCross BlueShield of South Carolina, Inc. has acquired Karna LLC, a provider of a broad range of health-related services primarily to the federal government.  Terms of the deal were not disclosed.

Celero Strategies, LLC has acquired CGR Associates, Inc., a provider of market research, strategic planning, acquisition search, and program and budget analysis.  Terms of the deal were not disclosed.

Cyxtera Technologies has agreed to acquire Immunity, Inc, a provider of offense-oriented systems vulnerability research, exploit development and penetration testing services.  Terms of the deal were not disclosed.

HKW Capital Partners has acquired GCR, Inc., a provider of professional services and software products to public sector clients.  Terms of the deal were not disclosed.

Leading Edge Aviation Services, Inc. has acquired Pro Air Services, Inc., a provider of fixed-base operator, maintenance, avionics and flight school services.  Terms of the deal were not disclosed.

ZRODelta has acquired Critical Capabilities, a provider of original equipment manufacturer supply-chain management solutions for firearm parts.  Terms of the deal were not disclosed.

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Industry Week in Review – January 5, 2018

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Aerospace & Defense Update

In 2018, the Pentagon is hoping to increase the speed of its foreign military sales process.  To decrease procurement times, the Pentagon’s top acquisition official, Ellen Lord, has launched six Procurement Action Lead Time pilot programs designed to cut the time from requests for proposal to procurement.  These time-saving measures are expected to increase 2018 foreign weapon sales from $42.0 billion in 2017, a 20% increase over 2016 levels.  2018 foreign weapon sales will be further bolstered by Defense James Mattis’ initiative to scale up defense capabilities of U.S. allies and the Trump administration, which sees foreign weapon sales as a key to growing U.S. jobs.

The Head of the U.S. Strategic Command, General John Hyten, is calling for the Department of Defense (“DoD”) to transform its satellite development process through the adoption of a more commercially-oriented procurement methodology.  Commercial manufacturers have been able to successfully deliver complex satellites at fixed prices and within a 30 – 36 month window, commercial providers may also be less burdened by the stringent procurement requirements and program delays that often plague current DoD satellite production processes.  The DoD’s current acquisition strategy currently siloes three key elements of the satellite system (space, ground, and terminal), but Gen. Hyten hopes to streamline the process through one intertwined acquisition strategy.  Through streamlining the methodology, the DoD expects to increase technological readiness and agility, allowing it to deploy smaller, lower-cost satellites.

Government Technology Solutions

Similar to 2017, IT modernization remains the primary focal point of the federal IT community in 2018.  However, three key emerging trends will drive technology solutions and adoption in the government sector.  First, federal agencies, including the DHS, FBI, and DOD, are increasing their use of biometric authentication systems.  Specifically, iris recognition technology and facial scanning that enable agencies to implement deeper and more accurate security measures.  As such, the biometric authentication systems market is expected to grow at a rate of ~14% through 2020.  Second, the industry is expected to increase its use of federal contractors in 2018 to allow for greater project agility and efficiency.  Lastly, the federal IT community is expected to adopt automation technology to more effectively utilize current resources, with examples potentially including automated budget processing to replace traditional Excel spreadsheets.

The Government Accountability Office (“GAO”) publicly released a report on December 21, 2017 detailing a two-and-a-half-year exercise during which undercover GAO agents purchased firearms, to include an AR-15 rifle and an Uzi submachine gun, on the dark web.  The GAO described the exercise as an attempt to assess the extent to which the Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”) enforces existing laws in prohibiting firearm sales to people not allowed or eligible to possess a firearm.  On the surface web, federal regulations held up well as the GAO was unsuccessful in 72 unique attempts to purchase a firearm.  However, the GAO managed to purchase two firearms, as part of an investigation that included seven purchasing attempts, on the dark web.  The report offered no recommendations but illustrates the current shortcomings of online federal law enforcement.

Big Movers

Kratos Defense & Security Solutions (up 10.8%) – Share prices were up this week after the company received a $93 million award for unmanned aerial drone systems and a $20 million award for electronic warfare systems.

Bombardier (down 5.5%) – Share prices were down this week after the company delivered 17 C Series jets in 2017, short of its target of 20-22 jets.

