Industry Week in Review – May 26, 2017

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Aerospace & Defense Update

On Monday, President Donald Trump released his GFY2018 budget proposal which included ~$640 billion for military spending.  This request is more than $50 billion over the current congressional budget caps and only ~$15 billion more than former President Barack Obama budgeted in his forecast for GFY2018.  The proposed budget includes funding for 70 F-35 joint strike fighters, 34 Tomahawk cruise missiles, 1,400 Hellfire missiles, and 12,822 Joint Direct Attack Munitions.  It also includes more money for training, maintenance, and modernization.  ~$65 billion will be included in the overseas contingency operation (“OCO”) which pays for U.S. military operations in Afghanistan, Iraq, and elsewhere.

On Wednesday, French aerospace supplier Safran reduced its bid price for Zodiac Aerospace by ~15% to ~$8.2 billion after Zodiac released a series of profit warnings.  Zodiac issued 10 profit warnings in the past three years and recently had its CEO resign.  Management for both companies have approved the revised version of the deal; however, the deal still needs to be approved by Safran’s shareholders on June 15th.  Ross McInnes, chairman of Safran’s board of directors, expressed great optimism that Safran will be able to turn things around for Zodiac.

Government Technology Solutions Update

According to a recent interview conducted with the Small Business Administration’s (“SBA”) Deputy Chief Information Officer, Guy Cavallo, the agency is no longer seeking to purchase on-site IT systems, such as servers and storage arrays. Instead, the SBA wants to focus more heavily on migrating its IT systems to the cloud as part of its efforts to more heavily rely on infrastructure-as-a-service. The SBA believes that there are several key benefits to utilizing cloud-based infrastructure. For one, cloud vendors can offer more uniformly reliable, round-the-clock services and support to all the small businesses with which the SBA works. In addition, getting rid of on-site IT equipment frees up spending that would otherwise be used for maintenance and upgrades for legacy systems. While the SBA is currently working on the migration of just IT systems to the cloud, the end goal is to more completely leverage the benefits of cloud technology with the additional adoption of platform-as-a-service and software-as-a-service.

Earlier this week, the White House released its full budget proposal for fiscal 2018. Included in this latest budget is $228 million earmarked to be used for an IT modernization fund housed under the General Services Administration (“GSA”). That fund will be used as a long-term mechanism with which the Federal government can upgrade and invest in replacements for aging legacy IT infrastructure. The $228 million figure in President Trump’s budget is roughly in line with the IT modernization funding levels which would be approved under the Modernizing Government Technology (“MGT”) Act. That piece of legislation, which was recently passed in the House of Representatives, is now awaiting further confirmation in the Senate, where a bipartisan group of Senators has been urging immediate action on the bill. While the $228 million in funding is a small part of the $95.7 billion that the government would spend on IT, many insiders view it as a crucial first step towards more expansive, larger-scale IT modernization initiatives.

Big Movers

 Triumph Group (up 44.9%) – Share prices were up this week after the Company settled its lawsuit with Bombardier, allowing liquidity concerns to be alleviated.

CSRA (up 5.9%) – Share prices were up this week after the Company beat earnings estimates and announced its acquisition of NES Associates.

Transactions

CSRA, Inc. has agreed to acquire NES Associates, LLC, a provider of IT infrastructure, network operations, cybersecurity, and data center and application services to the Department of Defense (“DoD”) and other Federal and commercial customers. The deal is worth approximately $105 million.

L3 Technologies, Inc. has acquired Open Water Power, Inc., a provider of safe and high-energy-density undersea power generation technologies used by Unmanned Undersea Vehicles (UUVs) and other maritime platforms.  Terms of the deal were not disclosed

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Industry Week in Review – May 19, 2017

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Aerospace & Defense Update

Boeing faced years of delays before successfully introducing its 787-series aircraft, but made an on-time delivery of its first 737 MAX aircraft to Lion Mentari Airlines this week.  Boeing encountered some problems with 737 MAX engines last week; however, they moved forward with the delivery schedule as not all aircraft were impacted by the issue.  Boeing currently has over 3,700 orders for its MAX variant, which features new LEAP engines built by CFM International (a joint venture between GE Aviation and Safran Aircraft Engines) that allow for a 14% increase in fuel efficiency over its predecessor.  The 737 MAX also has increased range of ~19%, to over 3,500 nautical miles, which will help satisfy the bourgeoning small capacity “point to point” airline market.

The U.S. Air Force is in the middle of a shift in perceiving space as a “benign environment” to a “war-fighting domain.”  To address this issue, House Representative Mike Rogers from Alaska called for the creation of a Space Corps last month, which would focus on training, organizing, and equipping in space.  However, U.S. Air Force Chief of Staff General David Goldfein disagreed during a recent panel and instead believes that the Air Force should merge space missions with current military agencies.  Goldfein argues that the creation of a Space Corps would inhibit introduction times for technological advancement due to the natural preliminary inefficiencies embedded in new organizations.

