Industry Week in Review – December 07, 2018

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KippsDeSanto & Co. Industry Week in Review – December 07, 2018

Summary

Elon Musk’s SpaceX successfully launched its 19th rocket for 2018, striving to make space exploration more cost effective. CIA CIO John Edwards emphasized the importance of an efficient, data-centric workforce. The DoD and GSA announced that a request for quotes for the $8 billion cloud contract, DEOS, will be made early next year.

Aerospace & Defense Update

This week Elon Musk’s space startup, Space Exploration Technologies Corp. (“SpaceX”), successfully launched its Falcon 9 rocket, marking the company’s 19th successful launch this year, surpassing its previous record of 18 launches set in 2017.  Moreover, this launch represented a second major milestone as the vehicle carried more than 60 small satellites into space, the most ever a top U.S. booster.  Multi-satellite missions, along with recycling essential rocket hardware such as engines and other essential components, have enabled Elon Musk to make space exploration more cost effective and allows SpaceX to compete with larger industry players.  In line with SpaceX’s rapid launch tempo, the company is scheduled to send a cargo resupply capsule for NASA to the International Space Station early next week.

Government Technology Solutions 

In response to the growing number of domestic and foreign cyber threats, the Central Intelligence Agency’s (“CIA”) Chief Information Officer (“CIO”), John Edwards, emphasized the importance of developing a more data-centric workforce, while speaking at the FedScoop Public Sector Innovation Summit on Monday. Given the complex and voluminous nature of information that the CIA processes daily, the ability to “sense, collect, ingest, condition, analyze, and characterize data,” as Edwards stated, is imperative in matters of national security. In order to achieve actionable results, the CIA must balance the necessity of data-scientists, who can sift through vast quantities of data, and analysts, whose responsibility is to turn the parsed down data into insights. With these two employee bases working in tandem, Edwards remarks that, “data is the new tip of the spear” to more effectively combat adversaries and protect the U.S. Nevertheless, while the U.S. government has placed a great deal of emphasis on rapid IT modernization, Edwards’ initiative confirms the importance of a workforce with technical acumen to drive efficiency and achieve mission goals.  This is just yet another example of the federal government demonstrating a desire for increased capabilities across data analytics and data management.

The Department of Defense’s (“DoD”) $8 billion cloud-based email and messaging contract, Defense Enterpriser Office Solutions (“DEOS”), is drawing attention due to its expedited timeline. On Monday, the DoD – along with the General Services Administration (“GSA”) – announced that a request for quotes will be made in early 2019 with an award date expected in April. Continuing the DoD’s emphasis on upgrading legacy systems, DEOS will seek to enhance internal communications and, as a byproduct, further develop the commercial IT market’s relationship with federal customers. Given the prolonged and controversial procurement of the Joint Enterprise Defense Infrastructure (“JEDI”) cloud contract, however, officials are concerned a similar scenario could unfold with DEOS’ award process. To date, the final acquisition strategy has not been announced – leaving contractors guessing if DEOS will be multiple awards or a single, winner-take-all award like JEDI. Irrespective of the contracts’ acquisition strategies, these two cloud computing contracts represent the largest shift towards IT modernization in the department’s history and represent positive trends and opportunities for government contractors looking to expand NextGen IT support to federal customers.

Big Movers

General Dynamics (down 9.5%) – Share prices were down this week as uncertainty over trade set in following the G20 Summit.

VSE Corporation (up 7.0%) – Share prices were up this week after various brokerage firms upgraded the stock to a Buy.

Transactions

Cerberus Capital Management has acquired Navistar Defense, LLC., a provider of tactical wheeled vehicle original equipment serving military, law enforcement, and government agencies worldwide. Terms of the deal were not disclosed.

Huntington Ingalls Industries, Inc. has acquired G2, Inc., a provider of cybersecurity solutions and services headquartered in Annapolis Junction, Maryland. Terms of the deal were not disclosed.

Liberty Hall Capital Partners has acquired Aircraft Performance Group, Inc., a provider of proprietary flight operations software solutions into the aftermarket of the aerospace industry. Terms of the deal were not disclosed. 

Sun Capital Partners, Inc. has acquired Tier One Relocation, LLC., a provider of door-to-door household moving services for the military. Terms of the deal were not disclosed.

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Industry Week in Review – November 30, 2018

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KippsDeSanto & Co. Industry Week in Review – November 30, 2018

Summary

A little over a year after its $30.0 billion acquisition of Rockwell Collins, United Technologies Corporation (“UTC”) announced a decision to break itself up to focus on pure, aerospace opportunities.   In other A&D news, German armored vehicles-maker Rheinmetall signaled a potential acquisition of Krauss-Maffei Wegmann (“KMW”) through a joint venture with French tank maker, Nexter.  In the Government Technology Solutions arena, government efficiency remains a top priority as the General Services Administration (“GSA”) consolidates its award schedules in order to make its offerings more accessible and increase competition. Also, Amazon continues to stir headlines with its plans to penetrate the government satellite market through a partnership with Lockheed Martin.

Aerospace & Defense Update

UTC has decided to separate itself into three independent companies, splitting apart one of America’s last industrial conglomerates.  Following the approval of its acquisition of Rockwell Collins, UTC plans to spin off its Otis elevator division and Carrier building systems business.  This separation is expected to be completed by 2020 and leave UTC as a pure-play aerospace company.  UTC believes that being a more focused aerospace company will drive higher valuations as aerospace companies have tended to trade at higher multiples than manufacturing companies.  Surprisingly, shares closed at $122.68 (down 4 percent) following the news.  UTC intends to keep its current CEO and Chairman, Greg Hayes, and he stated that its newly merged aerospace business would have reported about $39 billion in revenue last year.

German armored vehicles-maker Rheinmetall has confirmed initial talks about an acquisition of its rival KMW, a move that would significantly alter the European tank industry.  According to Rheinmetall, a takeover of KMW through a joint venture with French tank maker, Nexter, is on the table.  Coincidentally, Rheinmetall is expected to pitch its design proposal for the pivotal Main Ground Combat system next year, and it will be interesting to see how the dynamic of a KMW acquisition will play into this design proposal.  Rheinmetall’s statement on Monday noted that a final decision regarding the acquisition depends on a “multitude of political, economic and regulatory” aspects.  However, a takeover deal could put to rest the question of what vehicles German defense companies will pitch for multibillion-dollar modernization programs of U.S. ground services.

