Industry Week in Review – December 8, 2017

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Aerospace & Defense Update

Per various reports, the Canadian government will cancel its planned purchase of 18 F/A-18E/F Super Hornet Jets from Boeing worth an estimated $5.2 billion.  The intended purchase was designed to bridge the interim between Canada’s aging CF-18 Hornet fleet and a new fighter.  However, the Canadian government cancelled the order after Boeing lodged a legal complaint against Bombardier, a Canadian company, accusing it of using Canadian government subsidies to undercut its competition in the U.S. commercial aircraft market.  In lieu of the new Boeing F-18 purchase, Canada plans to buy used F/A-18 Hornets from Australia.  The Canadian government will likely have to invest in extending the lives of the Hornet airframes, which could benefit L3 Technologies as it has worked on the CF-18 previously.  Additionally, the cancelled purchase could provide an opportunity for Lockheed’s F-35, the Eurofighter Typhoon, Saab Gripen E, or Dassualt Rafale to win Canada’s upcoming fighter jet competition.

On Thursday night, Congress passed a two-week Continuing Resolution (“CR”) to avert a government shutdown and keep the government funded through December 22nd while lawmakers attempt to pass a yearlong budget.  Under the CR, funding remains at the GFY2017 levels and the military does not have any flexibility on how it can allocate its funding.  In order to pass a budget, Democrats and Republicans must overcome stalled negotiations over spending caps, immigration issues, and increases in defense funding.  President Trump met with Congressional leadership from the Senate and House on Thursday afternoon to restart negotiations for a budget deal.  Reports from the meeting detailed that the leadership from both parties agreed on the need to eliminate the defense sequester to ensure the military has full support to deal with national security threats.

Government Technology Solutions

Military services are further emphasizing mobile projects, ranging from continuing education to logistics aimed at enhancing readiness.  Implementation priorities of such mobile technologies vary by agency.  For example, the Army is looking to establish wireless capabilities in the classroom to expand web-based training into the field.  In the Marine Corps, the focus is on making logistics more mobile friendly by using wireless devices to update supply transactions, thus eliminating the need to log onto a desktop computer.  The Air Force has detailed the grandest plans within the military, specifically targeting logistics investment, by emphasizing the need to refit its IT architecture and move applications into the commercial cloud.  Additionally, six different Air Force groups, the mobile solutions company, Monkton, and Apple are collaborating to build a mobile app that connects with an integrated maintenance data system to track ongoing work instead of inputting work manually at the end of the workday.

Defense secretary Jim Mattis has nominated Rear Admiral Nancy Norton to be the next leader of the Defense Information Systems Agency (“DISA”) when current Director Lt. General Alan Lynn leaves his post.  Norton will receive a promotion to Vice Admiral with the appointment and will also take over as commander of the Joint Forces Headquarters-Department of Defense Information Network at Fort Meade in Maryland.  However, Norton’s appointment does not have a specified timeline.  Her directorship will require Senate confirmation, and the Pentagon has yet to specify an end date to Lynn’s current term, which is expected to extend into 2018.  A 30-year Navy veteran, Norton joined DISA in August as Vice Director and previously served as Director of both the Warfare Integration for Information Warfare and the Command, Control, Communications, and Cyber Directorate of the U.S. Pacific Command.  DISA manages an $11 billion budget overseeing IT operations for the Department of Defense.

Big Movers

Boeing (up 5.4%) – Share prices were up this week after the company delivered two widebody jets to Middle Eastern airlines and won a 747 order.

AeroVironment (up 24.5%) – Share prices were up this week after the company beat earnings and reported 47% year-over-year revenue growth.

Transactions

Kordsa, Inc. has agreed to acquire Textile Products, Inc. and Fabric Development, Inc., providers of textile manufacturing of specialty fabrics for aerospace, industrial, and marine industries.  The combined deals are worth an estimated $100 million.

System One has acquired GAP Solutions, Inc., a provider of operations enhancing programs and consulting services to defense, homeland security, and civilian government agencies in the U.S.  Terms of the deal were not disclosed.

TTM Technologies has agreed to acquire Anaren, Inc., a provider of high-frequency RF and microwave microelectronics, components, and assemblies for the space, defense, and telecommunications sectors.  The deal is worth an estimated $775 million.

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Industry Week in Review – December 1, 2017

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Aerospace & Defense Update

On Tuesday, Director of the U.S. Air Force’s Rapid Capabilities Office (“RCO”), Randall Waldren, discussed the progress of the B-21 Raider, a stealth bomber developed by Northrop Grumman. The B-21 is designed to be nuclear-capable and able to fly manned and unmanned missions.  The B-21 program work began in February of 2016 and has garnered $13.5 billion in funding through 2022, making it the Air Force’s largest development program.  Per Director Waldren, the Air Force plans to deliver the heavy bomber on cost, requiring minimal schedule delays with a production target of 100 bombers that will enter service in the mid-2020s.  The B-21 program will enter the critical design review phase in 2018 with the eventual goal of replacing the Boeing B-1, B-52, and Northrop B-2 fleets.

The National Aeronautics and Space Administration (“NASA”) and international partners are planning to release an international space exploration document in early-2018, detailing updated plans for human missions to the moon and Mars.  The document has a roadmap laying out a three-phase plan for the exploration efforts and emphasizes the role of NASA’s Deep Space Gateway.  Phase 0 will entail ongoing research and testing on the International Space Station, and Phase 1 will occur in the 2020s with plans for international agencies to explore the lunar vicinity.  During Phase 1, NASA would work with various partners to construct the Deep Space Gateway from which robotic missions would be deployed to explore the lunar surface and prepare for human lunar missions.  In preparation, NASA has already awarded contracts to Boeing, Lockheed Martin, Orbital ATK, Sierra Nevada Space Systems, and Space Systems Loral to develop a module to power the Deep Space Gateway throughout its lunar orbit.  Ultimately, Phase 2 plans for agencies to send exploration missions to orbit Mars in the 2030s.