Government Technology Solutions Update

On Wednesday, the most recent iteration of the Modernizing Government Technology Act (“MGT”) was passed by the House of Representatives.  This come roughly one week after the Congressional Budget Office (“CBO”) assigned a $500 million price tag to the bill, a figure that is substantially lower than the $9 billion cost associated with the previous version of MGT passed by the House in late 2016.  The original version of the bill stalled in the Senate during the lame duck session of Congress, due in part to the large cost associated with its implementation.  The newest draft of the bill would establish a $500 million centralized Federal fund which would be used to support IT modernization initiatives across the government, and would also set up various working capital funds across 24 Federal agencies.  By setting up these funds, the government will be able to be more agile, flexible, and responsive in terms of its ability to upgrade systems in a rapidly evolving technology environment.  Due in part to its lower CBO score, the new MGT had widespread bipartisan support.  While it is unknown how the bill will fare in the Senate, many insiders are eager to have access to better tools with which to ensure that the Federal IT infrastructure is flexible, and able to contend with a rapidly evolving technological landscape.

The U.S. Army recently unveiled awardees on its $34.5 billion Responsive Strategic Sourcing for Services (“RS3”) contract.  Initially, the Army announced that a total of 55 large and small business contractors had won positions on RS3.  The Army’s goal was to award a total of 15 small businesses and 25 large businesses awards.  While the small business criterion was met, with a total of 29 small business awards, only 16 large business awards were originally made.  As a result, the Army will be moving into Phase 2 of its awards process.  In this phase, the Army will accept revisions to original proposals made by unsuccessful bidders, focusing primarily on experience and expertise, past performance, and cost.  RS3 was designed as a 10-year professional services contract aimed at procuring command and control, intelligence, and surveillance solutions.  It is currently unknown how many additional awards will be made following this process, but Phase 2 offers a significant opportunity for large businesses who were not originally given awards to participate in this contract.

Big Movers

 AvonRubber (up 4.9%) – Share prices were up this week after the company beat earnings estimates.

 Triumph Group (up 15.9%) – Share prices were up this week after an equity report raised the price target of shares; the report argued share prices have bottomed after news of a possible bankruptcy for Triumph’s aero structures division.

Transactions

Apax Partners has agreed to acquire The Keystone Peer Review Organization, a provider of customizable healthcare management solutions for Federal and commercial customers.  Terms of the deal were not disclosed.

CTS Corp has acquired Noliac A / S, a provider of tape cast and bulk piezoelectric components, sensors, and transducers.  Terms of the deal were not disclosed.

Boyd Corp. has acquired Aavid Thermalloy, LLC, a provider of a broad range of technologically advanced thermal management solutions for aerospace and defense, telecommunication, LED lighting, server, data center, consumer electronics, transportation, and industrial applications to customers all over the world.  Terms of the deal were not disclosed.

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Industry Week in Review – May 12, 2017

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Aerospace & Defense Update

On Wednesday, Boeing announced it has temporarily paused test flights for the new 737 MAX aircraft after discovering an engine issue.  The announcement came just days before Boeing planned to deliver its first 737 MAX aircraft to Malaysian carrier, Malindo Air.  The Company must now receive re-approval from the U.S. Federal Aviation Administration (“FAA”) before the aircraft can take flight.  It is not clear how long the engine approval process will take; however, Boeing still plans to deliver its first 737 MAX aircraft this month.

According to multiple reports, President Donald Trump’s senior military advisors are pushing for a significant increase to the number of troops in Afghanistan.  Currently, ~8,500 U.S. troops and ~5,000 foreign ally troops are stationed in the area.  The advisors also hope the President will allow the Pentagon to set its own troop numbers, instead of following the traditional White House recommendations.  President Trump is expected to decide on the troop increase before the North Atlantic Treaty Organization (“NATO”) summit on May 25th.  No formal plan has been announced or sent to Congress yet.

Government Technology Solutions Update

On Thursday, President Donald Trump signed into effect an executive order focused on cybersecurity, a document which has been anticipated since the White House’s original draft was pulled back in January.  While the main objective of the new order is the improvement of the nation’s cybersecurity capabilities, it also includes IT modernization as an integral step in creating a more secure, interconnected, and efficient Federal system.  The American Technology Council (“ATC”) will take the lead on exploring the feasibility of potential modernization initiatives.  The ATC has been tasked with reaching out to agency heads in order to determine what the financial and technical requirements would be for moving agencies onto shared IT services.  The White House hopes that, through the creation of a modernized and centralized IT infrastructure, the Federal government will be better prepared to withstand and counter cyber threats.  While there have not been any specific new modernization initiatives announced, the ATC will have the next 90 days to meet with various agencies to determine the best course of action.

According to a recent report released by Deloitte, increased investment and implementation of artificial intelligence (“AI”) technologies can lead to significant cost and time savings for Federal workers.  The report calculated that investment in AI might able to save between 96.7 million and 1.2 billion labor hours per year depending on the level of investment.  That represents between $3.3 billion and $41.1 billion in cost savings annually.  By investing in technologies such as machine learning, speech recognition, robotics, and natural language processing, workers will be able to automate large numbers of tasks such as filling in forms, writing to databases, and extracting data from documents. This would allow the government to sharply cut paperwork burdens and reduce backlogs. Deloitte’s report estimates that, with adequate investments in these technologies, the government workforce could potentially free up 30% of its time within five to seven years after the application of AI technologies to routine, automatable tasks.

Big Movers

Cubic (down 14.4%) – Share prices were down this week after Cubic missed earnings estimates.

AeroVironment (5.0%) – Share prices were up this week after AeroVironment began full rate production and shipment of its Mantis i45 EO/IR Gimbal Sensor Suite.

