Industry Week in Review – March 10, 2017

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Aerospace & Defense Update

To end the current continuing resolution (“CR”), which has put new-start defense procurements on hold, the United States House of Representatives voted 371-48 to pass a $578 billion defense bill for GFY2017.  The spending bill includes $516.1 billion in the base budget and $61.8 billion in overseas contingency operations (“OCO”).  If ultimately passed, it would increase funding for the troubled F-35 program by $1.2 billion and increase funding for the F-18 by ~$1.0 billion.  The Navy would also benefit by receiving an additional $1.6 billion for a new amphibious ship.  The bill will now move to the Senate where it is expected to be met with some resistance from Democrats who are expected to want to evaluate the defense bill in the context of other non-defense budgets.

Heli-Expo was held from March 7th to March 9th in Dallas, TX and hosted over 20,000 industry professionals from around the world who visited 700+ exhibitors.  With over 1 million square feet of exhibit space, the conference included a display of over 60 helicopters.  In advance of the conference, Honeywell released its updated rotorcraft delivery estimates which decreased last year’s forecast by ~400 units. Honeywell is now forecasting 3,900 to 4,400 civilian use helicopters will be delivered from 2017 to 2021.  However, even with this news, the atmosphere at the Heli-Expo conference was still filled with high energy and excitement for the industry.

Government Technology Solutions Update

KeyW Corporation agreed this week to acquire Sotera Defense Solutions, Inc. from global asset management firm, Ares Management, L.P, for approximately $235 million.  This acquisition is highly strategic as it will nearly double KeyW’s size.  At the end of 2016, KeyW employed 1,000 people and had $288 million in revenue and Sotera will add another 1,100 employees and a projected $225 million of revenue in 2017.  Sotera was attractive to KeyW given its contract mix, high-profile customer base, and unique, high-end technical capabilities.  Approximately 80% of Sotera’s revenue is derived from prime contracts, driving KeyW’s prime revenue mix up to 67% from 58%.  In its investor presentation, KeyW noted that Sotera also provides KeyW with a stronger foothold in the Intelligence Community (“IC”), as well as across the Department of Defense (“DoD”).  KeyW, which has historically served 25% of the IC’s agencies, will now have access to 60% of its agencies.  The combined company will also have enhanced cyber security, cloud computing, big data, analytics, machine learning, artificial intelligence, and agile development capabilities.  The deal is expected to generate $7 to $10 million of long-term synergies via consolidated facilities and IT infrastructure and is expected to close by the end of June.

On Monday, Microsoft announced that it would expand its Azure Government Cloud offerings with the addition of two products, Power BI Pro and HDInsight.  The latter is an open-source platform which enables its users to more easily and efficiently create powerful big data analytics solutions, applying machine learning capabilities to process large amounts of data in real-time.  Power BI Pro is a cloud-based data visualization suite capable of tracking real-time or interactive changes in data.  In addition to Power BI Pro and HDInsight, the expanded Microsoft Azure Government suite would also include Cognitive Services, allowing for voice, facial, and emotional recognition.  Industry insiders believe that the ability to analyze, visualize, and stream large amounts of data in real time has great innovative potential, and may allow for significantly increased efficiency and speed with which functions can be carried out.

Big Movers

Bombardier (down 15.2%) – Share prices were down this week after Bombardier officials suspected of bribery were arrested in Sweden.

KeyW (down 8.3%) – Share prices were down this week after the Company announced disappointing 4Q16 earnings.

Transactions

CeramTec GmbH has agreed to acquire Morgan Advanced Materials plc’s UK Electro-Ceramics Business, a provider piezo and dielectric ceramic products used in a wide range of industrial, electronics, medical, and defense applications.  The deal is worth an estimated $57.3 million.

HEICO Corp. has agreed to acquire Air Cost Control SAS, a provider of connectors, wire, cable, protection, and fastening systems.  Terms of the deal were not disclosed.

KeyW Corporation has agreed to acquire Sotera Defense Solutions, Inc., from Ares Management, L.P., a provider of technology-based systems and solutions, including cyber security, big data analytics, machine learning, artificial intelligence, and data visualization, primarily for the IC and DoD.  The deal is worth an estimated $235 million.

Leonardo S.p.A has agreed to acquire Daylight Solutions, Inc., a provider of quantum cascade laser products and technology.  The deal is worth an estimated $150 million.

Rockwood Equity Partners, LLC has acquired Ibis Tek, LLC, a provider of transparent armor and accessory products for tactical and combat vehicles.  Terms of the deal were not disclosed.

Samuel, Son and Co., Ltd. has acquired Burloak Technologies, Inc., a provider of additive metal and plastic components for aerospace, defense, and commercial high-tech companies.  Terms of the deal were not disclosed.

West Star Aviation, LLC has acquired Avant Aerospace, Inc., a provider of Dassault Falcon Jet spares and equipment.  Terms of the deal were not disclosed.

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Industry Week in Review – March 3, 2017

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Aerospace & Defense Update

According to a White House official, President Trump’s upcoming budget proposal for GFY2018 will increase the defense budget by $54 billion to $603 billion, a ~10% increase over the spending levels set in the Budget Control Act.  This proposed amount is a relatively modest ~$18 billion more than the amount former President Obama had proposed in his final budget.  Trump proposed budget cuts, notably to the State Department, to offset this defense spending increase.  A portion of Trump’s budget proposal will be submitted to Congress in a few weeks, but the final budget proposal is not expected to be completed until early May.  In addition, Trump is expected to request another $20-$30 billion in defense spending this month for the remainder of GFY2017.  The Federal government is currently operating under a Continuing Resolution and will need to finalize their spending bills for GFY2017 by April 28th.