Government Technology Solutions

Less than two weeks after the General Services Administration (“GSA”) awarded 61 companies positions on its $50 billion Alliant 2 contract, five companies filed protests against the government’s decision.  Two of the protestors, Harris IT Service Corp. and Kratos Technology and Training solutions, were incumbents on Alliant 1.  The other protestors are Compuline International, the Centech Group, and Capgemini Government Solutions.  Given the size and importance of Alliant 2, as well as the history of protests associated with the first iteration of the contract back in 2007, it was expected that the government would receive numerous protests regarding this contract award.  The original Alliant contract experienced delays of more than a year as a result of various protest activities.  The Government Accountability Office has until March of 2018 to make a determination on the protests.

The growing popularity of blockchain has encouraged government agencies to explore practical applications for implementing this innovative technology.  Analysts expect blockchain to be introduced into mainstream government processes similarly to how cloud computing was introduced.  However, government agencies are moving much more quickly and independently towards adopting blockchain as compared to cloud computing many years ago.  Due to the government’s reliance on legacy systems, blockchain will be used to support and augment such systems with the goal of improving overall functionality, as opposed to replacing legacy systems.  In the near-term, the government aims to incorporate private blockchains to improve privacy and operating efficiency.

Big Movers

Honeywell (up 3.2%) – Share prices were up this week after reports stated the company is looking to acquire Arconic Inc.

L3 Technologies (up 2.9%) – Share prices were up this week after the company appointed several key executives to start in the beginning of next year.

Transactions

ABSS Solutions, Inc. has acquired 1st American Systems and Services, LLC, a provider of technical and professional services, supporting the design, integration, and management of program solutions related to business operations, advanced learning, information technology, health care IT, and engineering services.  Terms of the deal were not disclosed.

AE Industrial Partners, LLC has agreed to acquire EnCore Composites Holdings, Inc., a provider interior cabin and composite and other lightweight products for the aviation industry.  Terms of the deal were not disclosed. 

CapitalWorks, LLC has acquired GEMCITY Engineering, a provider of advanced automated equipment, complex assemblies, robotics, and high precision machining.  Terms of the deal were not disclosed.

Hartzell Engine Technologies, LLC has acquired Meggitt’s South Wind Aircraft Heater Business, a provider of combustion heating solutions for South Wind Aircraft.  Terms of the deal were not disclosed.

Microsemi Corp. has acquired the High Performance Timing Business of Vectron International, a provider of frequency control, sensor and hybrid solutions using both bulk acoustic wave and surface acoustic wave-based designs.  The deal is worth an estimated $130 million.

Thales S.A. has acquired Aveillant, a provider of  holographic radar technology ideal for drone surveillance.  Terms of the deal were not disclosed.

Tinicum L.P. has acquired Astrodyne TDI, a provider of specialized power solutions for demanding applications in the advanced military, aerospace, medical, and industrial markets worldwide.  Terms of the deal were not disclosed.

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Industry Week in Review – November 24, 2017

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Aerospace & Defense Update

This past week, Boeing and Avolon finalized an order for 75 737 MAX airplanes, which includes 55 MAX 8s and 20 MAX 10s with an option for an additional 20 MAX 8s.  The MAX 10 was launched at the Paris Air Show this year and is expected to have the lowest seat-mile cost of any single-aisle aircraft.  The deal is valued at nearly $11 billion for the 75 aircraft as well as the 20 additional aircraft.  Per Avolon’s CEO, Domhnal Slattery, the deal will strengthen Avolon’s portfolio to meet growing customer demand within the narrow-body market segment.  Avolon, a Dublin-based aircraft lessor, already has a fleet of 915 aircraft and is expected to reach 990 aircraft with this new purchase.  Additionally, Boeing’s 737 MAX has exceeded 4,000 orders from 92 customers, making it the fastest selling aircraft in Boeing’s history.

Northrop Grumman is developing a next-generation flank array for the U.S. Navy through an internal development project named Advanced Flank Array.  The flank array is a sonar system mounted on both sides of a submarine’s hull and will be evaluated by the Naval Underwater Warfare Center.  Northrop has been the sole manufacturer of flank arrays for Virginia Class submarines and has over fifty years of experience developing underwater acoustic systems.  Production of the next-generation flank array is predominately focused on improving the affordability and reliability of flank array manufacturing while still maintaining the Navy’s strict performance requirements for array technology.  The project is designed to minimize lifecycle system performance risk and position Northrop to be a low-risk prime contractor in support of next-generation flank arrays.

Government Technology Solutions

The Government Services Administration (“GSA”) announced that 61 companies were awarded F&O positions on the 10-year, $50 billion Alliant 2 contract for IT and professional services.  Major customers include the Department of State, the Department of the Army, and the Department of Homeland Security.  As the successor to Alliant 1, which expires April 30, 2019, the Alliant 2 unrestricted contract contains a five-year base period and a five-year option.  The GSA said awards for the small business portion of the contract will be announced separately in the near future.  The agency is anticipating 80 awards on the small business portion with a ceiling value of $15 billion.  The announcement comes more than a year after the GSA released the Alliant 2 request for proposals (“RFPs”) in June 2016.  Of the 61 awardees, 25 did not hold positions on Alliant 1 or Alliant Small Business.  A total of 18 companies on Alliant 1 were not listed as winners of Alliant 2, although it is unclear whether those companies bid and lost or did not bid at all.