 

Transactions

Luminator Technology Group, LLC has acquired Apollo Video Technology, LLC, a provider of mobile video surveillance and fleet and information management solutions for law enforcement, military, and government applications.  Terms of the deal were not disclosed.

VISTA Technology Services Inc. has acquired General Scientific Corporation, a provider of strategic planning, systems engineering, program management, network management, and other technical services primarily for Department of Defense (“DoD”) customers.  Terms of the deal were not disclosed.

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Industry Week in Review – May 5, 2017

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Aerospace & Defense Update

After the GFY17 budget cleared the house on Wednesday with a 309 to 118 vote, the U.S. Senate on Thursday voted 79 to 18 on a $1.1 trillion spending bill to fund the government through September; the bill now goes to President Trump’s desk for final approval.  Of the total $1.1 trillion, the measure contains $593 billion for defense spending, an increase of ~$20 billion over GFY16 enacted levels and ~$16 billion more than President Obama’s budget request.  When combined with $5.8 billion in supplemental funding passed in the December Continuing Resolution (“CR”), total defense funding for GFY17 is $598.5 billion.

Large portions of the $593 billion defense bill include ~$223 billion allocated for operations and maintenance (compared to ~$214 billion in GFY16), ~$123 billion for equipment procurement (~$119 billion in GFY16), and ~$74 billion for research and development (~$69 billion in GFY16).  Review of the bill calls for major platform procurements across the DoD, including $21.2 billion for 13 Navy ships (including three Littoral Combat Ships and three guided missile destroyers), $8.2 billion for 74 F-35 aircraft, $2.6 billion for 15 KC-46A tanker aircraft, $1.8 billion for 11 P-8A Poseidon aircraft, $1.3 billion for 17 130J aircraft, and $1.2 billion for 62 UH-60 Blackhawk helicopters.

Government Technology Solutions Update

Mary Davie, assistant commissioner for the Office of Information Technology in the General Services Administration’s (“GSA”) Federal Acquisition Service recently met with Federal IT industry partners to discuss ways in which the GSA might work to streamline the acquisition process.  According to Ms. Davie, her discussions led to the identification of several common acquisition practices that industry leaders felt generated unnecessary friction in the acquisition process.  For example, one common complaint in the industry has been that Federal customers tend to issue prescriptive statements of work rather than statements of objectives.  The former detail exactly how the customer wants the work to be done, which places constraints vendors.  A statement of objective, created in conjunction with customers and industry representatives alike, could lead to more tailored and innovative solutions.  Other points of emphasis in Ms. Davie’s discussions were that of creating a more centralized repository for vendors to access information relevant to new opportunities, increasing the responsiveness and availability of Federal program management personnel, and placing an emphasis on reducing schedule slips and procurement delays.  While it remains to be seen what solutions will be proposed for these issues, Ms. Davie believes that her meeting with the industry gave greater clarity as to where the government could focus its efforts in improving the efficiency of the acquisition process.

On Monday, President Trump issued an executive order creating the American Technology Council, which will focus on the goal of improving and modernizing Federal IT.  Outside of naming which positions in the Federal government would have seats on the council, the order does not mention much in terms of its specific goals.  Former Federal Chief Information Officer (“CIO”) Tony Scott was supportive of the council’s creation, saying that similar organizations under the Obama Administration were an effective way to develop policy.  The creation of the council highlights the continued emphasis on Federal technology modernization under the Trump administration, coming roughly a week after Representative Will Hurd reintroduced his Modernizing Government Technology Act to the House of Representatives, and just over one month after the creation of the Office of American Innovation.  The American Technology Council will first meet in June, where it is expected to invite several prominent tech industry leaders to discuss how technology could be more effectively utilized and implemented throughout the Federal government.

Big Movers

ManTech (up 11.8%) – Share prices were up this week after the company beat earnings estimates. 

Wesco Aircraft (down 24.7%) – Share prices were down this week after the company appointed a new CEO Monday.

Transactions

Applied Research Associates, Inc. has acquired Neya Systems, LLC, a provider of unmanned systems for defense, homeland security, and commercial users.  Terms of the deal were not disclosed.

Atlantic Street Capita has acquired GAT Airline Ground Support, Inc., a provider of outsourced airline services at airports across the United States.  Terms of the deal were not disclosed.

Belden Inc. has agreed to acquire Thinklogical, Inc., a provider of uncompressed, high-bandwidth signal stream and flexible switching options.  The deal is worth an estimated $160 million.

Charlesbank Capital Partners has acquired Tecomet, Inc., a provider of contract manufacturing for orthopedic implants, as well as critical components for the cardiovascular, medical imaging, and aerospace markets.  Terms of the deal were not disclosed.

Digital Power Corp. has acquired Microphase Corp., a provider of standard and customized state-of-the-art RF, microwave, and millimeter-wave components, devices, subsystems and integrated modules. Terms of the deal were not disclosed.

J.F. Lehman & Co. has acquired BEI Precision Systems & Space Co., a provider of precision positioning sensor technologies, including scanners, optical encoders, and accelerometers, for programs of record and enduring platforms across space, defense, and critical infrastructure markets.  KippsDeSanto & Co. acted as exclusive financial advisor to BEI Precision Systems & Space Co.  Terms of the deal were not disclosed.