According to the Congressional Budget Office, the U.S. Navy’s 2017 shipbuilding plan, submitted to Congress last July, will cost ~$566 billion over a 30-year period, as the Navy aims to increase its fleet from 272 ships to 308 ships.  After factoring in the current ship retirement plans, 254 ships must be built over the next 30 years in order to reach the Navy’s target of 308 ships.  According to this proposed plan, seven ships will be built in 2017, 38 ships between 2017 and 2021, and 216 ships between 2022 and 2046.  The Navy plans to build 56 new submarines, which will consume a majority of the shipbuilding budget due to the high costs of building submarines capable of firing nuclear missiles.  This proposed increase will cost ~$19 billion a year, a 36% increase over the historical average that the Navy typically spends.  However, the Navy recently indicated that it has increased its’ target goal of 308 ships to 355 ships in anticipation of Trump’s campaign promise to build a 350-ship naval fleet.

Government Technology Solutions Update

Late last week, the Department of Defense (“DoD”) launched a new collaborative, open-source software development website called code.mil.  The website was created to promote further collaboration between the public and private sectors.  The only requirement for this new site is that potential private developers would read and agree to a document called the Defense Open Source Agreement (“DOSA”), and submit a signed-off Developer’s Certificate of Origin whenever they make a contribution to something on the site.  The DOSA is what allows the Federal government to make their projects open source. Work completed by Federal employees cannot normally be patented, and thus cannot be collaboratively developed in an open source format.  However, by using the DOSA to establish a contractual framework between themselves and private developers, the DoD is able to form a relationship that allows for open-source development.  Many insiders in the private sector have praised open-source methods for leading to increased efficiencies and innovation in the development and improvement of software projects.

The Defense Information Systems Agency (“DISA”) recently issued requests for proposals (“RFPs”) for its 10-year, $7.5 billion Systems Engineering Technology and Innovation (“SETI”) contract.  SETI will be a multiple award task order contract (“MATOC”), and is designed to be complementary to procurements made via DISA’s other major upcoming indefinite delivery / indefinite quantity (“IDIQ”) contract, ENCORE-III.  According to DISA, SETI will be used to “provide complex IT engineering required to design, develop, and deliver new DISA and DoD-provided IT capabilities.” The plan would be to initially develop and implement new IT solutions using SETI, and then provide for the maintenance of those new systems through ENCORE.  More specifically, SETI would be used to address higher-level technical issues, including systems engineering, design analysis, and systems architecture, among others.  The contract is initially slated to use a best value tradeoff method for procurement, and in terms of competition will have both a small-business pool as well as a full and open pool.

Big Movers

 Aerojet Rocketdyne (up 11.7%) – Share prices were up this week after the Company completed its acquisition of Coleman Aerospace from L3 Technologies.

 Meggitt (up 9.3%) – Share prices were up this week after the Company beat profit expectations.

 Transactions

Defense and Government Solutions has acquired Ti-Nanotech, a provider of titanium plating for end products within the aerospace, defense, and commercial sectors.  Terms of the deal were not disclosed.

Jabil Circuit, Inc. has acquired Lewis Engineering, Inc., a provider of aerospace products, turbine engine components, and industrial pumps.  Terms of the deal were not disclosed.

Veritas Capital has agreed to acquire the Capital Services Business of Chicago Bridge and Iron’s (“CB&I”) Capital Services business, a provider of comprehensive and integrated maintenance services, environmental engineering and remediation, program management, and disaster response and recovery services.  The deal is worth an estimated $755 million.

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Industry Week in Review – February 23, 2017

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Aerospace & Defense Update

After Retired Vice Admiral Bob Harward turned down President Trump’s offer to be National Security Advisor, the President selected Lieutenant General Herbert Raymond (“H.R.”) McMaster to replace Retired Lieutenant General Michael Flynn.  Ret. Lt. General Flynn resigned amid reports he communicated with Russian officials and could be vulnerable to blackmail.  Lt. General McMaster has served in the military since 1984 and was most recently the Director of the Army Capabilities Integration Center in Fort Eustis, VA.  General McMaster is well known for his book, Dereliction of Duty, in which he criticizes military leadership during the Vietnam era for giving in to powerful civilian officials such as President Johnson and Defense Secretary Robert McNamara.  He believes this caused the U.S. to not have a cohesive strategy in the Vietnam War.

This week, Airbus disclosed it is looking to renegotiate government contracts linked to its troubled A400M program, which is billions of euros over budget and years behind schedule.  In 2016, €2.2 billion in charges from the program was the main driver for companywide net income falling 63% for the year.  Over the last ten years, Airbus has faced ~€7.0 billion in charges in order to correct for unanticipated redesigns and problems with suppliers.  Airbus’ woes stem from back in 2003 when the Company agreed to absorb most of the development risk associated with the airplane, which is unusual in military aviation contracts.  Currently, Airbus has 174 total orders for the aircraft, but will need to win more orders to make the program profitable.

Government Technology Solutions Update

Secretary of Defense James Mattis recently issued a memo in which he described his desire for a review of some of the Pentagon’s business practices.  This was done in order to see if there were any ways in which the Department of Defense (“DoD”) could improve the efficiency with which it conducts business.  According to Mattis, some of the initial areas of focus in this review center on, among others, logistics and supply chain management and cyber and information technology management.  Some in the industry think that Mattis could potentially use this opportunity to drive innovation in the technical capabilities of the DoD.  Mattis’ memo was not entirely comprehensive in terms of exactly what measures will be taken.  Until a more thorough review of the Pentagon’s policies is completed, it remains to be seen what initiatives the DoD will take to modernize and improve efficiencies in its IT and cyber infrastructure.