The military’s IT budget is poised to benefit from anticipated increases in defense spending in government fiscal year 2018 as the service branches push to incorporate more emerging technologies.  Over the past five years, civilian IT spending has far outpaced defense IT, which has averaged approximately 1% growth, annually, over that time.  The National Defense Authorization Act (“NDAA”), which the Senate passed on Monday, will allocate $33.2 billion to the Department of Defense (“DoD”) to unclassified IT funds.  If signed into law, the NDAA would increase the department-wide IT budget from $10 billion in government fiscal year 2017 to $11 billion in fiscal 2018.  The Navy-Marine Corps would also see their defense IT budget increase by approximately $1 billion, from $7 billion to $8 billion.  Spending will be focused on similar IT areas as government fiscal year 2017, including automation, cloud computing, cybersecurity, and the convergence of all three to build self-healing network capabilities that require less manpower to operate.

Big Movers

Embraer (up 3.2%) – Share prices were up this week after the company conducted flight trials of its KC-390 multi-mission military transport and tanker jet in the U.S.

L3 Technologies (up 3.1%) – Share prices were up this week after the company announced the award of multiple contracts relating to the development of Free Space Optics capabilities for the DoD and space customers.

Transactions

Broadcom Limited has completed its acquisition of Brocade Communications Systems, Inc., a provider of networking hardware, software, and services, including Storage Area Networking (“SAN”) solutions and Internet Protocol (“IP”) Networking solutions.  The close of the transaction concurred with the close of Hitachi Vantara Federal Corp.’s acquisition of the cleared assets and support services of Brocade Communications Systems, Inc., which was announced on June 27, 2017.  The deal is worth an estimated $5.5 billion.

Deltek, Inc. has closed its acquisition of Onvia, Inc., a provider of market intelligence platforms that offer clients contracting leads in the federal, state, and local government arenas.  The deal is worth an estimated $70 million.

Hitachi Vantara Federal Corp., a subsidiary of Hitachi, Ltd., has completed its acquisition of the cleared assets and support services of Brocade Communications Systems, Inc., a provider of networking hardware, software, and services, including Storage Area Networking (“SAN”) solutions and Internet Protocol (“IP”) Networking solutions.  Terms of the deal were not disclosed.

Novume Solutions Inc. has acquired NeoSystems Corp., a provider of strategic back office services for government contractors, small companies or nonprofit organizations, and medium-sized organizations.  The deal was worth an estimated $21 million.

Washington Equity Partners announced its majority recapitalization of Arc Drilling, a provider of electrical discharge machining for aerospace engines and industrial gas turbines.  Terms of the recapitalization were not disclosed.

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Industry Week in Review – November 17, 2017

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Aerospace & Defense Update

At the Dubai Air Show this week, Airbus secured the largest commercial plane transaction in its history, a nearly $50 billion order for single-aisle aircraft, which overshadowed Boeing’s own large-scale $20 billion deal for 175 737 Max planes, the A320’s primary competitor.  Airbus’ mega-deal will provide Indigo Partners with 273 A320neo narrow-body aircraft and 157 of its larger variant, the A321neo, both of which will be distributed amongst four low-cost carriers in Indigo’s investment portfolio, including Frontier Airlines, Volaris, Wizz Air Holdings, and JetSmart.  The deal with Indigo is expected to double Airbus’ previous order book for the year and increases the company’s backlog to more than 7,000 jets, reversing previous expectations that orders in 2017 will trail deliveries.

Last Sunday, Orbital ATK successfully launched a civilian cargo capsule into orbit, propelling a Cygnus spacecraft to supply the International Space Station with food, experiments, and supplies.  This is the second successful launch for the redesigned Antares rocket and increases Orbital ATK’s chances of being selected to develop a more powerful booster for Department of Defense (“DoD”) missions.  In 2018, the Air Force is anticipated to pick three contractors to provide prototype rockets designed to fulfill the military’s requirements for the next three decades.  Orbital ATK will be competing with SpaceX, Blue Origin, and United Launch Alliance (“ULA”), a joint venture between Boeing and Lockheed Martin, for the opportunity to transport the Pentagon’s future national security satellites into high-altitude orbits.  Currently, ULA is the primary heavy-lift launch provider for the U.S. military, however a strong-performing Antares rocket could help secure future DoD business for Orbital ATK and Northrop Grumman, which recently agreed to acquire the company.  While commercial use of the Antares rocket has thus far been prohibited by expense and launch frequency, Orbital ATK emphasized the next-generation rocket will be less expensive and more flexible, positioning it to compete with SpaceX’s Falcon 9 rocket.

Government Technology Solutions

The House Oversight and Government Reform Committee released its fifth Federal IT Acquisition Reform Act (“FITARA”) scorecard this week.  The scorecard shows moderate adherence to the 2014 law and some associated data center optimization and governmentwide software license usage initiatives, however, agencies across the board are receiving lower scores than what the government deems acceptable.  While three out of twenty-four agencies improved compliance with FITARA, six agencies received lower scores.   Specifically, seventeen agencies received an “F” for compliance with the MEGABYTE Act for software licensing.  Overall, most agencies, including the Departments of Homeland Security, Housing and Urban Development, Justice, and the Environmental Protection Agency received “C” grades.  In response to the subpar results, the House Subcommittee on Government Operations and Subcommittee on IT called a joint hearing this week to discuss the lack of progress on the scorecards and ways to improve agency compliance.

On Thursday, November 16th the Senate passed the 2018 National Defense Authorization Act (“NDAA”), which authorizes the level of defense spending and sets policies controlling how the money is spent. In an effort to reduce costs associated with new contract protests, the NDAA implemented a provision whereby protesters are required to reimburse the Department of Defense (“DoD”) for all government costs associated with the protest if the decision is not subsequently overturned.  To protect small businesses from high reimbursement costs, only companies with more than $100 million in revenue would be subject to this provision.  In order for the DoD to qualify for protest reimbursement, the Government Accountability Office (“GAO”) would also have to deny all elements of the protest, however, this ambiguous language around the requirement may lead to an increase in litigation as protestors challenge the basis for expense reimbursement.  Although the new provision aims to minimize the number of protests, the GAO will have increased responsibility related to tracking expenses by individual protests and may face additional litigation costs following request for reimbursement.

