News & Events

Industry Week in Review – February 2, 2018


Aerospace & Defense Update

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

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

Government Technology Solutions

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

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

Big Movers

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

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

Transactions

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

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

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

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

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

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

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

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

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