Harlow Aerostructures, LLC has acquired Aerospace Holdings, a provider of aerospace components and assemblies, servicing military and civilian fixed wing and helicopter markets for over 30 years.  Terms of the deal were not disclosed.

Infinite Electronics, Inc has acquired Smiths Interconnect Microwave Companies Kaelus, PolyPhaser, Transtector Systems, and Radio Waves, Inc.; these companies provide RF and microwave solutions, RF lighting protection, surge suppression solutions, and microwave antennas, respectively.  Terms of the deal were not disclosed.

Point Blank Enterprises, Inc. has acquired Gould & Goodrich, Inc., a provider of leather, ballistic nylon, and synthetic duty belts, holsters, and accessories.  Terms of the deal were not disclosed.

Trescal S.A.  has acquired Acucal, Inc., a provider of calibration services.  Terms of the deal were not disclosed.

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Industry Week in Review – April 28, 2017

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Aerospace & Defense Update

Boeing, Lockheed Martin, and Northrop Grumman all announced 1Q17 earnings this past week with mixed results.  Boeing raised its forecast for full-year earnings after it reported a ~19.0% year-over-year (“YoY”) increase in profit for 1Q17.  However, Boeing’s revenue decreased ~7.3% YoY and missed consensus analyst estimates by ~$330 million (~1.5%).   In contrast, Lockheed lowered its full-year earnings outlook but raised its revenue forecast for the remainder of the year.  Lockheed’s revenue during 1Q17 missed consensus analyst estimates by ~$170 million (~1.5%), but still showed a YoY increase of ~$690 million (~6.6%).  Lastly, Northrop Grumman raised its full-year earnings outlook after beating consensus analyst estimates for revenue by ~$125 million (~2.0%).  Northrop’s Aerospace Systems division, responsible for producing the center sections of the F-35 jets, increased revenue ~13.0% YoY.

On Friday, Congress approved a one-week, stopgap spending bill allowing the government to stay open through May 5th as it negotiates a budget for the remainder of GFY2017.  The government was operating under a Continuing Resolution (“CR”) that was set to expire on April 29th.  House Appropriations Committee Chairman Rodney Frelinghuysen is hopeful a funding package will be completed shortly.  There is speculation that the supplemental defense spending amendment will be close to half of President Donald Trump’s initial $30 billion request.  Additionally, President Trump is expected to lay out his 2018 funding proposal for GFY2018 over the next few weeks.

Government Technology Solutions Update

On Friday, Representative Will Hurd reintroduced his Modernizing Government Technology Act (“MGT”) to the House of Representatives.  Mr. Hurd had proposed an earlier version of the bill in late 2016, but despite being passed by the House, it was unable to get traction in the Senate.  The end goal of the bill remains relatively unchanged from prior iterations, giving agency Chief Information Officers (“CIOs”) access to funds which will enable them to upgrade and modernize legacy IT infrastructure.  While this new version of the bill follows a similar pattern of its predecessor, proposing a centralized fund as well as setting up individual agency funds for the procurement of major IT upgrades, the original MGT was more expensive and less appealing for lawmakers.  The bill Mr. Hurd introduced on Friday asks for $500 million in total compared to the $9 billion price tag assessed to the original bill by the Congressional Budget Office (“CBO”).  Mr. Hurd hopes that the smaller central fund, more appealing CBO score, and high-profile support will give the bill enough momentum to pass both the House and the Senate this time around.

The House Armed Services Committee held its Emerging Threats and Capabilities subcommittee hearing on Wednesday, during which members of Congress and other industry experts pressed for the Department of Defense (“DoD”) to overhaul and modernize the way the agency procures and implements new IT, saying that there are too many inefficiencies in the way it currently conducts acquisitions.  Industry insiders noted that the DoD should prioritize finding proven, commercial solutions before attempting the creation of proprietary systems. Mr. Terry Halvorsen, retired DoD CIO, said that the agency often over-allocates both funds and resources towards the customization and testing of commercial solutions compared to using technology which has been certified to industry standards.  Industry insiders also argued that the DoD needs to become more flexible in the manner through which small purchases are funded.  They note that current policies make it difficult to quickly procure smaller items, and that the acquisition process itself is currently overly burdensome.  Several in attendance proposed that Congress should enact legislation which would allow the more streamlined integration of commercial technology, and which would also give agency officials the authority they need for the flexible acquisition of IT systems

Big Movers

Airbus (up 5.6%) – Share prices were up this week after the Company reported growth in all its segments except defense during 1Q17.

TE Connectivity (up 5.1%) – Share prices were up this week after the Company raised its full-year sales and profit forecast.          

Transactions

Dubai Aerospace Enterprise has agreed to acquire AWAS, a provider of customized aviation solutions.  Terms of the deal were not disclosed.

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Industry Week in Review – April 14, 2017

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Aerospace & Defense Update

On Wednesday, President Trump held a joint press conference with North Atlantic Treaty Organization (“NATO”) Secretary General Jens Stoltenberg at the White House.  In his remarks, Trump stated that he no longer thinks NATO is “obsolete.”  The President reconfirmed his commitment to NATO and believes it is now doing more to fight terrorism.  Trump also reiterated that NATO allies must increase their financial obligations and reach the alliance’s goal of spending at least 2.0% of their gross domestic product (“GDP”) on defense by 2024.  Stoltenberg backed Trump’s message on member-nation defense spending and stated that NATO has turned a corner in fair burden-sharing.  NATO increased defense spending from 2015 to 2016 by ~$10.0 billion (3.8%).  Stoltenberg also echoed that NATO can and should do more in the global fight against terror.