Government Technology Solutions

 In an effort to improve the efficiency of the federal acquisition process, the General Services Administration (“GSA”) will consolidate 24 award schedules into a single contract vehicle for products and services—reforming the Multiple Award Schedule program.  The initiative seeks to simplify the large and confusing web of contracts currently in place by providing agencies with a single, larger schedule.  Per Federal Acquisition Services Commissioner, Alan Thomas, “a single schedule for products and services will make it easier for customers to find and purchase the solutions they need to meet their respective missions.”  The reform will make offerings more accessible by allowing agencies to focus on acquiring and delivering the right solutions rather than navigating administrative logjams and contracts on multiple schedules.  The intent is that by streamlining acquisition of critical solutions, barriers to entry will be reduced and competition will be increased amongst contractors, providing for more optimized acquisitions for federal agencies. Further consolidation details will be unveiled at GSA’s December 12 industry day at its Washington, DC location.

On Tuesday, AWS hosted its annual re:Invent conference in Las Vegas, where it announced plans to provide antenna services that will allow users to download satellite data.  The new business venture, AWS Ground Station, includes a partnership with Lockheed Martin to access its network of antennas, called “Verge”, and combines it with Amazon’s cloud capabilities.  The partnership will allow AWS to deliver satellite capabilities to government customers, with services ranging from storage and hosting to analytics and data processing.  Additionally, the satellite network is expected to significantly cut costs for customers by providing them with an alternative to building their own ground centers that come with costly infrastructure requirements.  AWS also announced it will build 12 satellite facilities around the world as it attempts to penetrate the growing space-related hardware market and expand their existing cloud services, further affirming their commitment to satellite and space-related services in the government sector.

Big Movers

 Boeing (up 10.3%) – Share prices were up this week after Cowen aerospace analyst, Cai von Rumohr, singled out the Company as the “number one stock pick for 2019.” The analyst confirmed his report stating, “given visibility of a seven-year backlog and still-solid traffic growth, it would take a sharp economic slowdown to disrupt the favorable current production outlook.”

 KeyW Corporation (up 15.9%) – Share prices were up this week following an announcement by the Company on Wednesday that it had received $35.0 million in new awards and additional work to existing contracts for delivery over the next 12 months.

Transactions

Aersale, Inc. has acquired Avborne Accessory Group, Inc., a subsidiary of RBC Bearings, a provider of mid-life aircraft, engines, used serviceable material, and maintenance, repair, and overhaul services.  The deal is worth an estimated $21.5 million.

E3 Federal Solutions has merged with The Sentinel Company, a portfolio company of NewSpring Holdings, creating a provider of mission consulting, information technology, program management, and systems engineering and technical services for the DoD, Intelligence, Homeland / National Security, and other Federal Civilian agencies.  The terms of the transaction were not disclosed.

 Electronic Connector Company of Illinois LLC has acquired the Aerospace and Defense Division of Magellan Distribution, a provider of interconnect and MRO products to top tier U.S. defense contractors.  The terms of the transaction were not disclosed.

EverWatch Corporation, a portfolio company of Enlightenment Capital, has acquired Dynamic Engineering Solutions, a provider of cloud and network administration solutions to intelligence agencies.  The terms of the transaction were not disclosed.

General Dynamics European Land Systems (“GDELS”) has acquired FWW Fahrzeugwerk GmbH, a provider of maintenance and repair of military wheeled and tracked vehicles as well as complex weapon systems for the German Army and other international customers.  The terms of the transaction were not disclosed.

 HEICO Corp. has acquired Apex Microtechnology, Inc., a designer and manufacturer of precision power analog monolithic, hybrid, and open frame components for a wide range of aerospace, defense, industrial, medical, and test applications.  The terms of the transaction were not disclosed.

Kitron has acquired the EMS division of API Technologies Corp., a provider of design engineering and contract electronic manufacturing services for the commercial / industrial, energy, medical, military, and telecommunications markets.  The deal is worth an estimated $15.9 million.

 MTS Systems Corp. has acquired E2M Technologies B.V., a provider of high-quality, durable, electrical-driven motion systems, serving primarily the training sublimation markets.  The deal is worth an estimated $80 million.

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Industry Week in Review – November 23, 2018

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KippsDeSanto & Co. Industry Week in Review – November 23, 2018

Summary

India is expected to finalize its agreement with Russia to purchase S-400 air-defense missile systems for over $5 billion.  Moreover, the United States sold more than $900 million worth of missiles to Japan and NATO’s Support and Procurement Agency to bolster their defense capabilities. In addition, the current financial auditing effort at the Department of Defense (“DoD”), which was established to improve efficiency and reduce waste throughout its various divisions, identified major inefficiencies in the department’s information systems.

Aerospace & Defense Update

India is expected to finalize its agreement with Russia to purchase S-400 air-defense missile systems for over $5 billion. Over the past several months, the United States has sanctioned countries that partake in trade agreements with Russia in an effort to limit exports from Russia’s defense industry; Russia is currently the second largest defense exporter in the world. However, the United States is also attempting to strengthen its relationship with India as it sees India as a strategic and stabilizing force to counter China’s growing influence in the region. Over the past five years India has increased its purchasing of U.S defense products by over 500%, but also remains the second largest buyer of Russia arms. If the United States does not sanction India for its agreement to buy Russian arms, it could weaken the United States’ stance against Russia and set a precedent for other countries to participate in trade with Russia; at the same time, imposing sanctions may harm its growing relationship with an important ally. No announcement has yet been made regarding potential a final decision on any sanctions.

This week, the U.S. State Department cleared $944 million in foreign military sales to send missiles to Japan as well as NATO’s Support and Procurement Agency, which is set up to allow NATO countries to buy commonly used weapons systems. In this case, the weapons will be divided among Belgium, the Czech Republic, Denmark, and various other NATO countries. Raytheon is the primary contractor for the Japan deal, which sent several tranches of missiles, including SM-3 missiles and AIM-120-C-7 advanced Air-to-Air missiles to bolster Japan’s defense capabilities. Boeing and Raytheon partnered to be the prime contractor on the self-guided missiles sent to NATO.

