Industry Week in Review – May 26, 2017
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.
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.
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