In the same press conference, Trump announced that he will send National Security Adviser H.R. McMaster into Afghanistan to determine if more U.S. forces are necessary.  This statement came a day before the U.S. dropped the largest non-nuclear bomb on Afghanistan targeting tunnels and caves believed to be built by the Islamic State.  This move was the Trump Administration’s first significant step towards establishing a strategy for the deepening security crisis in Afghanistan.  In February, Army General John Nicholson requested a “few thousand” more troops to fight the Taliban and train the Afghan allies.  Of the ~13,000 NATO troops currently in Afghanistan, ~8,400 are American soldiers.  The Administration plans to work with NATO allies in establishing optimal troop levels but a timeline on when this review will be completed has not yet been established.

Government Technology Solutions Update

On Wednesday, the Department of Veterans Affairs (“VA”) issued a request for information (“RFI”) to potential vendors regarding a commercial, cloud-based version of the Vista electronic health record (“EHR”) system, with the goal of consolidating Vista down to just five physical data centers.  This would permit the VA to continue its use of Vista while outsourcing its maintenance to a commercial entity.  The RFI comes at a crossroads of the VA’s EHR modernization strategy.  The agency has until July 1st to decide whether it will continue to use, develop, and maintain the Vista system in-house or otherwise seek the procurement of a fully commercial EHR solution.  Some have argued that a cloud-based approach may be an acceptable middle ground, as it provides for the continued use of the familiar legacy Vista system while allowing an outside party to handle the logistics, complexity, and cost of maintenance and upgrades.  The VA pursued additional modernization initiatives this week when it launched a web-based access and quality tool designed to increase transparency, allowing veterans to view average wait times for local facilities and leave feedback regarding the quality of their visits.  Both the Vista cloud migration and web portal efforts are being made as the VA attempts to overhaul its practices by driving down costs, increasing efficiency, and providing higher-quality care for veterans nationwide.

The Army made awards on its $248.7 million Army Cloud Computing Enterprise Transformation (“ACCENT”) contract late last week.  The contract has 50 prime awardees, and will be used mainly to assist the Army in migrating its systems to a commercial cloud environment.  While the ceiling value of this ACCENT is relatively low given the number of awards, the Army noted that it will be, in part, a pilot program for future initiatives.  The contract is designed for ease of use, flexibility, and expediency, with a turnaround of one to two months envisioned from solicitation to award on each task order.  ACCENT is designed to procure several modernization solutions and services, such as cloud transition support, technical engineering, security requirements analysis, and data migration planning.  The Army is attempting to cut down on the costs associated with what it sees as an over-expanded IT infrastructure through data center consolidation, and believes that ACCENT will be a key component in laying the groundwork for a successful transition.

Big Movers

Orbital ATK (down 3.2%) – Share prices were down this week after a small ammunition plant run by the Company experienced a fatal explosion.  

Airbus (down 1.5%) – Share prices were down this week after Delta Air Lines announced it is reviewing its $14.0 billion purchase from Airbus.

Transactions

Buchanan & Edwards, Inc. has acquired The Reports and Requirements Company, LLC, a provider of data governance, data curation, cyber intelligence, collection management, and intelligence training to Intelligence Community (“IC”) and national security customers.  Terms of the deal were not disclosed.

Oasis Systems, LLC, has acquired Human Solutions, Inc., a provider of full lifecycle consulting in systems engineering, enterprise architecture, human factors, and user interface design for Federal and commercial customers.  Terms of the deal were not disclosed.

Wencor Group has acquired Accessory Technologies Corp., a provider of repairs for pneumatic valves, electro-mechanical actuators, and electrical components within aerospace industry.  Terms of the deal were not disclosed.

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Industry Week in Review – April 7, 2017

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Aerospace & Defense Update

On Thursday, April 6th, President Trump ordered a retaliation Tomahawk cruise missile strike against a Syrian Government controlled airfield that is suspected to be responsible for a chemical weapons attack against innocent civilians in Syria earlier this week.  The U.S. retaliation marks the first instance of direct military action against the Assad regime in Syria, adding further strain to already tense relationships in the region, both with Syria and its allies, including Russia.  Following the U.S. strike, Russia called on the United Nations Security Council to convene an emergency meeting and announced its intent to suspend communication channels designed to avoid air accidents in crowded Syrian airspace.  In the wake of U.S. military intervention, defense primes are trading up around 1% in contrast to an overall flat market for the day.

Last week, Boeing received a contract for at least 17 new P-8 Poseidon aircraft with a contract value of $2.2 billion and first delivery expected sometime in 2019.  The P-8 Poseidon is a militarized version of Boeing’s highly successful 737-800 platform and is used primarily for anti-submarine and anti-surface warfare as well as Intelligence, Surveillance, and Reconnaissance (“ISR”) capabilities.  Of the 17 aircraft already under contract, the U.S. Navy will purchase 11 units, with the Australian Royal Airforce and U.K. Royal Airforce purchasing an additional four and two aircraft, respectively.  This multinational agreement also contains options for 32 additional aircraft, which could bring the total contract value to $6.8 billion.