Big Movers

Ultra Electronics (down 22.7%) – Share prices were down this week after the company issued a profit warning and announced its CEO was stepping down.

ViaSat (up 7.9%) – Share prices were up this week after the company announced it has extended its relationship with JetBlue as the airline’s direct in-flight internet service provider.

Transactions

An affiliate of global private equity investment firm H.I.G. Capital, LLC has acquired Whitney, Bradley & Brown, Inc. (WBB), a portfolio company of Lake Capital.  WBB is a management consulting firm focused on business transformation, organizational realignment, and process improvement.  KippsDeSanto & Co. served as the exclusive advisor to WBB on this transaction.  Terms of the deal were not disclosed.

Arlington Capital Partners has acquired Cadence Aerospace, a provider of highly complex aerospace components and assemblies.  Terms of the deal were not disclosed.

General Atomics has acquired Surrey Satellite Technology, a provider of small satellite technologies, systems, and services.  Terms of the deal were not disclosed.

Intelligent Waves, LLC has acquired virtual mobile security technology and associated intellectual property of privately held Hypori, Inc., a provider of certified mobile virtualization technology.  Terms of the deal were not disclosed.

OMERS Private Equity division has agreed to acquire Ardian Holding’s portfolio company Trescal S.A., a provider of calibration services for defense, aerospace, telecommunications, transportation, and other sectors.  The deal is worth an estimated $789 million.

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Industry Week in Review – November 10, 2017

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Aerospace & Defense Update

On Wednesday, Congressional negotiators from both the House and Senate agreed on a $700 billion defense authorization plan for GFY 2018 with ~$634 billion set aside for base defense funding and ~$66 billion for the overseas contingency operations (“OCO”).  The proposal authorizes 90 new joint strike fighters (“JSF”), a new littoral combat ship, extra funding for Army helicopters, and five more ships than President Trump’s budget proposal.  The bill adds more than 20,000 service members as well as a 2.4% pay raise for troops, the largest increase since 2010.  The plan will need final approval from the full House and Senate, which will need to reconcile the bill’s plan as it currently exceeds the GFY2018 spending caps.

Last week, U.S. and Chinese negotiators signed a pact allowing Chinese-manufactured airplanes and parts to be sold in the U.S. and other countries.  The pact will increase Chinese companies’ opportunities to become key, global suppliers of commercial jetliners, which is a market currently dominated by Boeing and Airbus.  The Chinese-manufactured Comac C919 jetliner is leading China’s efforts to gain a stronger foothold in the global aerospace industry, directly competing with the Boeing 737 and Airbus A320 jets.  The C919 has already secured over 300 orders, which have mainly come from Chinese customers.  For Boeing, this agreement allows the company to deliver its new 737 Max jet to Chinese airlines after previously being warned that the approval would be delayed until 2018.  Boeing is also set to open a new facility near Shanghai in 2018 to work in partnership with Comac to work on 737’s that will be delivered for Chinese airlines.

Government Technology Solutions

The Defense Information Systems Agency (“DISA”) announced 20 awardees for the full and open portion of the $17.5 billion Encore III contract.  While usual suspects, such as Booz Allen Hamilton and CACI International, made the list, several notable incumbents on the predecessor Encore II contract were left out, including SAIC, Raytheon, and BAE Systems, among others.  Encore is one of DISA’s primary vehicles for a wide range of IT services across the Department of Defense (“DoD”), covering capabilities such as enterprise IT policy and planning, business process re-engineering, network support, and cloud professional services.  The contract has a five-year base and five one-year options.  DISA received 72 proposals, meaning the Government Accountability Office is likely to face protests like it did with Encore II, when 26 companies, including five small businesses, were ultimately awarded spots.  Companies will have 10 days after debriefings to file bid protests.

The Department of Housing and Urban Development (“HUD”) fell short of the Digital Accountability and Transparency Act’s (“DATA”) required reporting for the second quarter of fiscal year 2017.  Inspector General (“IG”) officials found that the agency’s chief financial officer (“CFO”) failed to implement standards required by the Office of Management and Budget (“OMB”) and the Department of Treasury, causing HUD to underreport billions of dollars in obligations and outlays to USASpending.gov.  The DATA Act requires federal agencies to submit standardized spending information to improve federal transparency.  However, HUD’s submission consisted of widespread errors, inconsistencies, omissions, and false values, according to the IG report.  Investigators found that HUD did not carry out necessary system upgrades to ensure financial data fit the DATA Act Information Model Schema.  The IG offered new recommendations on how the HUD could achieve DATA Act standards, including designating additional personnel and financial resources towards compliance.

Big Movers

ULE (down 15.5%) – Share prices were down this week after the U.S. Department of Justice delayed its decision regarding Ultra Electronics’ purchase of Sparton Corp.

ESL (down 25.7%) – Share prices were down this week after the company missed fourth quarter consensus earnings and sales estimates.

Transactions

Blue Cross and Blue Shield of South Carolina has acquired JBS International, Inc., a provider of professional services to public and private sector clients.  KippsDeSanto & Co. served as the exclusive advisor to JBS International, Inc. on this transaction.  Terms of the deal were not disclosed.

MAG Aerospace Corp. has acquired Avenge, Inc., a provider of Manned ISR (Intelligence, Surveillance, Reconnaissance) Operations and Training.  KippsDeSanto & Co. served as the exclusive advisor to Avenge, Inc on this transaction.  Terms of the deal were not disclosed.