Transactions

Chenega Corp. has completed its acquisition of privately held ADG Creative, a provider of strategic communications and digital transformation solutions.  KippsDeSanto & Co. served as the exclusive advisor to ADG on this transaction.  Terms of the deal were not disclosed.

Coolisys Technologies, Inc. has agreed to acquire Enertec Systems 2001 Ltd., a provider of missiles, UAVs, tanks, combat aircraft, missile boats and submarines, mobile trailers, and satellites.  The deal is worth an estimated $9.2 million.

Edmund Optics, Inc. has acquired ITOS GmbH, a provider of optical components, including filters and polarizers.  Terms of the deal were not disclosed.

UST-Aldetec has acquired Pioneers Magnetics, Inc., a provider of state-of-the-art switching power suppliers for defense and telecommunications platforms.  Terms of the deal were not disclosed.

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Industry Week in Review – December 29, 2017

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Aerospace & Defense Update

On Thursday, Deputy Secretary of Defense Patrick Shanahan told reporters that the Pentagon expects the GFY2019 budget request to be delivered to Congress on schedule, but the budget request will likely not contain an anticipated large-scale military buildup.  While there will be a defense spending increase in the 2019 budget request, the GFY2020 budget is the one expected to contain a major increase for defense spending.  With the release of the National Defense Strategy, Ballistic Missile Defense Review, and Nuclear Posture Review scheduled for 2018, there simply will not be enough time to incorporate the strategic decisions into the GFY2019 budget, per Shanahan.

The Pentagon is set to overhaul its acquisition structure in February by dividing the role of Undersecretary of Defense for Acquisition, Technology, and Logistics (“AT&L”) into two independent roles of Undersecretary of Defense for Research and Engineering (“USDR&E”) and Undersecretary of Defense for Acquisition and Sustainment (“USDA&S”).   The rationale for devolving the AT&L role is to better focus the efforts of each role to ensure that the DoD will be able to better drive innovation and increase warfighter readiness.  The USDR&E will help increase modernization efforts within the DoD.  The USDA&S role will help ensure that the U.S. does not lose ground in its advanced warfighting capability relative to other nations.  The current undersecretary of the AT&L, Ellen Lord, will become the new USDA&S.

Government Technology Solutions

The GOP tax bill, set to take effect starting January 1st, 2018, will have a meaningful impact on federal contractors, especially large, publicly traded government IT and professional service firms.  The most important change for federal contractors is the reduction in the corporate tax rate from 35% to 21%.  Nearly all government services companies with annual revenue above $1 billion pay the highest tax rates at 37.5% as most of their revenue comes from sales to U.S. federal agencies.  Comparatively, most large defense primes derive substantial portions of their revenue from overseas operations, bringing down their effective tax rates.  For example, Lockheed Martin had an effective tax rate of 23.2% last year and General Dynamics reported 27.6%.  While the cash savings may fall directly to the bottom line, companies will have the opportunity to explore more investments, including mergers and acquisitions, given their new financial flexibility.

Several protesters have brought law suits to court in hopes to win a spot on the General Service Administration’s (“GSA”) $50 billion Alliant 2 IT product and services contract.  Five protests were filed with the Government Accountability Office (“GAO”) in late November after the GSA awarded 61 positions on the vehicle.  The GAO subsequently dismissed all outstanding protests against Alliant 2 on December 20th.   Centech and OBXTek have taken their objections to the U.S. Court of Federal Claims, filing their lawsuits on December 26th and November 29th, respectively.  OBXTek and Centech have different objections but their cases will be decided together.  The GSA is scheduled to make its filing for the case by January 19th, 2018.

Big Movers

Vectrus, Inc. (down 5.1%) – Share prices were down this week after analysts reported the company is expected to miss sales estimates for the current fiscal quarter.

Bombardier (up 2.0%) – Share prices were up this week as the company received an order worth over $300 million from the French state railway.