Canada-based MacDonald, Dettwiler and Associates (“MDA”) has agreed to acquire DigitalGlobe, Inc., a provider of Earth-imagery products and services.  According to the terms of the deal, the acquisition will consist of $2.4 billion in cash and equity, as well as the assumption of approximately $1.2 billion in net debt, for a total enterprise value of $3.6 billion.  This acquisition is part of MDA’s strategy to increase its market share in the United States, and would substantially increase its presence in the Intelligence Community (“IC”).  DigitalGlobe’s satellite imaging, satellite constellation, and geospatial analysis offerings provide a variety of intelligence, reconnaissance, and analytics services to the Federal government.  Additionally, DigitalGlobe acquired The Radiant Group in October of 2016 for roughly $140 million.  That deal provided it with an expanded presence with customers such as the National Reconnaissance Office (“NRO”), the National Geospatial-Intelligence Agency (“NGIA”), the Defense Intelligence Agency (“DIA”), and U.S. Special Operations Command (“SOCOM”).  MDA hopes to leverage both DigitalGlobe’s high-end technical capabilities, as well as it’s valuable customer base, as it continues its push to expand further into the American marketplace.

Big Movers

MacDonald, Dettwiler and Associates (down 10.7%) – Share prices down this week after the Company agreed to acquire Digital Globe for $3.6 billion.

Emcor (down 10.9%) – Share prices were down this week after the Company missed 4Q profit forecasts.

Transactions

Aerojet Rocketdyne Holdings, Inc. has agreed to acquire Coleman Aerospace, a provider of suborbital launch vehicles, payloads, and launch services.  The deal is worth an estimated $15 million.

BAE Systems, Inc. has acquired IAP Research, Inc., a provider of electromagnetic metal forming technology, magnetic processing of metals and ceramic powders, and electrical and mechanical engineering solutions.  Terms of the deal were not disclosed.

Gooch & Housego plc has acquired StingRay Optics, LLC, a provider of high performance optical and opto-mechanical subsystems for demanding defense and commercial applications.  The deal is worth an estimated $10 million.

Gowanda Components Group has agreed to acquire Microwave Circuits, a provider of microwave components for commercial and military applications.  Terms of the deal were not disclosed.

MacDonald, Dettwiler and Associates Ltd. has agreed to acquire DigitalGlobe, Inc., a provider of high-resolution Earth-imagery products and services sourced from its own advanced satellite constellation and third-party providers.  The deal is worth an estimated $3.6 billion.

STG Group Inc. has agreed to acquire Preferred Systems Solutions Inc., a portfolio company of CM Equity Partners, and a provider of information technology, engineering, program management, intelligence, and staffing solutions to Federal government clients.  The deal is worth an estimated $119 million.

TransDigm Group, Inc. has acquired Takata Corp., Aerospace Business, a provider of specialty technical restraints covering Airbus and Boeing platforms.  The deal is worth an estimated $90 million.

 

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Industry Week in Review – February 17, 2017

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Aerospace & Defense Update

Two days before President Trump’s visit to Boeing’s South Carolina facility for the debut of Boeing’s 787-10 Dreamliner aircraft, 74% of the workers at the facility voted against unionization.  Union organizers with the International Association of Machinists and Aerospace Workers were unsuccessful in their efforts to unionize the workforce.  Workers in Boeing’s South Carolina facility currently earn ~1/3 less than unionized counterparts.  The Company began manufacturing aircraft in South Carolina in 2011 after a debilitating eight-week strike by 27,000 unionized workers in Washington state a few years earlier.  Analysts speculate Boeing placed the production of the 787-10 Dreamliner aircraft in South Carolina to reduce the leverage of the work force in Washington state.

This past week, U.S. Defense Secretary James Mattis demanded that the North Atlantic Treaty Organization’s (“NATO”) allies increase their defense spending by the end of 2017 to at least 2% of their gross domestic product (“GDP”).  Mattis stated that the Trump administration would “moderate its commitment” to countries that have not increased spending by year end.  The U.S. currently spends more on defense spending than all other countries combined (~3.6% of the U.S. GDP) and the Trump administration aims to have more sharing of military costs among NATO allies.  NATO Secretary-General Jens Stoltenberg believes the consensus among allies is to comply with Mattis’ ultimatum.  Despite President Trump’s recent praises of Russia, Trump and Mattis reassured Stoltenberg that the U.S. is still committed to supporting NATO and its allies.

Government Technology Solutions Update

The National Institutes of Health Information Technology Acquisition and Assessment Center (“NITAAC”) has been working to make the CIO-CS contract a much more attractive vehicle for prospective Federal agencies which may be seeking to procure cloud computing services.  Throughout the past year, NITAAC has used two main mechanisms in order to make this happen.  NITAAC first lowered the CIO-CS contract access fees, from 0.5% to 0.35%. More recently, at the end of January, NITAAC released a statement saying that they would be lowering the cap on the access fee for the CIO-CS contract to $70,000, as long as it was for an order with a base or option period ceiling greater than $20 million.  The organization has also been working with the industry and cloud service providers to create a more streamlined procurement process by asking providers how their services could best be used to service various agencies across the Federal government.  These efforts have started to pay off, with the Department of Veterans Affairs (“VA”) using CIO-CS to issue its Enterprise Cloud Services for IT Infrastructure Modernization contracts. According to industry insiders, NITAAC hopes that, with cheaper and more streamlined ways to access CIO-CS, an increased number of government agencies will make it their vehicle of choice for major cloud service acquisitions.