Booz Allen Hamilton, Inc. has completed its acquisition of Morphick, a provider of managed detection and response (“MDR”) services.  Terms of the deal were not disclosed.

Radiant Power Corp. has acquired Interface Displays & Controls, Inc., a provider of electronic products for aviation, marine, military fighting vehicles, and embedded computing markets.  Terms of the deal were not disclosed.

Speedcast International Ltd. has completed its acquisition of UltiSat, Inc., a provider of remote communications and professional services.  The deal was worth an estimated $100 million.

Structural Monitoring Systems plc has agreed to acquire Anodyne Electronic Manufacturing Corp., a provider of electronic components for the aerospace industry.  The deal is worth an estimated $8 million.

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Industry Week in Review – November 3, 2017

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Aerospace & Defense Update

After Pratt & Whitney’s continued production problems with its geared turbofan engines, Bombardier has decreased projected deliveries from 30 – 35 to 20 – 22 aircraft for 2017, causing a strain on the company’s free cash flow due to bloated inventories.  In response, Pratt & Whitney has offered to support excess inventory due to engine issues, stemming from a recent letter of intent (“LOI”) by an unidentified European airline for up to 61 aircraft, by providing Bombardier with supplier advances.  The delay in aircraft deliveries will lower Bombardier’s Commercial Aircraft revenues for 2017, but the company still expects to meet its overall target of 50 regional aircraft deliveries, which includes the C-Series and Q400 aircraft.

The Pentagon is in the process of reviewing the estimated $1.2 trillion cost of modernizing the U.S.’s nuclear arsenal over the next three decades, as the Pentagon begins to build its budgets for government fiscal year (“GFY”) 2019 and beyond.  A Congressional Budget Office review of GFY2017 to GFY2046 estimated the costs of incremental upgrades of nuclear forces at $400 billion and operations and sustainment of the nuclear arsenal at $800 billion.  This $1.2 trillion in estimated costs would also coincide with defense budgets constrained by long-term fiscal pressures.  The proposal for increasing the nuclear arsenal over the next three decades includes expenditures on ballistic missile submarines, intercontinental ballistic missiles, B-21 bombers, and a long-range standoff weapon.

Government Technology Solutions

The Department of Health and Human Services (“HHS”) has announced plans to modernize the agency’s legacy IT systems, which represent roughly 40% of the systems of record at HHS.  Because these systems are becoming increasingly expensive to maintain, the Office of Chief Information Officer aims to transition 30% of them to the cloud over the next few years.  With the largest non-defense IT budget in the government, HHS should have the ability to effectively spend and improve the department’s IT systems through cloud migration and modernization.  Undertaking these efforts will support HHS’s plan to achieve an A-grade on the department’s Federal Information Technology Reform Act (“FITARA”) scorecard by May of next year.  FITARA’s scorecard is influencing decision making at the HHS and creating a great opportunity for IT vendors to earn lucrative modernization contracts.

This past Wednesday, the government outlined 2018 spending for federal contracting when the Professional Services Council (“PSC”) released its 2017 Vision Federal Market Forecast.  In the report, PSC officials commended the progress made on cloud services and IT modernization, but noted the remaining workforce challenges and a lack of appointed officials in key positions.  With 2018 budgets expected to remain at the same level as 2017, agencies will struggle to devote significant resources towards modernization.  However, agencies will look towards shared services to drive savings and allow for more spending.  The PSC claims that initiatives taken this year, such as the Modernizing Government Technology Act, are promising, but are clouded with uncertainty due to the lack of sufficient leadership.  Successful appointments from the Trump administration will provide federal agencies more certainty and direction as they plan to update technology using a stagnant budget.

Big Movers

MANT (up 8.9%) – Share prices were up this week after the company reported positive third quarter earnings and a 28% increase in backlog from 2Q17.

KEYW (down 30.2%) – Share prices were down this week after the company missed third quarter consensus earnings per share estimates and reported a loss of $0.08 per share.

Transactions

AC&A Enterprises, LLC has acquired Applied Composites Engineering, Inc., a provider of advanced composites engineering and manufacturing, providing advanced composites technologies and solutions to many A&D OEMs.  Terms of the deal were not disclosed.

AE Industrial Partners, LLC has acquired FMI, Inc., a provider of a full range of premium forming, machining, engineering, and complex assembly services to global aerospace customers.  Terms of the deal were not disclosed.

L2 Defense, Inc., an SBA 8(a)-certified small business, has acquired Advanced Technical and Educational Consultants, Inc. (ATEC), a woman-owned business.  ATEC is a provider of emergency services training and simulation exercises for the military and federal agencies, as well as state and local emergency services communities.  Terms of the deal were not disclosed.

 Raisbeck Engineering, Inc. has acquired Butterfield Industries, a provider of FAA-approved replacement parts for numerous King Air models.  Terms of the deal were not disclosed.

 TeraThink Corporation and Dominion Consulting announced a definitive merger agreement. Dominion Consulting is a technology and management consulting company.  KippsDeSanto & Co. served as the exclusive advisor to Dominion Consulting on this transaction.  Terms of the deal were not disclosed.

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Industry Week in Review – October 27, 2017

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Aerospace & Defense Update

Numerous companies announced 3Q17 earnings this past week with mixed results.  Lockheed Martin missed earnings per share (“EPS”) estimates by 0.6% but increased revenue by 5.4% year-over-year (“YoY”) to $12.2 billion.  Despite Lockheed’s slight miss on EPS figures and lower than expected revenue, management increased EPS and revenue guidance for 2017.  Northrop Grumman exhibited strong 3Q17 performance, beating EPS estimates by 26.0% and growing revenue by 6.0% YoY to $6.5 billion.  The revenue increase was driven by sales growth in the Aerospace Systems and Mission Systems segments.  Additionally, Boeing beat EPS estimates by 2.3% and increased its revenue by 1.7% YoY to $24.3 billion.  Boeing set a record with 202 commercial aircraft deliveries in the quarter and raised its earnings and cash flow guidance for the year.