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Industry Week in Review – December 22, 2017

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Aerospace & Defense Update

Boeing confirmed it is in talks to acquire Brazil-based Embraer SA, a maker of small jetliners, business jets, and military aircraft.  The potential acquisition would give Boeing access to jetliners that are smaller than its traditional product range and position.  Initial estimates place the cost of the Embraer acquisition around ~$9 billion, inclusive of debt.  The deal would position Boeing to compete directly with Airbus in the small commercial aircraft market after Airbus’ expansion into the 100 to 150 seat jet market through its joint venture with Bombardier.  The acquisition could also prevent fast-growing Chinese aerospace companies from gaining a stronger global foothold in the regional and single-aisle passenger jet market.  In order for the acquisition to occur, it must be agreed upon by the Brazilian government, which has a “golden share” in Embraer, giving it veto power over any potential sale or joint venture.

On Thursday, Congress avoided a pre-Christmas government shutdown by passing a continuing resolution (“CR”) through January 19th to extend budget funding through January 19th.  The CR will allow the government to continue operations at GFY2017 funding levels.  Included in the CR is a measure granting an additional $4.7 billion in supplemental military funding to increase ballistic missile defense systems and repair damaged warships.  This marks the third CR passed this year by Congress and further postpones negotiations of key issues such as a full-year appropriations bill for the Department of Defense (“DoD”).

Government Technology Solutions

The Department of Defense has not yet finalized a decision on how to approach the contracting process for a planned multi-billion dollar cloud infrastructure project.  The DoD ideally wants to move as much of its IT infrastructure to the cloud as possible as it believes that enterprise-wide cloud adoption would provide considerable scale, enabling more advanced data analytics, increased application of machine learning, and the ability to more quickly share mission-critical information with warfighters.  The DoD initially planned on using a single vendor for the cloud infrastructure. However, according to industry insiders, there has been considerable backlash against this approach.  Some believe that a “one-size fits all” approach is not sufficient given numerous and various missions that would be relying on uniform infrastructure.  In addition, others worry that using a single supplier increases the risks and subsequent consequences of any sort of system failure, and that using multiple vendors provides a way to mitigate that risk.  The DoD has not yet committed to any one acquisition strategy, but is planning on holding an industry day and issuing a draft request for proposal (“RFP”) in early 2018.

Kaspersky Lab, the Russian multi-national cybersecurity firm and anti-virus provider, has filed a lawsuit against the United States following the Federal Government’s decision to ban Kaspersky software from use by all federal civilian agencies.  The Department of Homeland Security (“DHS”) originally issued an order to remove Kaspersky software from federal networks in September, but the decision was signed into law last week as part of the 2018 National Defense Authorization Act.  U.S. officials believe, that as a result of alleged ties between Kaspersky and the Russian government, the software could potentially compromise national security.  Eugene Kaspersky, the CEO and founder of Kaspersky Lab, has denied any such improper connection with Moscow.  He claims that the U.S. government did not follow due process in its decision to ban his company’s software, and that there was not sufficient evidence to substantiate any of its claims.  Mr. Kaspersky has said, that while direct sales to the Federal Government historically accounted for a small portion of the company’s overall revenue, the ban has damaged the company’s reputation and subsequently adversely affected its commercial business.

Big Movers

Embraer (up 23.5%) – Share prices were up this week after the company announced it was in talks with Boeing regarding a potential acquisition.

AAR (down 5.7%) – Share prices were down this week as the company reported second quarter earnings below consensus estimates.

Transactions

DC Capital Partners has acquired Janus Global Operations, LLC, a provider of integrated stability operations support services, including risk management, logistics, and munitions and environment services to government and commercial customers.  Terms of the deal were not disclosed.

Element Materials Technology Group has agreed to acquire Metals Testing Co Inc., a provider of non-destructive testing services to the aerospace industry.  Terms of the deal were not disclosed.

Mercury Systems, Inc. has agreed to acquire Themis Computer, Inc., a provider commercial, Size, Weight, and Power (“SWaP”)-optimized rugged servers, computers and storage systems for U.S. and international defense programs.  KippsDeSanto served as the exclusive advisor to Themis Computer on this transaction.  The deal is worth an estimated $180 million.

Molex, LLC has acquired Triton Manufacturing Company, Inc., a provider of flexible power cable assemblies and custom bus bars used in a wide range of current and heat transfer applications.  Terms of the deal were not disclosed.

Perusa Partners has agreed to acquire SCHROTH Safety Products GmbH, a provider of a wide range of restraint systems used on commercial airplanes, including traditional two-point lapbelts and three-point shoulder belts.  Terms of the deal were not disclosed.