Government Technology Solutions Update

At the McAfee Security Through Innovation Summit held on Thursday, officials reiterated the Federal government’s focus on modernizing Federal IT.  The acting Federal Chief Information Security Officer, Grant Schneider, noted that the Trump administration would continue to place an emphasis on upgrading aging legacy IT systems throughout the government.  Representative Will Hurd, who has recently spearheaded such initiatives, has noted that he planned on attempting to reintroduce his Modernizing Government Technology Act sometime in the near future.  That particular piece of legislation, which would have created a multi-billion-dollar centralized fund dedicated on IT modernization, was not able to pass in the most recent lame duck session of Congress.  While there still have not been any specifics mentioned about new legislation or IT modernization, many people in the industry, as well as in the Federal government, believe that the Trump administration will continue to be amenable towards pushing for upgrading legacy government technology.

On Monday, the acting Chief Information Officer (“CIO”) of the Department of Veterans Affairs (“VA”) confirmed that the agency was targeting July 1st to decide whether Vista, the VA’s proprietary electronic health record (“EHR”) system, would continue to be supported.  David Shulkin, who was confirmed in February as VA Secretary, first proposed early July as the target date to make that decision.  Vista, which was originally created as an open-source platform over 25 years ago, will require another set of upgrades by mid-2018.  However, there are many in the industry who believe that the VA should not continue to fund and support the proprietary system, and that commercial procurement might instead be the best option.  For example, the Department of Defense (“DoD”) recently rolled out its MHS Genesis EHR system.  That platform was commercially-sourced, being procured from Cerner.  The VA has hired a team of consultants to help in the decision-making process, and believes that it is currently on track to have a decision about whether to proceed with Vista by their proposed July 1st deadline.

Big Movers

NCI (down 19.6%) – Share prices were down this week after the Company’s 4Q17 earnings missed analyst expectations.

Wesco Aircraft (up 3.5%) – Share prices were up this week after the Company announced an extension of a current contract to provide integrated supply chain services for C-class aerospace hardware in support of the F-35 program.

Transactions

Astronics Corp. has acquired Custom Control Concepts, Inc., a provider of cabin management and in-flight entertainment (“IFE”) systems for the complete range of privately operated Boeing and Airbus aircraft.  Terms of the deal were not disclosed.

Audax Group has acquired Fastener Distribution Holdings, LLC (FDH), a provider of aerospace fasteners and other c-class components to commercial and defense aircraft manufacturers, and subcontractors.  Terms of the deal were not disclosed.

Belcan, LLC, a portfolio company of AE Industrial Partners, has agreed to acquire Schafer Corporation, a portfolio company of Metalmark Capital Partners, and a provider of scientific, engineering, and technical services to military and civilian customers within the Federal government.  Terms of the deal were not disclosed.

Gowanda Components Group (GCG) has acquired Dyco Electronics, Inc. a provider of standard and custom magnetic components and electronic assemblies.  Terms of the deal were not disclosed.

L3 Technologies, Inc. has acquired OceanServer Technology, Inc., a provider of Provides autonomous, lightweight Unmanned Undersea Vehicles (“UUVs”).  Terms of the deal were not disclosed.

Mercury Systems, Inc.  has acquired Delta Microwave, LLC, a provider of high-value radio frequency, microwave and millimeter wave subassemblies and components for the military, aerospace and space markets.  The deal is worth an estimated $40.5 million.

PAE Group, a portfolio company of Platinum Equity, has agreed to acquire FCi Federal, Inc., a provider of managed professional, administrative, and technical services to Federal government customers.  Terms of the deal were not disclosed.

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Industry Week in Review – March 31, 2017

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Aerospace & Defense Update

Lockheed Martin is expected to receive approval from the Pentagon for the production of 200 CH-53K King Stallion helicopters for ~$29 billion.  This new helicopter has the ability to transport three times as much cargo as its predecessor, the Super Stallion.  The Defense Acquisition Board met on Thursday to review whether to approve production for the first 24 helicopters.  If approved, the King Stallion helicopter would be the first major acquisition decision under Defense Secretary James Mattis.  Lockheed’s Chief Financial Officer, Bruce Tanner, stated that the CH-53K’s large revenue potential was an important reason behind Lockheed’s $9 billion acquisition of Sikorsky Aircraft in 2015.  Based on a congressional hearing, the King Stallion is currently expected to cost ~$122 million per helicopter, but is expected to drop below $89 million once full-rate production begins.

Thursday’s launch of SpaceX’s used Falcon 9 rocket marked the first time an orbital rocket has launched into space for the second time.  This launch highlights the benefits of reusable boosters for rockets after SpaceX reused the Falcon 9’s repurposed lower stage, which included nine refurbished main engines.  SpaceX believes reusable rockets will reduce launch prices by ~10% in the initial stages and ~30% in the later years.  SpaceX plans to launch up to six reused Falcon 9’s this year.