Government Technology Solutions

The current financial auditing effort at the Department of Defense (“DoD”), which was established to improve efficiency and reduce waste throughout its various divisions, identified major inefficiencies in the department’s information systems. The report emphasized DoD vulnerabilities to cyber-attacks — which have become a more frequent occurrence in the past few years. Given the size and complexity of the audit, the DoD did not expect to pass; however, the intent of the audit was to uncover potential areas for improvement. The pentagon comptroller, David Norquist, suggested that the department recognizes the flaws unveiled by the failed audit and intends to mitigate them: “We didn’t pass. That’s the blunt and bottom line. We have issues and we’re going to go fix them.” The DoD will continue its 28-year effort to audit its $2.7 trillion in assets, making it the largest organization ever audited. Ongoing efforts to modernize government IT and bolster cybersecurity represent a significant tailwind for technology solution contractors.

Big Movers

Bombardier (Up 43.0%) – Share prices were up this week as Bombardier launched its new global 7500 class business jet. The business aircraft was well received by the market due to its innovative design and renewed focus towards passenger comfort.

Boeing (down 7.0%) – Share prices continued to fall this week after information surfaced that Boeing pilots were not adequately trained to use the 737 MAX jet features. The plane was involved in the Lion Air plane crash in Indonesia last month.

Transactions

No relevant transactions were announced this week.

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Industry Week in Review – November 16, 2018

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KippsDeSanto & Co. Industry Week in Review – November 16, 2018

Summary

International and domestic defense spending continues to increase as Australia has chosen General Atomics Aeronautical Solutions to provide its next remotely piloted aircraft and the Pentagon has amended its F-35 contract vehicle to allow block purchases.  In addition, Amazon has confirmed its highly-anticipated HQ2 will be split between Crystal City, VA and Long Island City, NY.  The pre-award protest for the JEDI contract was denied by the Government Accountability Office.

Aerospace & Defense Update

Australian Defense Minister, Christopher Pyne, announced that General Atomics Aeronautical Systems has been selected to supply the medium altitude long endurance (“MALE”) remotely piloted aircraft (“RPA”) for the Australian Defense Force.  However, the Australian Defense Force has yet to decide which variant of General Atomics’ RPA solution they want to move forward with.  Pyne stated that the requested 12 to 16 air vehicles will cost approximately $1 billion and is looking at initial deliveries in the 2020 – 2021 timeframe.  Interestingly, the Australian Defense Force used the single source acquisition methodology rather than open competition to award this contract, which was a blow to many viable vendors, most notably Israel Aircraft Industries.  Pyne stated that going through a full-tender process would not have been practical as General Atomics was best-suited to fulfill their needs.  In addition, under the Australian Defense Organizations’ First Principal review, single source supply is permitted if the purpose and capabilities of the single source supplier can deliver to par with the minimum resources necessary.

The Pentagon took first steps toward initiating a block buy for future F-35 orders last week, amending the department’s existing contract vehicle to allow international customers to buy in block purchases.  In order to reduce costs, the F-35 joint program office has advocated grouping international orders together, and possibly future U.S. orders, to allow prime contractor Lockheed Martin and its suppliers more time and resources to make necessary investments.  This contracting funding strategy provides stability and steady production rates, which enables suppliers to plan and make investments that reduce costs and achieve greater efficiencies.  This amendment will provide at least $6 billion to Lockheed Martin but also sets a cap of $22.7 billion for the initial production for international military sales.  The finalization of the contract is expected to take place in 2020 — a key year for the F-35 program, in which the Pentagon expects to see prices for the F-35A model reach $80 million per plane — with deliveries starting in 2022.

Government Technology Solutions

On Tuesday, Amazon (NYSE: AMZN) confirmed that its highly-anticipated second headquarters (“HQ2”) will be split between two locations: Crystal City, VA and Long Island City, NY.  While initially expected to be in a single location with 50,000 employees, now HQ2 will be spread across two locations, each expected to have approximately 25,000 employees.  The move to Crystal City is believed to help Amazon in its drive to increase its share of the Federal market.  Amazon’s presence will have many positive implications on the local economy by creating jobs, enlivening the Northern Virginia area as an entrepreneurial hub, and building infrastructure to support the numbers.  Amazon will also spark competition amongst federal contracts as the government pushes onward in its modernization efforts.  Perspecta Inc.’s CEO (NYSE: PRSP), Mac Curtis, noted in his second quarter earnings call that the introduction of Amazon to the area will, “push together the government customer and industry.”

The pre-award protest of the JEDI contract that Oracle filed in August was denied this week by the Government Accountability Office (“GAO”).  Oracle, among various other tech giants that have expressed their displeasure with the winner-take-all award structure, claimed the 10-year contract is anticompetitive and locks the Department of Defense (“DoD”) into a single cloud provider for the foreseeable future.  GAO reaffirmed its initial stance that a single-award is in the government’s best interest – notably, the Office mentioned the decision was in part a matter of national security.  While the DoD has avoided a potential conflict with Oracle’s protest, IBM’s protest is still outstanding, with a decision deadline of January 18.  Like Oracle, IBM criticized the contract structure for restricting the field of competition.  Additionally, IBM believes the requirements of JEDI were tailored to match AWS’ internal processes, giving the Company an unfair advantage.

Big Movers

Boeing (down 9.1%) – Share prices were down this week due to reports that the company had failed to properly brief pilots on the features of its 737 MAX jet.  This is the model that was involved in the Lion Air plane crash in Indonesia last month.

Bombardier (down 39.0%) – Share prices were down this week as regulators said they were reviewing the company’s executive stock-sale program in the wake of an earlier share rout.

Transactions

Advantest Corp. has acquired Astronics Corp.’s Semiconductor System Level Test Technology, a provider of semiconductor test solutions.  The deal is worth an estimated $185 million.

BEI Precision Systems & Space Company, Inc., a portfolio company of J.F. Lehman & Company, has acquired Thistle Design (MMC) Limited, a provider of positioning and measurement sensors for the defense and industrial markets.  The terms of the transaction were not disclosed.

Novetta Solutions, LLC, a portfolio company of The Carlyle Group, has acquired Berico Technologies, LLC, a provider of innovative, technology-enabled cloud engineering, data analytics, and IT modernization solutions to customers in the Intelligence Community.  The terms of the transaction were not disclosed.