According to recent reports, several Federal agencies have already begun work on transitioning their IT and telecom infrastructure solutions from the legacy Networx vehicle to the new $50 billion Enterprise Infrastructure Solutions (“EIS”) vehicle.  Leading the way in this transition is the United States Department of Agriculture (“USDA”), who began the transition process back in 2014.  According to Federal guidelines, agencies have until March of 2020 to make the shift from Networx to EIS.  The General Services Administration expects that awards on EIS will be made soon, sometime in the spring of 2017.  According to industry insiders, other Federal agencies, such as the Department of Justice (“DoJ”), have been issuing requests for information to figure out how various vendors could potentially meet their needs.  As they gather more information, agencies such as the USDA and the DoJ will be getting a clearer picture on how they can leverage EIS to modernize and find efficiencies in their IT and telecom networks, potentially fundamentally changing how they are able to perform their core functions in the future.

Big Movers

LMI Aerospace (up 51.8%) – Share prices were up this week after the Company announced it entered into a merger agreement to be acquired by Sonaca Group.

Zodiac Aerospace (down 6.2%) – Share prices were down this week after an activist hedge fund voiced its opposition to Safran’s acquisition of Zodiac Aerospace.

Transactions

Convergence Technology Consulting, LLC has acquired Deep Run Security Services, LLC, a provider of cyber security services, cyber risk management, cyber due diligence for mergers and acquisitions (“M&A”), and other consulting services.  Terms of the deal were not disclosed.

Sonaca S.A. has agreed to acquire LMI Aerospace, Inc., a provider of structural assemblies, kits, components, and engineering services to the commercial, business, regional, and military aerospace markets.  The deal is worth an estimated $191.0 million. 

Verizon Communications Inc. has acquired Skyward, a provider of a drone management platform that help industries use drones to plan their flights, avoid restricted airspace, and register aircraft with the Federal Aviation Administration (“FAA”).  Terms of the deal were not disclosed.

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Industry Week in Review – February 10, 2017

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Aerospace & Defense Update

Navy and Marine F-18 availability has dropped from traditional in-service levels of ~70% to under 40% due to decades of reduced aircraft procurement and the limitation of aviation support services from the 2013 budget sequestration.  Reduced procurement dates back to the end of the Cold War when the Navy bought fewer F-18s than originally expected and the Marine Corps didn’t buy any because of beliefs in decreased future military operations and anticipation for the new Joint Strike Fighter.  However, with the F-35 being billions of dollars over budget and still in the low rate initial production (“LRIP”) stages, the Navy and Marine Corps have been struggling to keep up with the heavier than expected use of F-18s to fight terrorism.  Decreased procurement is then compounded by an increase in grounded strike fighters due to limited availability of maintenance funds and personnel.

In a recent congressionally chartered study, the Center for Strategic & Budgetary Assessments (“CSBA”) concluded the Navy needs a larger fleet consisting of smaller ships as compared to the Navy’s proposed amount in its official Force Structure Assessment (“FSA”).  When including smaller patrol aircraft in the ship total, the CSBA believes the Navy will require 382 ships compared to the Navy’s own FSA amount of 368 ships.  While both parties stand in agreement about many big ticket items like the number of aircraft carriers (12) and the number of attack submarines (66), the CSBA sees the need for 42 patrol vessels while the Navy requested only 13.  Additionally, the CSBA calls for 71 Frigates / Littoral Combat Ships (“LCS”) while the Navy FSA only requested 52.

Government Technology Solutions Update

At Tuesday’s meeting of the House Veterans Affairs Committee, Representatives and other Federal officials pushed for the Department of Veterans Affairs (“VA”) to consider adopting a commercial replacement for Vista, the VA’s proprietary electronic health record (“EHR”) system.  Rob Thomas, the current acting Chief Information Officer (“CIO”) of the VA has noted that his preference was to utilize commercial solutions as much as he could.  Many in the industry think that Vista is not an adequate solution to the VA’s current issues with its IT infrastructure. This is despite the VA finishing up the five-year Vista Evolution program, which was aimed at improving and modernizing the Vista system.  While the VA decides on whether or not to proceed with its legacy EHR system or to replace it with a commercial solution, the Department of Defense (“DoD”) has begun rolling out a commercial EHR solution of its own.  On Tuesday, Cerner’s MHS Genesis system went live at Fairchild Air Force base. The installation and maintenance of the MHS Genesis system is being performed by Leidos in a 10-year, $4.3 billion contract.

On Wednesday, Avi Bender, Director of the National Technical Information Service (“NTIS”), provided some additional color on its joint venture partnership (“JVP”) program.  The NTIS originally selected 35 JVPs back in October, which included a mix of large government contractors, small contractors, universities and research groups, and non-profit organizations.  The JVPs include organizations such as Booz Allen Hamilton, Deloitte Consulting, Stanford University, Govini, Palantir Technologies, and HP Enterprise Services.  According to Mr. Bender, the plan is for Federal agencies to outline their unique technological issues, goals, or strategic modernization priorities to the NTIS.  The NTIS would, in turn, more succinctly summarize what that particular agency needs, and meet with the JVPs who would further analyze, condense, and redefine what the necessary solution for that agency would be.  Once the NTIS has a clear, planned, and detailed solution for the problem, it will then go out to the JVPs and solicit bids to perform that work.  This entire process would be expected to take less than three months from start to the awarding of a contract.  According to Mr. Bender, by awarding work in this manner, the NTIS and JVPs essentially handle the bulk of drilling down to the crux of an agency’s issues, allowing that organization to more efficiently perform its own core functions.

Big Movers

Elbit Systems (up 4.7%) – Share prices were up this week after the Company was awarded a roughly $110M contract to upgrade M-17 helicopters.

Transdigm (up 12.4%) – Share prices were up this week after the Company raised its EPS and EBITDA guidance for FY2017.

Transactions

Accenture Federal Services has acquired the Federal Services business of Endgame, Inc., a provider of sophisticated cybersecurity solutions specializing in proactive cyber defense, hunt-as-a-service, and red-teaming for Federal government customers.  Terms of the deal were not disclosed.