Government Technology Solutions Update

On Monday, CSC’s shareholders voted to approve the merger of the company with the IT Services business of HP Enterprise.  The combined company, called DXC Technology, will begin trading publicly on Monday, April 3rd. DXC Technology is expected to have $24 billion in annual revenues, of which $2.9 billion is expected to be contributed by the company’s U.S. public sector business.  The majority of the government work will be brought by HP, as CSC had originally distanced itself from the Federal marketplace in late 2015 when it spun-off its government services business into what would eventually be called CSRA.  HP will also bring with it work performed on the Navy’s Next Generation Enterprise Network (“NGEN”) contract.  NGEN contributed nearly $700 million in revenue in 2016, which amounted to roughly one third of HP Enterprise’s prime contract revenue in that year.  While there has been some speculation that the combined entity will end up shedding its government business, corporate executives have not signaled that this is the case.  CSC CEO Mike Lawrie believes that the government services business of DXC Technology will see low single-digit top line growth, implying that he may be willing to hold onto the business in the near term.

On Monday, President Donald Trump signed an executive order creating the White House Office of American Innovation.  This new office, to be led by Jared Kushner, will “focus on implementing policies and scaling proven private-sector models to spur job creation and innovation.”  According to White House Press Secretary Sean Spicer, the office will have a particular focus on tech procurement aimed at increasing efficiencies within the Department of Veterans Affairs.  The office would focus on bringing in data, technology, and ideas from tech leaders in the private sector, as well as modernizing technology and IT throughout the Federal government.  Donald Trump’s most recent budget request has included a proposal for creating a centralized fund dedicated to IT modernization.  A similar fund was proposed at end of 2016 through the Modernizing Government Technology Act which contained a $3.1 billion price tag for its centralized fund.  However, there is as of yet no clarity as to how much Mr. Trump would request in his iteration of this fund.

Big Movers

SAIC (down 13.6%) – Share prices were down this week after the Company’s 4Q17 earnings missed analyst expectations.

Esterline (up 4.2%) – Share prices were up this week after the Company completed its sale of BVR Technologies to Kaney Aerospace.

Transactions

Deloitte Consulting LLP has acquired Day1 Solutions, Inc., a provider of cloud consulting services, systems integration, managed services, and value-added resale of cloud solutions for Federal government customers.  Terms of the deal were not disclosed.

GE Aviation has acquired Critical Technologies, Inc., a provider of web-based records management solutions, including aircraft maintenance records.  Terms of the deal were not disclosed.

Kaney Aerospace, Inc. has acquired BVR Technologies, a provider of actuation and motion control products.  Terms of the deal were not disclosed.

StandardAero Holdings, Inc. has agreed to acquire PAS International Holdings, Inc., a provider of cost-effective original equipment manufacturer (“OEM”) and maintenance, repair, and overhaul (“MRO”) solutions for the aerospace industry.  Terms of the deal were not disclosed.

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Industry Week in Review – March 24, 2017

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Aerospace & Defense Update

After recent intelligence that the Islamic State is developing a bomb to hide in portable electronics, the U.S. and Britain banned the carrying of electronics larger than a cell phone aboard flights directly from certain Muslim-majority countries in the Middle East and Africa.  Anonymous U.S. officials stated that the explosives of concern are designed to be concealed in laptop batteries.  The Trump administration has said the ban is not an indication that there is information on a credible, specific attack.  However, House Representative Peter King, a member of the House Intelligence and Homeland Security Committees, has indicated the intelligence reports are recent and there are reports of an event that is “possibly planned.”  Impacted countries include, but are not limited to, the United Arab Emirates, Jordan, Egypt, Morocco, Turkey, and Saudi Arabia and it is estimated that ~50 flights into the U.S. will be impacted each day.

As part of its three-year review cycle of top positions in state-owned companies, the Italian government named Alessandro Profumo, a career banker, to be the new Chief Executive Officer of Leonardo, replacing Mauro Moretti.  In January 2017, Moretti was convicted and sentenced to seven years in prison for his role in a train crash from 2009 where 32 people died, excluding him from another term as CEO.  Profumo was previously the CEO of UniCredit and chairman of Italian bank Monte dei Paschi di Siena and has strong center-left ties within the Italian government.  Though he has no aerospace and defense experience, he brings a considerable amount of international market experience, which the Italian government believes will be extremely valuable in expanding revenue channels.

Government Technology Solutions Update

The Department of Homeland Security’s (“DHS”) Flexible Agile Support for the Homeland (“FLASH”) contract was recently hit with a second round of protests last week. FLASH is a $1.4 billion, small business set-aside indefinite delivery / indefinite quantity (“IDIQ”) contract issued by DHS to procure Agile development solutions for the rapid deployment of several key IT capabilities. FLASH was initially awarded to 13 small businesses in November 2016, a decision which was quickly protested. Following corrective action in early March, DHS pulled back those original awards and issued new awards to 11 companies, dropping two of the original awardees. This triggered the recent protests, with four coming last week and three more this week, for which the government has until late June to make protest decisions.

The General Services Administration (“GSA”) recently proposed a new special item number (“SIN”) under IT Schedule 70 which would cover the acquisition of Continuous Diagnostics and Mitigation (“CDM”) solutions. GSA issued a Request for Information (“RFI”) on Wednesday, looking to get feedback from the industry to better understand how it improve efficiencies and increase the quality of CDM offerings available on Schedule 70. Currently, CDM solutions have been offered through a blanket purchase agreement (“BPA”), which is set to expire in August 2018. By adding a CDM-specific SIN to Schedule 70, GSA hopes to have the requisite approvals in place for agencies to access and procure the latest, and most effective set of tools and technologies. GSA wants to ensure that the current list of products and services offered through the BPA is not lost, and the SIN gives adequate flexibility to allow for the qualification of new CDM products as they become available. Responses to the RFI are due by early April, with awards under the SIN expected to be made sometime in May.