SMTC Corp. has acquired MC Assembly Holdings, Inc., a provider of electronic components serving the aerospace, industrial, telecommunications, networking, and medical markets.  The deal is worth an estimated $65 million.

Wencor Group, LLC has acquired Silver Wings Aerospace, Inc., a provider of electric power and hydraulic component repair with unique capabilities in Used Serviceable Material.  The terms of the transaction were not disclosed.

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Industry Week in Review – November 09, 2018

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KippsDeSanto & Co. Industry Week in Review – November 9, 2018

Summary

Democrats recaptured the House of Representatives, while Republicans expanded their majority in the Senate in the mid-term elections. Bombardier sells of its Q-series turboprop passenger business unit to Viking Air amid its restructuring. Various corporations and executives were recognized at this week’s Greater Washington Government Contractor Awards. Amazon has reportedly commenced negotiations with Virginia regarding the location of one of its two new headquarters.

Aerospace & Defense Update

The 2018 U.S mid-term elections were held this week, with Democrats recapturing the House of Representatives, while Republicans expanded their majority in the Senate. With their majority in the House, Democrats are expected to prioritize the pursuit of domestic initiatives such as infrastructure, healthcare, and education. Currently, the government is planning a $33 billion budget reduction for fiscal year 2020 national defense spending, which could potentially more closely align with the Democrats’ agenda. With a divided government, President Trump and the Senate may have to seek additional bipartisan support to craft the defense budget and other defense-related legislation.

Viking Air, a portfolio company of Longview Aviation Capital, has reached an agreement to acquire Bombardier’s Q-series turboprop passenger business segment for an estimated $300 million. Robust global air travel has created strong demand for regional aircraft, piquing interest from both private equity and strategic suitors. Viking Air hopes to add scale to Bombardier’s operations to reduce costs, and eventually price, while maintaining operational superiority. In addition, Bombardier also divested its technical training business unit to CAE, a global designer and manufacturer of simulation equipment. That deal is worth an estimated $650 million. Bombardier is divesting these business units as it attempts to reposition the company to prioritize its business aircraft division. As part of this restructuring initiative, Bombardier’s management has indicated that it will continue to explore strategic alternatives for its existing commercial aircraft divisions and has announced plans to cut 5,000 jobs over the next 18 months.

Government Technology Solutions

At Monday’s Greater Washington Government Contractor Awards, corporations and executives were recognized for their commitment to excellence in the region’s government contracting community. This year’s winner from the largest category, consisting of contractors with over $300 million in revenue, was ICF. The strategic, digital consulting leader attributes their recent success to their ability to leverage commercial businesses to provide innovative tools and digital technologies. The winner in the $75 to $300 million category was Attain. Attain has proven to be an agile company with flexible strategic, management, and technology solutions and services. Ad Hoc was the winner from the $25 to $75 million category. The company started with a team of top engineering talent that was assembled to correct course for the troubled launch of HealthCare.gov. Since then, the business has grown into a premier government digital services agency. From the contractors with revenue up to $25 million, InCadence came out on top. The company has seen significant growth and success since its inception in 2009, including CEO Sandra Corbett’s recent win of a FedFem Award this year. Executive of the Year awardees were Accenture CEO, John Goodman, Telos Corporation CEO, John Wood, and Berico Technologies CEO, Marybeth Wootton, in their respective contractor size categories.

Earlier this week, it was reported that Amazon (NYSE:AMZN) may split up its new headquarters among two locations.  Long Island City in New York and Crystal City in Arlington, Virginia are considered the frontrunners.  Amazon establishing a major presence in the D.C. metro area would bring with it approximately 25,000 jobs, amid an already tight labor environment.  The move would bring the technology giant closer to a major customer, as Amazon has significantly increased its federal exposure over recent years by successfully selling its popular Amazon Web Services (“AWS”) into the federal government and securing billions of dollars in federal contracts.  Situating itself on GovCon home turf and a stone’s throw from the White House and the U.S. Capitol would suggest that the company intends to further embed itself within the federal market. The integration of a behemoth headquarters like Amazon’s—albeit split with a second location—is expected to drive additional growth in the technology market as a whole across the region and will hopefully attract more tech talent to the area in response.

Big Movers

Bombardier (down 19.8%) – Share prices were down this week after the Company announced its plans to cut another 5,000 jobs and to sell off two units amid its restructuring.

KeyW (up 16.2%) – Share prices were up this week after KeyW announced it beat expectations for revenue and EBITDA as well as paid down $10 million of debt during the third quarter.

Transactions

ACR Electronics, Inc. has acquired Latitude Technologies Corp., a provider of versatile aeronautical communications devices and a robust web-based aircraft tracking   and flight data analytics platform. Terms of the deal were not disclosed.

CAE, Inc. has acquired the aircraft training business of Bombardier, Inc., a provider of flight training and technical training services.  The deal is worth an estimated $645 million.

CALIBRE Systems, Inc. has acquired SPEAR, Inc., a provider of IT solutions, including cyber, analytics, and C4ISR, to federal agency clients. Terms of the deal were not disclosed.

IPG Photonics Corp has agreed to acquired Genesis Systems Group, LLC, a provider of integration of robotic welding and automation solutions, with more than 300 blue-chip customers in the transportation, aerospace and industrial end market. The deal is worth an estimated $115 million.

Viking Air, a portfolio company of Longview Aviation Capital, has acquired the Q-Series Turboprop business of Bombardier, Inc., a provider of Q-Series turboprop passenger airlines. The deal is worth an estimated $300 million.

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Industry Week in Review – November 02, 2018

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KippsDeSanto & Co. Industry Week in Review – November 02, 2018

Summary

This week the U.S. Department of Defense announced its end of year budget numbers for the Military Intelligence Program.  In the commercial Aerospace sector, narrow-body aircraft orders took a back seat as several Asian airlines considered alternate makes and models to compensate for lack of fleet growth.  In the government sector, Leidos’ CEO, Roger Krone, discussed the implications of the U.S. labor shortage and shortfalls in end of year government spending.

Aerospace & Defense Update

The U.S. Department of Defense announced its top-line budget for its secretive intelligence program for FY18 this past week.  The total Military Intelligence Program (“MIP”) budget, including base budget and Overseas Contingency Operations appropriations, was $22.1 billion for FY18.  The department releases this figure at the end of each fiscal year because it does not want to jeopardize any classified activities within the MIP.  No other MIP figures of program details will be released, for classified reasons.  However, this amount is greater than the $20.7 billion the Pentagon requested for FY18 and even the $21.2 billion requested for FY19.  FY18’s $22.1 billion appropriation is the most the MIP has been granted since 2012.  In total, all intelligence programs were appropriated $78.4 billion in FY18, accounting for approximately 11 percent of the total base budget.