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Industry Week in Review – December 15, 2017

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Aerospace & Defense Update

On Tuesday, President Trump signed a $700 billion defense bill into law, surpassing President Trump’s previous request by $32 billion.  The defense bill authorizes $634 billion for the base budget and $66 billion for overseas contingency operations.  However, the bill is also subject to Congress rolling back the 2011 Budget Control Act, which sets strict limits on federal spending and would only allow for $549 billion of defense spending.  Congress is expected to eliminate the cap on defense spending, and lawmakers have until December 22nd to send the White House a broader government funding bill.  The 2018 defense bill includes $12.3 billion for the Pentagon’s Missile Defense Agency to counter growing threats from the Korean peninsula and includes additional jet fighters and ships, which are designed to boost military readiness.

Lockheed Martin is in discussions to create a joint venture with Aerion Corp. to develop a new supersonic business jet, the Aerion AS2, which would begin operations in 2025.  The proposed project marks a return for Lockheed to the supersonic jet business after a two-decade gap.  Lockheed is not alone as competitors Boom Technology, Inc. and Spike Aerospace, Inc. have been touting proposals for supersonic passenger jets as well.  If Lockheed proceeds with the proposal, the company is equipped to build the jets at its existing facility in Greenville, S.C. where it produces F-16 combat jets and military cargo aircraft.  Aerion executives are estimating the total development cost of the jet at $4.0 billion.  The AS2 jet would be able to travel at up to 1.5 times the speed of sound and would have a range of 4,750 nautical miles.  Aerion is forecasting demand of 300 jets over the next decade and has already secured an order for 20 jets from FlexJet, LLC.

Government Technology Solutions

The day after President Trump signed the National Defense Authorization Act into law, the White House revealed its plan for modernizing the Federal Government’s IT infrastructure.  The IT Modernization Report outlines fifty action plans to help modernize and consolidate the current IT infrastructure with an emphasis on increased cybersecurity and shared services.  The report encourages shifting the government’s IT infrastructure to a service model and leveraging cloud technologies that are available through government technology contractors.  In order to effectively implement cloud technologies across government agencies, the report emphasizes the importance of migrating towards cloud email solutions.  White House officials have indicated that agencies will begin to adopt these suggested improvements as early as January of next year.

This past week, House and Senate Republicans have been working to reconcile their tax reform bills to arrive at a joint proposal.  With only a 52-48 majority and several Republican Senators not voicing public approval for the bill, Republicans do not have room for any error.  The Republican’s loss in Alabama has put even more pressure on the G.O.P. to finalize tax reform before Doug Jones officially takes his position in January.  While details are still being discussed, final votes are expected to take place next week with the hope of the President signing a proposal into law before Christmas.  The current tax reform plan, which would take effect in 2018, features a 21% corporate tax rate and a top individual tax rate of 37%.  Additionally, the bill will allow homeowners to deduct mortgage interest on loans up to $750,000 and will likely allow for a state and local or property tax deduction of up to $10,000.  While lowering tax rates for businesses and individuals, the deductions and tax breaks are expected to add $1 trillion or more to federal budget deficits over the next decade.

Big Movers

Boeing (up 2.8%) – Share prices were up this week after the company announced that it will raise its quarterly dividend by 20%.

Bombardier (down 3.4%) – Share prices were down this week as the company is entering a critical phase of its trade dispute with Boeing and the U.S. International Trade Commission.

Transactions

Advanced Core Concepts announced the acquisition of ACTA, a provider of engineering and technical services firm.  Terms of the deal were not disclosed.

Belcan, LLC has acquired CDI Corp.’s Aerospace and Industrial Equipment Business Unit, a provider of engineering and recruitment solutions for a broad range of aerospace platforms.  Terms of the deal were not disclosed.

Chenega Corp. has signed a definitive agreement to acquire privately held ADG Creative, a provider of strategic communications and digital transformation solutions.  KippsDeSanto & Co. served as the exclusive advisor to ADG on this transaction.  Terms of the deal were not disclosed.

Xator Corp. has acquired the professional services business of privately held Merlin International, Inc., a provider of cyber security, infrastructure/network operations, and enterprise applications business supporting the Federal sector.  Terms of the deal were not disclosed.

 

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