Accenture Security has acquired iDefense Security Intelligence Services from VeriSign, Inc., a provider of information security and cyber threat intelligence services relating to vulnerabilities, malicious code, and global organizational threats.  Terms of the deal were not disclosed.

Salient CRGT, Inc., a portfolio company of Bridge Growth Partners and the Frontenac Company, has agreed to acquire Information Innovators, Inc., a portfolio company of DFW Capital Partners, Inc., and a provider of healthcare IT services, enterprise IT solutions, agile development capabilities, and cloud services for a variety of Federal customers.  Terms of the deal were not disclosed.  KippsDeSanto & Co. served as exclusive financial advisor to Information Innovators in this transaction.

Soaring Pine Capital has acquired ETI Tech, a provider of more than 200 flight hardware parts for military aircraft and ground support equipment for fixed and rotary wing aircrafts.  Terms of the deal were not disclosed.

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Industry Week in Review – February 3, 2017

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Aerospace & Defense Update

This past week, Defense Secretary James Mattis officially introduced his plan for rebuilding the U.S. Armed Forces to address President Trump’s national defense strategy.  Mattis issued a memo to Pentagon budget planners announcing his desire to “build a larger, more capable, and more lethal joint force” and provided guidance for the FY2017 budget amendment, the FY2018 President’s Budget request, and the FY2019 – FY2023 Defense Program.  Mattis plans to increase immediate readiness by focusing on defense programs that are behind schedule and upgrading important military facilities.  He is also advocating for increased defense funding so the U.S. can strategically increase its presence around the world.

After the Raytheon / Leonardo-Finmeccanica team publicly withdrew from the competition last week, Northrop Grumman has officially become the second company that has declined to submit a bid for the U.S. Air Force’s T-X advanced pilot training program.  This news comes after Northrop’s earnings call last week, during which the Company’s CEO implied that Northrop was considering withdrawing from the competition.  This ~$16.0 billion T-X jet trainer program will require the production of 350 aircraft by the end of 2024.  Presently, Boeing, Lockheed Martin-Korean Aerospace Industries, and Sierra Nevada & Turkish Aerospace Industries are still in the competition.

Government Technology Solutions Update

On Wednesday, it was announced that cloud.gov, the Platform as a Service (“PaaS”) developed by the General Services Administration’s 18F agency, has been granted provisional authority to operate (“P-ATO”) by the Federal Risk and Authorization Management Program (“FedRAMP”).  This makes cloud.gov the first fully-open source solution to be authorized by FedRAMP.  Cloud.gov is a PaaS which allows Federal agencies to host their websites and applications online.  The open-source nature of the site allows these agencies to more easily and efficiently connect with both employees and contractors to maintain and develop online solutions.  With the P-ATO from FedRAMP, agencies will have a much more streamlined process in building or updating their own solutions, since the FedRAMP’s Joint Authorization Board (“JAB”) has already vetted cloud.gov’s security and compliance standards.  This means that agencies who host and build solutions on cloud.gov do not have to go through the compliance process themselves.  Cloud.gov went through the FedRAMP Accelerated, becoming just the second cloud provider to do so after Microsoft did so back in September of 2016.

On Tuesday, a draft of President Donald Trump’s planned executive order on cybersecurity was leaked, giving some insight into how his administration might approach the issue.  In the draft, the Department of Defense (“DoD”) would be given an equal role to the Department of Homeland Security (“DoD”) in carrying out cybersecurity policies.  When President Trump originally promoted this order, he noted that he would hold agency heads responsible for developing and maintaining a sound and secure cyber infrastructure within their own departments.  The executive order would have also called for, and promoted, modernization initiatives aimed at creating and maintaining secure IT infrastructure within the Federal government.  While not specifically outlined in any of the versions of the draft of Trump’s cybersecurity order, the President has maintained that the Federal government needs to continue to work with the private sector in developing these solutions.  Mr. Trump was expected to sign this order into action on Tuesday evening, but as of right now, the order has been put on hold for the time being.

Big Movers

CACI (up 6.3%) – Share prices were up this week after the Company raised its top and bottom line guidance for FY2017.

Spirit AeroSystems (down 5.7%) – Share prices were down this week after the Company reported a 21.8% decrease in profit during 4Q16.

Transactions

Acuity Technologies Holding Company, a portfolio company of DC Capital Partners, has agreed to acquire Owl Computing Technologies, a designer, developer, and manufacturer of advanced network security products and cyber defense solutions.  Terms of the deal were not disclosed.

Altuiiq, LLC has acquired Alcyon, Inc., a provider of systems engineering, laboratory, and IT services to various Federal agencies and aerospace companies.  Terms of the deal were not disclosed.

Analytic Services, Inc. (“ANSER”) has acquired Advanced Technology International, an organizer and manager of research and development consortia for the Federal government. The deal is worth an estimated $25.0 million.

Concept Plus, LLC has acquired Thao, Inc., a provider of Federal-specific expertise in electronic health record (“EHR”) interoperability, identity management, and care delivery. Terms of the deal were not disclosed.

Dos Rios Partners has acquired Pathfinder Aviation, Inc., a provider of helicopter services and logistical support, specializing in remote operations and extreme climates.  Terms of the deal were not disclosed.

Liberty Hall Capital Partners, L.P. has acquired Quatro Composites, LLC, a provider of highly engineered advanced composite structures, components, and assemblies for the aerospace industry and medical and industrial markets.  Terms of the deal were not disclosed.

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Industry Week in Review – January 27, 2017

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Aerospace & Defense Update

Boeing, Lockheed Martin, Northrop Grumman, and Raytheon all announced year-end earnings this week, with only Boeing receiving a positive market reaction from the earnings calls.  Boeing beat forecasted quarterly earnings and raised guidance on its 2017 cash flow and profit compared to 2016, even as the company faces questions transitioning from the 777 to the 777X program.  The company also hopes to increase 737 output by 15 planes per month to reach 57 planes per month by the end of the decade.