While massive orders for narrowbody aircraft often dominate headlines in the fast-growing Asia-Pacific airline industry, some of the region’s major legacy carriers are considering new widebody orders to replace aging fleets.  Among the legacy, Asian carriers assessing widebody replacement orders are Thai Airways, Malaysia Airlines and Korean Air.  These airlines are having trouble keeping up with competitors as lack of fleet growth has forced consolidation among existing markets rather than expansion into new routes.  Leaders and senior executives of the carriers discussed fleet growth plans at the Asia Pacific Airlines annual assembly this past week.  Boeing and Airbus have been paying close attention to these talks as these orders could provide significant revenue for their twin-aisle aircraft programs.  However, even if an acquisition plan is approved soon, the first order would likely be placed in the first half of 2019 with deliveries starting the following year.

Government Technology Solutions

Notwithstanding the benefits of low unemployment to the overall economy, this dynamic remains a challenge for many government technology solutions companies.  Competitive talent markets – especially for cleared and / or highly technical professionals – have made it increasingly difficult to respond to the evolving needs of customers especially with now funded and growing requirements for which they rely on the contracting community to execute.  Last week, Leidos CEO, Roger Krone, said on an earnings call that the decrease in hiring activity has “had a regulating effect on Leidos’ growth in the third quarter and likely into the fourth quarter as well.”  Others including Booz Allen Hamilton and ManTech expressed similar feelings on their recent earnings calls.  In response, many government contractors, such as SAIC and CACI, have continued to expand their footprint outside the DC-Metro area in order to tap into new talent pools and selectively realize cost advantages of less competitive regional labor markets.

As end-of-year spending information is released, agencies’ GFY18 budget to actual results are at the forefront of the government contracting community. While some contractors were able to take advantage of the abundant funding environment, it has been speculated that Civilian agencies were unable to deploy nearly $70 billion in allocated funds.  As has been often noted by the press towards the close of the government fiscal year, the late passage of the budget this past March created a significant time crunch for agencies and contractors alike. Although leaving funds on the table could potentially have negative connotations, it is to government agencies’ credit that they did not fall prey to fickle year-end spending and were remarkably prudent, considering the uncertainty of future spending environments.

Big Movers

Bombardier (up 6.1%) – Share prices were up this week after the Company announced its plans to protest the Transport for London’s (“TfL”) $3.2 billion contract to build 94 new London Underground trains.

L3 Technologies (down 9.0%) – Share prices were down this week after Lifshitz & Miller LLP announced the launch of an investigation regarding a potential breach of fiduciary duties in the sale of L3 to Harris Corporation.

Transactions

Akoya Capital Partners, LLC, and Hillcrest Holdings have partnered to acquire Evolver and eVigilant, two Northern Virginia security companies that together will form Converged Security Solutions (“CSS”) and offer both cyber and physical security services.  Terms of the deal were not disclosed.

AMETEK, Inc. has acquired Forza Silicon Corp., a provider of high-performance imaging sensors used in medical, defense, commercial, and industrial applications.  The deal is worth an estimated $40 million.

ANSER Services, Inc. has acquired Domain X Technologies, a provider of program management, DoD acquisition, systems engineering, software engineering, and modeling & simulation support.  Terms of the deal were not disclosed.

EverWatch, a portfolio company of Enlightenment Capital, has acquired Analysis, Computing and Engineering Solutions, Inc. (“ACES”), a provider of intelligence analysis, software development, and system engineering to the intelligence community and the U.S. DoD. Terms of the deal were not disclosed.

HEICO Corp. has acquired Specialty Silicone Products, Inc., a provider of silicone materials for a variety of application, used in aerospace, defense, research, oil and gas, testing, pharmaceuticals, and other markets.  Terms of the deal were not disclosed.

J.F. Lehman & Co. acquired International Marine & Industrial Applicators, LLC / Craft and Technical Solutions, LLC, a provider of critical vessel preservation services to the U.S. Navy; commercial maintenance, repair, and overhaul (MRO); and new construction markets.  Terms of the deal were not disclosed.

Nanometrics, Inc. has acquired 4D technology Corp., a provider of high-performance interferometric and inspection systems for variety of industries including aerospace, astronomy, and defense, among others.  The deal is worth an estimated $40 million.

Textron, Inc. has agreed to acquire Howe & Howe Technologies, Inc., a provider of extreme vehicle production and advanced robotics for extreme conditions and for a multitude of industries including defense.  Terms of the deal were not disclosed.

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Industry Week in Review – October 26, 2018

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KippsDeSanto & Co. Industry Week in Review – October 26, 2018

Summary

Several aerospace and defense and government technology solutions companies announced positive earnings this week. Healthy global air travel and rising military budgets were cited as primary drivers behind the strong earnings reports. Moreover, the U.S Department of Justice continues to prioritize cybersecurity and has formally charged a Russian national in connection with fabricating disinformation throughout the 2016 election.

Aerospace & Defense Update

Numerous aerospace and defense companies announced positive 3Q18 earnings this past week.  Boeing beat earnings per share (“EPS”) estimates by $0.11 (3.2%) and revenue estimates by $1 billion, reporting $25.1 billion of total revenue for 3Q18, reflecting more efficient commercial aircraft production and robust defense business growth highlighted by several major contract awards.  Moreover, Lockheed Martin beat EPS estimates by $0.83 (19.3%) and increased year-over-year revenue 16% to $14.2 billion.  Lockheed’s strong revenue and earnings growth was led by its Aeronautics business unit, which continues to benefit from increased production of its F-35 combat jet program.  Raytheon’s earnings also beat EPS estimates by $0.24 (11.9%) and grew revenue by 8.3% YoY to $6.81 billion, driven by 7% sales growth in its missile systems business unit and 13% sales growth in its intelligence, information and services business units.