United Technologies beat EPS estimates by 3.0% and increased revenue by 3.6% YoY to $15.4 billion.  This increase was sustained by investments in innovation, resulting in its best quarter of organic growth since 2011 per Chairman and CEO, Greg Hayes.  Hayes also reaffirmed United Technologies’ confidence in its proposed acquisition of Rockwell Collins and the transformational aspect the acquisition will have for United Technologies.  General Dynamics beat EPS estimates by 3.3% but lowered its revenue by 1.0% YoY to $7.6 billion.  However, General Dynamics said its total order backlog was up to $63.9 billion, an increase of 9.2% from the end of 2Q17.  Lastly, Raytheon beat EPS estimates by 3.0% and increased its revenue by 4.5% YoY to $6.3 billion.  This increase was driven by robust growth in its Missile Systems unit.

Government Technology Solutions

Rep. Robin Kelly voiced her support Thursday for the Connected Government Act, a bill that would require federal agencies to maintain mobile-friendly public websites.  The bill was approved by the Oversight and Government Reform Committee in September and by the Senate Homeland Security and Governmental Affairs Committee in early October.  The legislation would codify an existing Office of Management and Budget memorandum that calls for agencies to ensure that their websites perform equally well on non-desktop devices, such as smartphones and tablets.  However, an Information Technology and Innovation Foundation Report from March found that many agencies have not heeded this advice, as 31% of popular federal agencies’ websites failed a mobile friendliness test by a significant margin.  With 77% of Americans owning a smartphone, Kelly called the inability by the government to design mobile friendly websites a “complete failure”.  According to a study, approximately 40% of visits to government websites in the past 90 days were via a mobile device.

Bhupesh Wadhawan, the founder of a small business contracting firm, Link Solutions, has plead guilty to five years in prison for bribing a contracting official to award his company a $50 million contract.  The bribery scheme began almost immediately after the company was founded in 2006 and lasted through 2012.  To grow Link Solutions’ business with the Army Public Health Command at Aberdeen Proving Ground in Maryland, Wadhawan bribed Rainer Ramos, a contracting official at Aberdeen, with gifts that included Wizards basketball tickets, various football team tickets, and access to the company luxury suite at FedEx Field.  In one instance, Wadhawan convinced Ramos to convert full-and-open work into an 8(a) set-aside contract that Link Solutions ultimately won.  While commercial companies can offer potential customers certain incentives to encourage business transactions, government contractors are explicitly forbidden from offering government contracting officials any form of monetary compensation, including gifts that cover entertainment activities.  Wadhawan’s actions resulted in a five-year prison sentence and $2.2 million in restitution.

Big Movers

FLIR (up 8.9%) – Share prices were up this week after the company reported positive third quarter earnings and increased revenue by 15% YoY.

Airbus (up 5.4%) – Share prices were up this week after the company acquired a majority stake in the Bombardier C Series program.

Transactions

Serco, Inc., the wholly-owned U.S. subsidiary of Serco Group plc, has agreed to acquire BTP Systems, LLC, a provider of satellite communications (“SATCOM”), radar modernization, operations and maintenance, and sustainment services that enable customers to extend the lives of existing systems and achieve phased upgrades.  KippsDeSanto & Co. served as the exclusive advisor to BTP Systems, LLC on this transaction.  Terms of the deal were not disclosed. 

Astronics Corp. has agreed to acquire Telefonix, Inc., a provider of advanced in-flight entertainment and connectivity equipment, as well as providing industry leading design consultancy services for the global aerospace industry.  The deal is worth an estimated $104 million.

Booz Allen Hamilton, Inc. has agreed to acquire Morphick, Inc., a provider of managed detection and response (“MDR”) services.  Terms of the deal were not disclosed.

Fuse Engineering, LLC has acquired ZyEdge, a provider of IT managed services for the small and mid-sized business market in the D.C. Metro / Northern Virginia area.  Terms of the deal were not disclosed.

Highpoint Global, LLC has acquired Primescape Solutions, Inc., a provider of enterprise-scale information technology services and solutions to the public sector.  Terms of the deal were not disclosed.

MavenHill Capital has agreed to acquire Connecticut Coining, Inc., a provider of precision deep drawn metal parts for mission-critical applications for aerospace, defense, medical, and power tube industries.  Terms of the deal were not disclosed.

OpenGov, Inc. has acquired Peak Democracy, Inc., a provider of online citizen engagement solutions for the government sector.  Terms of the deal were not disclosed.

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Industry Week in Review – October 20, 2017

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Aerospace & Defense Update

Airbus has acquired a majority stake in the Bombardier C-Series jetliner, creating an avenue for Bombardier to avoid a potentially damaging trade dispute with Boeing where the U.S. Department of Commerce threatened a 300% tariff on C-Series imports.  The agreement gives Airbus a 50.01% stake in Bombardier’s C-Series Aircraft Limited Partnership and would allow Bombardier to avoid the tariff through performing final assembly of the aircraft at Airbus’ factory in Alabama, making the aircraft a domestic product.  The deal benefits Bombardier by improving the C-Series’ economies of scale and providing access to a broader sales distribution network.  For Airbus, the deal will support the bottom end of its narrowbody aircraft portfolio and help to expand its global network through the potential expansion of further deals in Canada spanning other sectors.

The U.S. Navy may ask Congress to purchase two new aircraft carriers at the same time in order to decrease construction costs for each ship, partially in response to President Trump’s initiatives to lower the costs of the service’s fleet.  After Navy Secretary Richard V. Spencer requested companies develop cost-reduction plans for the warships, many companies responded that buying two aircraft carriers at the same time could improve efficiencies and translate into potential cost savings.  The Navy has set out a plan for a 355-ship fleet, adding more than 50 ships to its current portfolio.  This expansion includes four additional aircraft carriers, which the Pentagon anticipates will cost $43 billion.