While Boeing had an overall positive earnings outlook, Lockheed, Northrop, and Raytheon guidance dropped below market expectations.  Lockheed Martin tried to assuage investor fears spurned from President Trump about F-35 cost overruns by announcing the program will become more profitable even as the price per plane dips below $100 million.  This good news was overshadowed by Lockheed’s initial 2017 profit guidance falling short of expectations.  Northrop Grumman reported strong 12% revenue growth in 4Q16 stemming from 20% aerospace systems growth, and the unit is now larger than the company’s mission systems division in terms of revenues.  However, similar to Lockheed, Northrop lowered its 2017 profit guidance, which cause the stock to drop.   Lastly, Raytheon had 4Q YoY revenue decline and quoted 2017 revenue of ~$25 billion, which fell below analyst expectations of ~$25.5 billion.  Though earnings announcements caused these stocks to fall, the stock prices for these three companies have since rebounded.

Government Technology Solutions Update

The Federal CIO Council recently released a report titled “The State of Federal IT,” for the Trump administration’s use.  The report provides a foundation for understanding the current status of the nation’s IT infrastructure, as well as a glimpse of how various Federal agencies are planning on modernizing legacy systems and /or processes.  The report suggests that the new administration work with Congress on setting up a working, centralized fund for the procurement of modernized IT systems.  An attempt to do this was made towards the end of last year, with the Modernizing Government Technology Act (“MGT”).  This effort, spearheaded by Representative Will Hurd, was not able to pass through the Senate, due in part to the roughly $9 billion cost attributed to the bill.  The report makes several other recommendations, including the use of centralized IT systems for smaller government agencies, which they believe could be useful in reducing inefficiencies, and serve as a proof-of-concept for similar IT centralization in the future for larger government agencies.

On Friday, Harris Corporation announced the sale of its government IT services business to Veritas Capital, a New York-based private equity firm, for $690 million.  This transaction comes roughly three months after the $425 million sale of Harris’ CapRock energy and maritime business; it also comes roughly five months after Jana Partners acquired a 1.9% stake in Harris, which fueled speculation that Harris would be pressured to sell off some of its non-core assets by the hedge fund.  The sale of the government IT business is just the latest in a spate of divestitures by Harris.  Harris exited its commercial healthcare solutions business in 2015, its $210 million aero structures business last February, and the aforementioned CapRock Communications in November.  However, Harris will maintain ownership of its air traffic control business, which is currently working on a $3.5 billion contract for the FAA.  The government IT business, which mainly serves NASA, among other Federal agencies, is expected to have roughly $1.07 billion of revenue in 2017.

Big Movers

Boeing (up 5.1%) – Share prices were up this week after the Company raised its 2017 cash flow and profit guidance.

KeyW (down 14.3%) – Share prices were down this week after the Company announced its plans to price 8.5M additional common stock shares at $10.50 per share.

Transactions

Millstein & Co. has acquired the government services business of PRA Group, which provides technology, revenue enhancement and discovery, compliance, and consulting services to government customers.  The deal is worth $91.5 million.

Octo Consulting Group has acquired Aquilent’s SeaPort business unit, a provider of strategic sourcing, systems, and program management, including the operation of the SeaPort-e portal.  Terms of the deal were not disclosed.

Veritas Capital has acquired Harris Corporation’s Government IT Services business, a provider of IT, communications, and engineering services to Federal and civilian customers, with a particular focus on serving NASA’s Space Communications Network and Deep Space Network programs.  The deal is worth an estimated $690 million.

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Industry Week in Review – January 20, 2017

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Aerospace & Defense Update

On Friday, the Senate confirmed General James Mattis to be the new Secretary of Defense hours after President Donald Trump’s inauguration.  Earlier that day, Trump signed legislation granting Mattis a one-time exemption from the law requiring the Secretary of Defense to not be employed by the armed services for at least seven years.  This legislation was approved by Congress last week and is meant to retain civilian oversight of the military.  Additionally, the Senate Armed Services Committee overwhelmingly approved Mattis by a 26 to 1 vote earlier this week.  Mattis retired from the Marine Corps in 2013 after spending 41 years in uniform.

French aircraft manufacturer Safran S.A. announced it has entered into exclusive negotiations to acquire Zodiac Aerospace, a seating and cabin interior manufacturer, for ~$9.0 billion.  Adding to the recent aerospace sector consolidation, this transaction will make Safran one of the world’s largest aerospace suppliers, with leading positions in landing gear, seats, cabin interiors, wheels and brakes, nacelles, power systems, actuation and avionics, and oxygen and fluid systems.  The combined company is expected to strengthen Safran’s presence across all major aircraft programs while limiting its exposure to aircraft delivery cycles.  Safran attempted to acquire Zodiac in 2010, but was thwarted by Zodiac’s family-controlled shareholders before it could place a bid.  Safran expects the acquisition to yield over $210 million in savings during the first two years by reducing manufacturing costs.

Government Technology Solutions Update

Last week, the Technology CEO Council (“TCC”) released a report claiming that the Federal government could potentially save as much as $1 trillion over the next ten years through the procurement and use of optimized, modernized, and efficient practices and solutions in regards to the nation’s IT infrastructure.  The report lists several key areas of focus where the TCC envisions there to be significant opportunities for cost reductions, the largest of which is related to the reform of the Federal government’s supply chain and acquisition practices.  The TCC believes that improvements in this area alone may lead to up to $500 billion in cost savings over the next decade.  The TCC also suggested that the government continue to adopt its implementation of modernized technology solutions and hardware.  Increasing the adoption of big data, analytics, and cognitive computing could potentially save over $200 billion, while IT modernization initiatives could lead to aggregate savings of over $100 billion.  The TCC initially prepared and shared their report, titled “The Government We Need,” for the use of President-elect Trump’s transition team, though it is still unknown how his administration will approach issues surrounding government IT.