 Big Movers

 Bombardier (down 4.3%) – Share prices were down this week after information surfaced about a controversial intermediary named Multiserv Overseas and its possible involvement with Bombardier in a new project in Mongolia.

 Transdigm (down 12.5%) – Share prices were down this week after U.S. Representative Ro Khanna of California requested a probe into the Company’s sales practices.

  Transactions

Aircraft Recycling International has acquired Universal Asset Management, Inc., a provider of asset management and aircraft solutions for ageing aircraft.  Terms of the deal were not disclosed.

Sussex Wire, Inc. has acquired Marox Corp., a provider of CNC precision machined orthopedic implants and aerospace components utilizing CNC multi-axis machining and additive manufacturing technologies.  Terms of the deal were not disclosed.

Valence Surface Technologies has acquired Magnetic & Penetrant Services Company, a provider of metal finishing services to the Aerospace and Defense industries as a mission-critical supplier in the aerostructure supply chain.  Terms of the deal were not disclosed.

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Industry Week in Review – March 17, 2017

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Aerospace & Defense Update

On Thursday, President Donald Trump announced a $1.1 trillion budget proposal for GFY2018 which includes $639 billion for the Department of Defense (“DoD”).  The budget request consists of $574 billion for DoD base budget programs and $65 billion for Overseas Contingency Operations (“OCO”).  Congress is unlikely to accept the proposal due to significant reductions proposed for the State Department, Environmental Protection Agency, Department of Housing and Urban Development, and National Institutes of Health.  President Trump also proposed a $30 billion supplemental funding request for the remainder of GFY2017 allocating ~$25 billion to DoD base-budget programs and $5 billion to OCO.  The supplemental proposal is not expected to pass as it requires Congress to increase current budget spending caps (requiring 60 votes in the Senate) and would cut non-defense spending by $18 billion.

President Trump nominated Patrick Shanahan, a senior Boeing executive, to serve as the Deputy Defense Secretary, the second highest position in the DoD.  Shanahan has 30 years of experience within Boeing’s military, space, and commercial aviation businesses.  The appointment signals an increasingly close relationship between the Trump Administration and Boeing, despite harsh criticism from Trump on the cost of Air Force One aircraft in December.  If confirmed by the Senate, Shanahan will not be allowed to partake in any Boeing-related issues for two years, pursuant to government policies.

Government Technology Solutions Update

According to a recent report released by the Data Foundation and PricewaterhouseCoopers, switching over to a standard business reporting (“SBR”) format could save the U.S. government and the private sector up to a combined $10 billion per year. Currently, companies in the United States spend roughly $2 trillion annually to remain compliant with Federal regulations. Using SBR, which is a standardized open data approach, would allow for the increased implementation of software which could automate costly existing manual processes for both the regulator and regulated companies.  According to the recent report, Australia’s government and private sector saved close to $1B by switching to SBR, while the Netherlands was able to significantly reduce the number of unique data elements necessary for regulatory filings.  Hudson Hollister, the interim president of the Data Foundation, noted that the Federal regulatory landscape in the United States is overly complex and inefficient.  He thinks that the first step in reducing such complexity, and therefore driving down costs for regulated companies and the regulators themselves, would be to create a standardized, shared dictionary of terms which would be used across all regulatory bodies.  Doing so would require congressional action and it remains unknown when that could happen, but Mr. Hollister believes that support for such action within the Federal government is growing and that it would be mutually beneficial for both the public and private sectors.

Will Roper, director of the Pentagon’s Strategic Capabilities Office (“SCO”), stated that the Department of Defense (“DoD”) is attempting to pivot its focus to being an increasingly data-driven organization.  In a statement made this week at the South by Southwest (“SXSW”) Conference, Mr. Roper said that the DoD needs to increase its focus on software, noting that the collection, analyzation, and protection of data is critical.  Part of doing so would be to place an emphasis on commercial technology.  While Mr. Roper acknowledged that proprietary software or systems created in-house can be incredibly effective, often they can be vulnerable to attack if they fall into enemy hands or are left behind on the battlefield.  That is less of a problem for commercial technology, which is less customized specifically for the DoD.  Mr. Roper also believes that following the private sector’s lead by pursuing research in artificial intelligence and machine learning would also be a necessary component in transforming the DoD into a more data-centric organization.

 

Big Movers

Zodiac Aerospace (down 17.6%) – Share prices were down this week after Safran signaled it could review the terms of its proposed acquisition of Zodiac after it issued a profit warning.

Unisys Corporation (up 4.6%) – Share prices were up this week after the Company launched a new service offering as a part of its analytics platform.

Transactions

American Securities, LLC has agreed to acquire Air Methods Corp., a provider of aeromedical and aerospace technology.  The deal is worth an estimated $2.5 billion.

Enlightenment Capital has made an investment in 1901 Group, LLC, a FedRAMP certified provider of infrastructure, applications management and security services through its IT-as-a-service model to Federal customers.  Terms of the deal were not disclosed.

Timothy Cooke, CEO of ASI Government, has acquired ASI Government, a provider of consulting and advisory services around acquisition policy and strategy, category management, cost-price analysis, capital planning, IT governance, change management, and process improvement.  Terms of the deal were not disclosed.

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