Government Technology Solutions

Federal Chief Information Officer Margie Graves announced that the final version of the technology modernization report by the White House’s American Technology Council and Office of American Innovation Technology will be released shortly.  This report lays out the current and envisioned state of Federal IT, while providing recommendations to implement these improvements.   Additionally, The White House is waiting on Congress to implement the Modernizing Government Technology Act (“MGT”), which will change funding structures within agencies to allow for unspent budgets to go towards IT modernization projects.  The Office of Management and Budget (“OMB”) will set up funding structures quickly so agencies can protect their assets immediately.  The OMB and National Institute of Standards and Technology (“NIST”) have formed a joint working group to determine better security protocols for identity verification and other security measures.  Considering the cybersecurity hacks reported in the past few weeks (e.g., Equifax and the Federal Deposit Insurance Corporation), Graves has emphasized the importance of the MGT and different solutions to increase its efficiency.

Due to the growing popularity of blockchain, government agencies are weighing whether to implement this new and rapidly growing technology.  As a decentralized currency, blockchain transactions are visible to all users, potentially making it a more efficient and cheaper alternative to standard currency.  Agencies have cited that blockchain could be used for identity management, alternative payment models, and auditing, among other services.  However, government leaders are worried about privacy issues and do not believe that blockchain would pass regulatory constraints.  The General Services Administration (“GSA”) has been one of the biggest agencies working on blockchain because it realizes hundreds of potential benefits, but is delaying the implementation of any new policies as it further analyzes the potential risks.  Additionally, the State Department is considering blockchain usage in diplomacy to potentially track foreign aid and police illegal mining.  Overall, government agencies realize the potential benefits of blockchain, but are waiting to implement the digital currency in a broader context as it weighs its feasibility in the broader market.

Big Movers

Astronics (up 10.1%) – Share prices were up this week after the company was selected by six major North American airlines to install in-seat power systems on up to 1,400 narrow-body and regional jet aircraft.

GKN (down 5.4%) – Share prices were down again this week after the company gave analysts guidance that profits would be below expectations due to two external claims expected to cost $53 million.

Transactions

AEA Investors LP has agreed to acquire Excelitas Technologies Corp., a provider of photonics technology solutions, with core capabilities in detection, optics, illumination and advanced electronics.  Terms of the deal were not disclosed.

CSRA has agreed to acquire Praxis Engineering Technologies, a provider of software and systems engineering services to agencies in the intelligence community with a particular emphasis on mission application development and engagement.  The deal is worth an estimated $235 million.

Intelligent Decisions, Inc. has acquired privately held Manning Services, Inc., a provider of custom application development and cloud migration services.  Terms of the deal were not disclosed.

Spectris plc has acquired privately held The Omnicon Group, Inc., a provider of engineering solutions for the aerospace, automotive, and defense sectors.  The deal is worth an estimated $29 million.

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Industry Week in Review – September 1, 2017

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Aerospace & Defense Update

United Technologies Corp. is in talks with Rockwell Collins about a potential deal valued at more than $20 billion to acquire the industry heavyweight with expectations of closing the deal within a week.  With the consolidation of two key aerospace and defense suppliers, the deal could lead to a wave of mergers and acquisitions (“M&A”) activity amongst other first-tier competitors.  Competitors such as Thales or Harris Corp. could have difficulty competing on contracts with Rockwell Collins with the backing of United Technologies’ resources.  Other large aircraft makers, such as Boeing and Airbus, could also have concerns over increasing costs in their respective supply chains as a result of further consolidation, which could lead to acquisitions of smaller avionics and electronics companies to lessen dependence on first-tier suppliers.  Additionally, Boeing has demonstrated interest in expanding its footprint in the aftermarket through the creation of an internal avionics business unit.  Industry analysts agree the Pentagon and other government agencies are likely to allow the acquisition without objection because neither United Technologies nor Rockwell Collins are competitive in the same space.

The U.S. Army has granted AM General a contract award for $2.2 billion in High Mobility Multipurpose Wheeled Vehicles (“Humvee”) sales to foreign countries, which equates to over 11,500 vehicles.  AM General designs, manufactures, and supplies high-quality specialized vehicles for military and commercial customers globally.  The contract award allows for foreign countries to order the Humvees over the next five years.  Two years ago, AM General lost its bid to build Joint Light Tactical Vehicles (“JLTV”) in the U.S. Army’s Humvee replacement competition to Oshkosh Defense.  However, AM General has managed to successfully expand its Humvee business internationally.  This contract would add to the more than 250,000 AM General Humvees already deployed across 60 countries.

Government Technology Solutions

On Wednesday, the White House’s American Technology Council and Office of American Innovation issued its report on the efforts needed to modernize federal technology.  Required as part of President Trump’s May 11th cybersecurity executive order, the report focuses its main priorities on modernizing and consolidating federal networks and moving to shared services.  For modernization and consolidation, the report calls for maximizing the secure use of cloud computing and modernizing government-hosted applications to protect federal data and cloud-optimized deployments.  For shared services, the report recommends increasing the use of commercial clouds, accelerating the adoption of cloud email and collaboration tools, and improving existing as well as providing additional, security shared services.  The Office of Management and Budget (“OMB”) will help agencies reprioritize funds away from obsolete, legacy Information Technology (“IT”) systems towards modern technologies, using agile development where possible.  The report made no mention of the IT modernization fund, for which the White House has requested $228 million for the next fiscal year.