StandardAero Aviation Holdings, Inc., a portfolio company of Veritas Capital, is exploring a potential sale that could be worth over $5 billion. StandardAero has a global presence and is one of the largest maintenance, repair, and overhaul providers for Boeing and Airbus’ aircrafts, engines, business jets, and helicopters. Favorable macroeconomic trends including robust global air travel, a proliferating military budget, and the Pentagon’s renewed focus on maintenance and upgrades make StandardAero a desirable acquisition target for a variety of strategic and private equity suitors.

Government Technology Solutions

As it continues its initiative on cracking down on foreign cyber threats, the Department of Justice (“DOJ”) officially charged a Russian national this past week in connection with a disinformation campaign in the wake of the 2016 election. The specifics behind the alleged cybercrime involved funding the creation of fake and politically-contentious information in an effort to stir up political unrest. This public indictment of a foreign national provides one of the first concrete examples of enforcing the U.S. government’s new National Cyber Strategy. The policy, released in September, specified a shift in approach whereby the U.S. would publicly condemn nation states for their involvement in cyberattacks. This year has already seen the DOJ responding to cybercrimes more publicly, including the indictment of nine Iranians for stealing several universities’ data in March, twelve Russians for the Democratic National Committee (”DNC”) hack in July, a North Korean programmer who was involved in some of the biggest cyber-attacks in recent years, and seven Russian military officers earlier this month for the attacks against the World Anti-Doping Agency (“WADA”). As cybercrime is becoming an increasingly popular political weapon for international states, the DOJ intends to respond accordingly publicly condemn and indict foreign cyber criminals, in an attempt to curtail the behavior and lead the way for other Western governments to do the same.

Big Movers

Bombardier (down 15.1%) – Share prices were down this week after Mitsubishi pushed back against claims Bombardier made in a lawsuit that Mitsubishi hired Bombardier engineers and stole trade secrets to expedite production.

General Dynamics (down 10.7%) – Share prices were down this week after the company announced revenue below expectations. Total revenue rose 20% to $9.09 billion but fell short of the $9.38 billion estimated.

Transactions

Applied Insight acquires Organizational Strategies Inc., a provider of analytics, IT and intelligence, surveillance and reconnaissance (“ISR”). Terms of the deal were not disclosed.

Directional Aviation has agreed to acquired SimCom International, Inc., a provider of initial and recurrent pilot training for jet, turboprop, and piston aircrafts using FAA-qualified flight training device and full-motion simulators. Terms of the deal were not disclosed.  

QinetiQ Group, plc. has acquired Inzpire Group, Ltd., a provider of operation training and mission systems for military customers in the UK and internationally. The deal is worth an estimated $30.5 million.

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Industry Week in Review – October 19, 2018

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KippsDeSanto & Co. Industry Week in Review – October 19, 2018

Summary

On the heels of the Esterline Technologies / TransDigm deal, L3 Technologies has entered into an agreement to combine with Harris Corporation to form another major player in the defense industry.  In addition to an active M&A market, federal agencies are recognizing the need and benefit of updating legacy infrastructure and incorporating NextGen technologies to drive increased investment in IT over the next few years.

 Aerospace & Defense Update

L3 Technologies and Harris Corporation have agreed to combine in an all-stock deal, which will be the largest-ever defense industry merger.  The combination will form a sixth prime defense contractor focused primarily on defense electronics and communications.  The newly formed entity, L3 Harris Technologies, will be based in Melbourne, Florida and will be approximately $33.5 billion in combined market value.  The two companies are projecting approximately $16 billion in combined revenue this year, which will surpass Huntington Ingalls and BAE Systems.  M&A activity continues to be highly active for the defense market, fueled by premium market valuations and favorable defense spending.  This merger also represents a further hollowing out of the middle of the U.S. defense market, as larger players continue to seek scale through inorganic growth.  This transaction is expected to close mid-way through 2019, pending a review by the Defense Department.

Shortly after midnight on October 17th, the Air Force’s fourth Advanced Extremely High Frequency (“AEHF”) satellite successfully launched aboard an Atlas 5 rocket from Cape Canaveral Air Force Base in Florida.  The AEHF satellite provides highly protected communications for the Department of Defense, offering “survivable, global, secure, protected and jam-resistant communication for high-priority military ground, sea, and air assets,“ according to an Air Force statement.  The fourth AEHF satellite significantly increases communication speed allowing the transmission of real-time video, battlefield maps, and targeting data to help combatant commanders make optimal tactical and strategic decisions.  The prime contractor on this $15 billion Air Force program, Lockheed Martin, is under contract to deliver a total of six AEHF satellites.  The launch of the next satellite, AEHF 5, is scheduled for July 2019.

Government Technology Solutions

This week, FedScoop released the results of a study that details shifting patterns in federal IT investment strategies.  The report, underwritten by IBM, surveyed 169 federal agency IT and program management executives to assess which IT and cloud deployment models are in the highest demand in the technology solutions market.  Agency efficiency has been a key priority for the federal government and the publishers of the survey hope to “break fresh ground in linking how IT investment strategies are helping, and to a certain extent hindering, agencies and their ability to capitalize on many of the benefits cloud computing services can offer,” according to Wyatt Kash, senior vice president of content strategy at Scoop News Group.  Nearly 38% of those surveyed are still investing in on-site, government-run data centers, compared to 20% in government-only community clouds, 7% in public / commercial clouds, 16% in hybrid models, and 19% outsourced, privately managed government cloud / data centers.  While the on-site approach is the least conducive to digital transformation compared to a hybrid approach, risk tolerance and data sensitivity remain areas of concern for many agencies.  Nevertheless, the results of the study indicate a coming shift in investment towards the aforementioned, cloud-friendly approaches that would provide enhanced flexibility and greater scalability for government agencies seeking to retain autonomy over their data.  The study indicates that agencies that devote a greater focus on enhancing cloud capabilities also demonstrate a greater propensity to pursue machine learning and AI to increase mission efficiency.  Not surprising, cloud forerunners are also more apt to early technology adopters.  Federal agency recognition of the need and benefit of updating legacy infrastructure and incorporating NextGen technologies should hopefully drive increased investment in IT over the next few years.

Big Movers

 L3 Technologies (up 10.0%) and Harris Corporation (up 9.0%) – Share prices for both entities were among the biggest movers as news of a merger fueled an increase in stock price for both companies.

Transactions

Harris Corporation and L3 Technologies, Inc. have agreed to merge, the combined entity will create a global defense technology leader, focused on developing differentiated and mission critical solutions.  The deal is worth an estimated $18.7 billion.