Microsoft Corporation’s Azure Government and Office 365 cloud services was recently given Level 5 provisional authority by the Department of Defense, making it the first commercial cloud solution to achieve that rating.  Level 5 authority allows commercial cloud platforms to handle controlled unclassified information (“CUI”) and is the second-highest authority rating, just below Level 6 authority, which involves handling information classed as Secret. Level 5 authority also gives government users of Azure and Office 365 increased flexibility in terms of the type of information that can be handled in applications they build and design.  Part of Microsoft’s ability to handle sensitive information comes from the use of its dedicated DoD data centers, which are designed to the strict standards of DoD’s Level 5 classification requirements.

Big Movers

Zodiac Aerospace (up 22.3%) – Shares were up this week after Safran announced its plans to acquire Zodiac for ~$9.0 billion.

TransDigm (down 10.0%) – Shares were down this week after the Company announced its plans to extend its leveraged loan deadline.

Transactions

Polaris Alpha, a portfolio company of Arlington Capital Partners, has acquired Intelesys Corporation, a provider of computer network operations, software engineering, embedded development, network engineering, and cyber solutions primarily for the Intelligence community. Terms of the deal were not disclosed.

Safran S.A. has agreed to acquire Zodiac Aerospace S.A., a provider of on-board systems, safety systems, and cabin interiors for the aerospace industry.  The deal is worth an estimated $9.0 billion.

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Industry Week in Review – January 13, 2017

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Aerospace & Defense Update

Earlier this week, the Senate began confirmation hearings to vet President-elect Donald Trump’s Cabinet nominees.  General James Mattis, the Secretary of Defense nominee, received broad bipartisan support after taking a strong stance against Russia and vowing his support for the Iran nuclear agreement.  General John F. Kelly, Trump’s nominee for Secretary of Homeland Security, also received widespread support after insisting that his top priority would be to secure the southern border.  ExxonMobil CEO Rex Tillerson, the Secretary of State nominee, received some opposition from both parties after refusing to call Vladamir Putin a “war criminal,” but gained support after insisting that it is imperative for the U.S. to push back against Putin’s attempts to increase Russian influence around the world.

During the opening remarks of President-elect Donald Trump’s first official press conference since the election, he restated his criticism for the high costs of the F-35 joint strike fighter program.  Trump was responding to Lockheed Martin’s projected seven-month delay of the F-35 and a $500 million cost overrun.  The President-elect indicated he aims to make the process more competitive in an effort to reduce costs and increase efficiency.  In a Senate confirmation hearing, Trump’s Secretary of Defense nominee, General James Mattis, noted that Trump is supportive of the program, but wants more accountability in defense spending programs.  Mattis believes that the F-35 program is critical to the defense of the U.S. and its allies.

Government Technology Solutions Update

On Wednesday, the Government Accountability Office (“GAO”) ruled against the final remaining bid protests on the Alliant 2 contract.  These final protests were based around a variety issues, mostly regarding how bid pricing would be analyzed and whether or not the number of awards on the contract was enough to ensure adequate competition.  The GAO’s ruling denied these arguments, stating that there were no regulations against their decision to pursue the highest technically rated bids as long as the price was reasonable; the GAO also claimed that the number of awards on the $50 billion Alliant 2 contract would be adequate to ensure competition and that they had specifically put safeguards in place to promote and ensure a proper level of competition.  With this decision, the GAO is now free to begin making awards on the contract and up to 60 winners are expected to be announced within the next few months.

John Kelly, a former U.S. Marine general and Donald Trump’s nominee for Secretary of Homeland Security, had his Senate confirmation hearing on Tuesday.  During that hearing, Mr. Kelly answered several questions on a range of topics, including his thoughts on the current state of the nation’s cybersecurity infrastructure.  Kelly claimed that he would work in closer proximity with commercial companies in order to field ideas as to how the Department of Homeland Security (“DHS”) could address and develop solutions for pressing cyber threats.  He further went on to say that he planned on working to thoroughly review the current status of the country’s cyber infrastructure, especially with respect to defensive capabilities.  His goal would be to find, identify, and correct any shortcomings and vulnerabilities through technological innovation and advancement in both the public and private sectors.

Big Movers

Bombardier (up 13.2%) – Shares were up this week after Germany’s economic minster announced that Bombardier will not close its plants in the country.

 L3 Technologies (down 3.4%) – Shares were down this week after the Company agreed to pay $1.6 million to settle accusations of improper accounting techniques.

Transactions

Atec, Inc. has acquired Vital Link, Inc., a provider of military and commercial jet engine test cells, hush houses, and associated facilities and systems.  Terms of the deal were not disclosed.

LLR Partners Inc. has acquired BluVector, Inc., a subsidiary of Northrop Grumman and a provider of cyber threat detection and hunting solutions for commercial and government clients. Terms of the deal were not disclosed.

Odyssey Investment Partners, LLC has acquired Avtron Aerospace, a provider of electronic and hydraulic aircraft component test solutions for the global commercial and military aerospace markets.  Terms of the deal were not disclosed.

Research Triangle Institute has acquired Engility Holdings Inc.’s International Resources Group Ltd., a provider of critical solutions to the US Agency for International Development (“USAID”) in developing nations around the world.  The deal is worth $24 million.

The Safariland Group has acquired Aegis Engineering Limited, a provider of personal protective apparel and equipment, including body armor, ballistic helmets, shields, and rifle plates.  Terms of the deal were not disclosed.