Due to a shorter budget timeframe for agencies and vacancies in politically-appointed positions, delays on certain major contract awards are becoming commonplace as the end of the federal fiscal year-end looms.  Many large-dollar programs require political guidance and thus have been slowed down with delayed appointee decisions during the transition to a new administration.  All but two of Deltek’s top-20 opportunities for fiscal year 2017 have seen their award date pushed further out, and as a result, many current contracts have been extended through modifications.  However, contract opportunities are still being actively pursued; with a compressed timeframe due to full appropriations only being in place since March, companies expect a very good bookings quarter, especially in relation to military training and readiness.  Agencies have a high volume of business and backlog to clear, so they may default to easily supportable conclusions favoring lower-cost bids in making awards.

Big Movers

ICF International (up 18.0%) – Share prices were up this week due to ICF’s role as the lead consultant for the Department of Housing and Urban Development and the subsequent increased role that ICF will play for recovery efforts in the wake of Hurricane Harvey’s destruction in Texas.

Embraer (up 5.5%) – Share prices were up this week after the Pentagon announced the sale of 12 Super Tucano A-29 planes made by Embraer to Nigeria.

Transactions

Braxton Science & Technology Group has acquired Ingenicomm LLC, a provider of architecture, implementation, and deployment services for satellite ground systems.  Terms of the deal were not disclosed.

Forcepoint, majority owned by Raytheon in a joint venture with Vista Equity Partners has acquired RedOwl Analytics, Inc., a provider of security analytics focused on understanding and managing human risk.  Terms of the deal were not disclosed.

Jacobs Engineering Group, Inc. has acquired Blue Canopy Group, LLC, a provider of cloud, big data analytics, data science, and enterprise information technology (“IT”) consultancy and services for federal government and commercial markets.  Terms of the deal were not disclosed.

Point Blank Enterprises, Inc. has acquired United Shield International, LLC, a provider of personal ballistic and fragmentation equipment.  Terms of the deal were not disclosed.

Strata-G Solutions, Inc. has agreed to acquire WestWind Aerospace, Inc., a provider of rotary wing systems and integration solutions.  Terms of the deal were not disclosed.

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Industry Week in Review – August 25, 2017

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Aerospace & Defense Update

On Monday night, President Trump announced the U.S. will be sending additional troops and aircraft to Afghanistan.  The revised strategy could include as many as 3,900 additional troops that will be deployed “down to a tactical level” to better support the Afghan military.  The increased U.S. military support in Afghanistan will keep pressure on the Taliban to cease the fighting and bring negotiated peace with the Afghan government.  The additional troops will also play a critical role in counterterrorism missions to quell the rise of the Islamic State and Al-Qaeda cells in the region.  The Trump administration does not plan to publicly announce a withdrawal date or disclose any finite numbers on troop deployment levels.

According to top Pentagon budget official David Norquist, the Pentagon is prepared to operate under a short-term continuing resolution (“CR”) at the end of September if Congress is unable to pass a defense budget.  Although Norquist stated he prefers there not to be a CR, the continuing resolution is likely due to the focus on healthcare reform this summer and Congress’ inability to reach a consensus.  Additionally, Congress must work out large items such as the debt ceiling, new infrastructure, and tax legislation once lawmakers return in September.  The last extended government shutdown occurred in October 2013 and delayed military pay and benefits to service members.

Government Technology Solutions

The Social Security Administration (“SSA”) awarded CGI Federal, Leidos, and Northrop Grumman a 10-year, $7.8 billion IT services contract for new hardware and software, as well as associated services.  Leidos will perform this work through the legacy Lockheed Martin Information Systems & Global Solutions business.  The contract includes two base years and eight one-year options with specific bid ceilings for each business.  CGI, Leidos, and Northrop Grumman are eligible for up to $2.4 billion, $2.3 billion, and $3.1 billion in task orders, respectively.  The contractors’ focus on system development lifecycles is expected to help the SSA achieve its goal of increasing the use of automation in IT systems.

CliniComp International, a San Diego-based commercial electronic health record (“EHR”) vendor, has filed a lawsuit against the Department of Veterans Affairs (“VA”) arguing that Secretary David Shulkin broke Federal contracting rules by issuing a sole-source contract to Cerner for updating the VA’s EHR system.  The VA issued the sole-source contract to address its reportedly urgent need for crossover capabilities with the Department of Defense, which is currently utilizing Cerner software for its own EHR overhaul.  CliniComp, who currently holds smaller EHR contracts with both the VA and DoD, argues that it will take Cerner six to eight months to negotiate the terms of the sole-source contract.  They claim that this is plenty of time for the VA to instead compete a contract under accelerated full-and-open competition.  Additionally, CliniComp contends that the overall risky nature of this contract and the work performed could be mitigated by a multiple award contract.  CliniComp’s agency-level protest was already dismissed earlier this month, but it is yet to be determined how this current lawsuit will proceed.

Big Movers

Rockwell Collins (up 3.7%) – Share prices were up this week after merger discussions with United Technologies Corp. advanced, making it more likely a transaction could be reached.

BAE Systems (up 3.0%) – Share prices were up this week after the company unveiled a next-generation hardened single-board computer for space-based use.

Transactions

Arlington Capital Partners has acquired Shoreview Industries portfolio company Tex Tech Industries, Inc., a provider of composite fiber and fabric products used in ballistics protection and fire-retardant thermal acoustic insulation.  Terms of the deal were not disclosed.

Clarus Corp. has acquired Sierra Bullets, LLC, a provider of high-quality bullets for both rifles and pistols used for distributors, law enforcement agencies, and industry original equipment manufacturers.  The deal is worth an estimated $79 million.

Platinum Equity Holdings has agreed to purchase Exponent Private Equity portfolio company Pattonair, a provider of distribution and supply chain management services for aerospace and defense markets worldwide.  Terms of the deal were not disclosed.

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