Luna Innovations, Inc. has acquired Micron Optics, Inc., a provider of innovative optical components and laser-based measurement technologies.  Terms of the transaction were not disclosed.

Sonardyne International Ltd has acquired Chelsea Technologies Group Ltd., a provider of underwater acoustic products to both civilian and defense customers.  Terms of the transaction were not disclosed.

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Industry Week in Review – October 12, 2018

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KippsDeSanto & Co. Industry Week in Review – October 12, 2018

Summary

TransDigm has entered into an agreement to acquire Esterline Technologies Corporation for $4 billion. After key aerospace and defense providers have experienced production issues, the Pentagon is partnering with the Intelligence Community to identify and improve shortcomings in companies’ supply chains. Google has announced it will not submit a bid for the $10 billion JEDI cloud contract due to potential conflicts with its corporate values and IBM files a pre-award protest of the contract. The Government Accountability Office released a report detailing a series of cyber vulnerabilities associated with the Department of Defense’s portfolio of weapon systems.

Aerospace & Defense Update

On Wednesday, TransDigm Group Inc. announced that it had entered into an agreement to acquire Esterline Technologies Corporation for a total consideration of approximately $4 billion.  Esterline provides engineered components, sensors, and specialized parts to the jetliner industry.  The company has strong customer relationships and is a sole-source supplier of certain parts to Boeing and Airbus.  TransDigm’s equity purchase price of $122.50 per share represents a 38% premium to Esterline’s closing stock price the day before the transaction was announced.  The acquisition continues a trend of industry leaders paying large multiples to condense their supply chain to achieve cost-saving synergies, and TransDigm hopes the acquisition will strengthen its supply chain, cut costs, and increase productivity.

The Pentagon and the Intelligence Community (“IC”) are partnering to audit domestic aerospace and defense companies’ supply chains to identify and improve shortcomings that could hamper U.S military readiness. The Pentagon is particularly concerned about the industry’s ability to effectively increase weapons production and supply a conflict.  Boeing’s recent 737 production issues reinforce the need to ameliorate supply chains, as shortages of various production inputs spanning from metal casting to circuit boards have hindered manufacturers’ ability to meet growing demand.  Production issues have affected both upstream and downstream suppliers as key providers such as Spirit AeroSystems, GE Aviation, and United Technologies have all experienced production issues, citing late delivery of materials as a contributing factor to their delays.  The Pentagon is incentivizing contractors to elevate their performance by offering bonuses for on-time deliveries and are simultaneously diligently working with industry leaders to foster communication and resolve these issues.

Government Technology Solutions

On Monday, Alphabet Inc.’s Google announced it will not submit a bid for the 10-year, $10 billion single-vendor DoD JEDI cloud contract because it may present potential conflicts with its AI principles. The withdrawal comes only a few months after the company decided it will not renew its AI contract with the DoD following significant internal complaints from employees. Google said they would have submitted a compelling solution for the portions that align with its values and fall within its scope had the contract been open to multiple vendors. The company was among a handful of tech giants in the hunt for the cloud contract, including Amazon Web Services, Microsoft Azure, IBM, GDIT (formerly CSRA) and Oracle—many of which have also expressed their displeasure with the winner-take-all award structure. In related news, this Wednesday, IBM filed a pre-award protest on JEDI, following Oracle’s pre-award protest of the contract earlier in the year. IBM is challenging the contract’s request for a single cloud environment for 10 years, as well as the RFP’s stringent requirements, which “mirror one vendor’s internal processes” and “restrict the field of competition”, according to IBM General Manager Sam Gordy. The final deadline for bids is Friday, with the awardee to be selected next April unless the protests cause the timeline to be extended.

This past week, the Government Accountability Office (“GAO”) released a report detailing a series of cyber vulnerabilities associated with the Department of Defense’s (“DoD”) portfolio of weapon systems. Because automation and connectivity are fundamental enablers of the DoD’s military capabilities, the potential for cyberattacks poses a serious threat to all network-based weapon systems. According to the report, testers attempting to breach weapons systems routinely were able to gain access to a variety of network connected defense platforms, within one hour; and were then able to take full control of, after a day, manipulating the platform’s system by changing or deleting data. With the report heavily criticizing defense officials for their lack of foresight in developing cyber capabilities for weapon systems, the Pentagon will have to move quickly to address these vulnerabilities. As the GAO prepares to brief Congress on its classified findings, the DoD will receive yet another reminder of the importance of increased cyber functionality and the proactive development of systems to keep up with rapid technological changes.

Big Movers

Astronics Corporation (down 20.7%) and Triumph Group (down 15.6%)– Share prices were among the hardest hit in the Aerospace, Defense and Government Services market after this week’s selloff, which resulted in the worst week for U.S. stocks since March.

Transactions

AE Industrial Partners has acquired The Atlas Group, a provider of manufactured complex assemblies for commercial, business, and military aircrafts. Terms of the deal were not disclosed.

Celestica, Inc. has agreed to acquire Impakt Holdings, a provider of manufacturing solutions for leading OEMs. The deal is worth an estimated $329 million.

Cognosante, LLC has acquired J.Lodge, LLC, a provider of integrated solutions that improve the customer-care experience using artificial intelligence, driven speech analysis, and industry-leading software to analyze contact center interactions and find insights. Terms of the deal were not disclosed.

Decision Point Corporation has acquired CORTEK, Inc., a provider of systems engineering, software engineering, cyber support, and technical analysis and documentation to the Department of Defense, Department of State, and other government agencies. Terms of the deal were not disclosed.

FLYHT Aerospace Solutions Ltd. has acquired the Assets of Panasonic Weather Solutions, a provider of satellite communications systems, aircraft tracking, and Tropospheric Airborne Meteorological Data reporting. The deal is worth an estimated $8.4 million.

Maximus, Inc. has agreed to acquire the Citizen Engagement Centers divestiture of General Dynamics Information Technology, Inc.,a provider and operator of centers that handles government services inquires and management. The deal is expected to be worth an estimated $400 million.

Ravn Air Group has agreed to acquire Assets of Peninsula Airways, Inc., a provider of airline operating schedule passenger and charter throughout Alaska. The deal is worth an estimated $12.3 million.