The Safariland Group has acquired LBA International Limited, a provider of protective equipment, including hard armor plates and ballistic helmets to law enforcement officers.  Terms of the deal were not disclosed.

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Industry Week in Review – January 6, 2017

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Aerospace & Defense Update

President Elect Trump has made strong remarks about indicating a desire to increase the U.S. Navy’s ship count by 28%, from its current 274 to 350.  Based on these remarks, the U.S. Navy stands to be a substantial ‘winner’ in gaining additional funding in the coming years.  Trump’s recent comment referring to China as an enemy of the U.S. would create an increased need for a strong presence in the Pacific Ocean.  Additionally, as Trump continues to propagate the idea for nuclear modernization, the Navy’s Columbia-class ballistic submarine may receive additional attention.  In contrast to these positive messages for the Navy, key Army and Air Force missions have been the rhetorical target of the President Elect.  Trump has sought to smooth ties with Russia, which would eliminate one of the Army’s main mission areas in Europe and has criticized the extensive cost for the Air Force One and F-35 aircraft.

SpaceX plans to resume rocket launches as early as January 8th by launching 10 Iridium Communications satellites.  This comes after an unmanned Falcon 9 rocket explosion during fueling back in September, which caused the destruction of a $200 million satellite.  SpaceX originally aimed to have the rocket operational by November, but delays have pushed the reintroduction date into 2017.  The Company believes faulty fuel procedures caused a failure inside a second stage helium bottle, which caused the Falcon 9 rocket to explode.

Government Technology Solutions Update

Shaun Donovan, the outgoing chief of the Office of Management and Budget (“OMB”) released an exit memo on Thursday in which he advised Presidential-elect Trump’s transition team to follow the precedent set by President Obama in making information technology (“IT”) modernization a priority in the new administration.  Currently, Trump’s stance on IT modernization is still somewhat unclear, as is that of Rep. Mick Mulvaney, the nominee chosen to replace Donovan as head of the OMB.  However, Mulvaney has shown an appetite for reducing costs and increasing Federal reliance on private outsourcing, both of which could be achieved to some degree by continuing IT modernization efforts.  Some of these initiatives include an increase in usage of cloud-based services and solutions and platforms-as-a-service, among others, which may work to create a suite of increasingly commoditized and reusable solutions.  By streamlining and simplifying the way in which Federal IT solutions are created and delivered, the OMB hopes to drive down costs.  According to Donovan, IT modernization initiatives carried out in the past eight years have been responsible for saving the Federal government up to $4.7 billion in aggregate.

The General Services Administration (“GSA”) issued a request for information (“RFI”) under its Unified Shared Services Management (“USSM”) office, seeking industry input on if, and to what degree, software-as-a-service (“SaaS”) solutions can be used to handle certain back office administrative functions for the Federal government.  According to the GSA, these would primarily be focused on meeting needs for shared services such as financial management, human resources, or acquisitions.  The RFI wanted further industry input on whether or not these SaaS solutions, if developed, could be delivered in a modular capacity, increasing interoperability between Federal agencies.  Part of the rationale behind this would be that, in creating services and solutions which can be streamlined and easily shared, back-office administrative functions can become cheaper and less complex.  The GSA plans to field responses to this RFI through to the end of February.

Big Movers

Raytheon (up 4.4%) – Shares were up this week after Raytheon won a $163 million contract for training services to Qatar.

Sturm, Ruger & Company (up 2.8%) – Shares were up this week after the Company announced it had repurchased ~280,000 shares during the fourth quarter.

Transactions

Airborne Maintenance and Engineering Services, Inc. has acquired PEMCO World Air Services, Inc., a provider of heavy maintenance, repair, and overhaul aircraft services and passenger-to-freighter aircraft conversion solutions.  Terms of the deal were not disclosed.

BBA Aviation’s Aircraft Management and Charter Business to merge with U.S. Business of Gama Aviation plc, a provider aircraft management services for aircraft owners, such as fuel and insurance, crew, and maintenance services.  Terms of the deal were not disclosed.

Belcan, LLC, a portfolio company of AE Industrial Partners, has acquired The Kemtah Group, Inc., a provider of IT support services, enterprise-wide IT services, software development, and cybersecurity solutions for the Federal government.  Terms of the deal were not disclosed.

Corbel Capital Partners closed a non-control investment in ARES Security Corporation, a provider of products and services used to prevent, detect, and assess risks to critical infrastructure for Federal government clients.  Terms of the deal were not disclosed.

Dynetics, Inc. has acquired Camber Corp.’s stake in Aviation and Missile Solutions, LLC (AMS), a provider of engineering and precision technology solutions to Defense and Intelligence agencies.  Terms of the deal were not disclosed.

Macaulay-Brown, Inc. has acquired Enlighten IT Consulting, Inc., a provider of advanced and mission-critical big data infrastructure, secure cloud engineering, and analytic solutions for Federal, state, and local government clients.  Terms of the deal were not disclosed. 

The Phacil Employee Stock Ownership Plan (ESOP) has acquired Phacil, Inc., a provider of software services, systems engineering, integration & operations, cybersecurity, and service desk operations solutions primarily to Federal government clients.  Terms of the ESOP were not disclosed.

Puglia Engineering, Inc. has acquired the San Francisco Ship Repair, Inc. business of BAE Systems, a provider of maintenance, alteration, and repair services to cruise liners, military support vessels, local bay traffic, bulk carriers, and container ships.  Terms of the deal were not disclosed.

 Rockwell Collins, Inc. has acquired Pulse.Aero Ltd, a provider of self-service bag drop solutions and airline applications to enhance the company’s passenger processing services for airports and airlines.  Terms of the deal were not disclosed.

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