Seemann Composites, Inc. has acquired Materials Sciences Corp., a provider of products and services to study advanced materials and structures. Terms of the deal were not disclosed.

TransDigm Group, Inc. has agreed to acquire Esterline Technologies Corp., a provider of engineered products and systems for aerospace and defense customers. The deal is worth an estimated $4.064 billion.

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Industry Week in Review – October 05, 2018

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KippsDeSanto & Co. Industry Week in Review – October 5, 2018

Summary

Updates and overhauls continue to stand out as prevalent trends in the Aerospace, Defense, and Government Technology communities.  This week, the U.S. Army came closer to finding a supplier for its defense radar system, and Boeing and Embraer mentioned the prospect of building an assembly line for Embraer’s cargo aircraft to make up for lagging interest from Brazilian buyers.  In the Government Technology sector, digital transformation remains a pressure point as agencies pursue alternative avenues to facilitate cloud modernization and increased cyber functions.

Aerospace & Defense Update

The U.S. Army has narrowed its selection of awardees to develop a next-generation air and missile defense radar (“AMD”) system to Raytheon and Lockheed Martin.  The Department of Defense Ordnance Technology Consortium originally had awarded contracts to four companies to develop designs for the Patriot AMD radar replacement system but has removed Northrop Grumman’s and Technovative Application’s from the process.  The concept design contracts were given a period of performance of 15 months, but the down-select came early.  Raytheon currently manufactures the legacy Patriot System while Lockheed Martin currently is developing the Medium Extended Air Defense System as competition.  Radar technology is becoming more prevalent as Congress has mandated that the U.S. Army find a way to produce more capable radars that will fit into the future Integrated Air and Missile Defense framework by 2025.

Boeing and Brazilian aerospace company, Embraer, are reportedly discussing the prospect of building an assembly line for Embraer’s KC-390 cargo planes in the United States.  This discussion comes on the heels of Boeing’s 80% stake in Embraer’s commercial business, and it is widely speculated that a similar deal on the companies’ defense businesses might be negotiated in the coming months.  Boeing and Embraer had previously established agreements in 2012 and 2014, but a defense-related joint venture would allow for the development of much broader market opportunities.  The KC-390 is a multi-mission aircraft built to haul cargo, transport passengers, insert special operators, and even help refuel other aircraft.  Embraer has struggled to draw serious interest from international buyers as Brazil currently remains its only customer, however Embraer believes this agreement could change that.

Government Technology Solutions

With their innovative and agile solutions offerings, commercial companies have begun to increase their desire to more effectively penetrate the federal contracting space.  This is largely driven by a change in the historic reluctance of federal agencies to adopt commercial technologies, given a heightened focus on, and need for, more robust cybersecurity measures and enhancements to outdated legacy systems.  Government contractors have turned to partnerships with commercial companies in order to more quickly deliver commercial solutions as contractors typically have required contracting vehicles in place.  Raytheon (NYSE: RTN) has been one of the leaders in this movement and recently teamed with Florida-based Cybraics, Inc. and California-based Authentic8, Inc., to deliver cyber and cloud solutions to federal and state and local agencies.  Intended solutions include enhanced security for various voting and healthcare platforms.  These companies will provide their services through a subscription model, deemed cyber-as-a-service, that will allow Raytheon “to deliver security faster and at a lower total cost,” according to John DeSimone, Vice President of Cybersecurity and Special Missions at Raytheon’s Intelligence, Information, and Services (“IIS”) segment.  With government spending at all-time highs, Raytheon’s decision to collaborate with innovative commercial companies could give it a serious competitive advantage as the demand for departmental IT overhauls continues to grow.

On Thursday, the senate passed a bill that solidifies the role of the Department of Homeland Security’s (“DHS”) Cybersecurity and Infrastructure Security Agency (“CISA”).  Formerly known as the National Protection and Programs Directorate (“NPPD”), the agency was rebranded amid increasing cyber threats and tasked with securing federal networks and protecting critical infrastructure.  The elevation of CISA comes in the wake of a long line of cyber breaches, including alleged Russian meddling in the U.S. election in 2016 and the recent Chinese hardware hack that made its way into Apple and Amazon Web Services’ data center equipment.  This move, coupled with the recent passage of the Cyber Deterrence and Response Act in September, further reinforces U.S. prioritization of combatting the increasing cyber vulnerability of federal agencies and commercial companies as they modernize.

Transactions

Air Transport Services group, Inc. has agreed to acquire Omni Air International, LLC, a provider of airline and charter services for commercial and government clients.  The transaction is worth an estimated $845 million.

Artech Information Systems, LLC has acquired The Talent & Technology Solutions Business Unit of CDI Corporation, a provider of IT and engineering talent sourcing services and technology solutions to clients across North America.  Terms of the deal were not disclosed.

Behrman Capital has acquired kSARIA, a provider of mission-critical connectivity solutions for the aerospace and defense end markets.  Terms of the deal were not disclosed.

Bel Fuse, Inc. has acquired BCMZ Precision Engineering Limited, a provider of precision machined components to customers in the automotive, aerospace, defense, telecommunications, fiber optic, and medical industrial sectors.  Terms of the deal were not disclosed.

Bytecubed, LLC has acquired InterKN, a provider of proprietary technology platforms that connect enterprise buyers with innovative suppliers by dynamically surfacing available funding, technology needs, and data insights.  Terms of the deal were not disclosed.

Gulfstream Aerospace Corp. has acquired a manufacturing line of The Nordham Group, Inc., a provider of nacelles for the Gulfstream G500 and Gulfstream G600.  Terms of the deal were now disclosed.

Enlightenment Capital has made a strategic investment in Emagine IT, Inc., a provider of information technology services, with a focus on cyber, data analytics, and cloud, to government and commercial customers.  Terms of the deal were not disclosed.

Hilcrest Holdings, Inc., in partnership with Akoya Capital, LLC, has acquired Evolver, Inc. and eVigiliant Security, merging the two to create Converged Security Solutions (“CSS”), a provider of comprehensive converged security managed services solutions spanning cyber and physical security.  Terms of the deal were not disclosed.

Standex International Corp. has acquired Regional Mfg. Specialists, Inc. (d.b.a. Agile Mechanics), a provider of high-reliability magnetics, including transformers, inductors, and coils for mission critical applications for blue chip OEMs.  The transaction is worth an estimated $39 million.

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