Industry Week in Review – September 28, 2018

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KippsDeSanto & Co. Industry Week in Review – September 28, 2018

Summary

Boeing has been awarded a $9.2 billion contract from the Air Force to supply next-generation training jets. Furthermore, commercial technology companies continue to penetrate into the government contracting market. This week the Air Force announced it will award AT&T and Microsoft cloud Other Transaction Authority (“OTA”) contracts worth up to $121.7 million.

Aerospace & Defense Update

The Air Force announced that it had selected a bid by a Boeing-Saab partnership for the award of a $9.2 billion contract to supply next-generation training jets.  This is expected to be the Air Force’s last major aircraft procurement opportunity for the foreseeable future.  The Air Force plans to purchase 351 T-X aircraft, 46 simulators, and associated ground equipment with an option to buy up to 475 aircraft and 120 simulators.  The new aircraft will provide Air Force pilots with critical training capabilities required to increase operational efficiency.  Boeing’s award is its third major contract victory since August, following an $805 million Navy contract to build four MQ-25 unmanned tankers and a $2.38 billion Air Force contract to manufacture Huey replacement helicopters.

Boeing and Lockheed Martin’s joint venture, United Launch Alliance (“ULA”), has chosen Jeff Bezos’ space industry startup, Blue Origin, to provide its BE-4 engine for ULA’s upcoming Vulcan rocket.  The first launch of ULA’s Vulcan is tentatively scheduled for 2020, but testing and final certification may push back that date.  ULA estimates the project will create over 20,000 direct and indirect jobs. The potential billion-dollar agreement is an important stepping stone for Blue Origin as it seeks to become a major military launch provider.  Blue Origin’s penetration into the military launch systems market comes amid significant military and commercial activity in the space industry.  The Air Force is seeking to procure a wider range of lower-cost, more diverse launch systems, providing private sector billionaires such as Bezos and Elon Musk an opportunity to expand their presence in the growing space launch markets.

Government Technology Solutions

Commercial technology players continue the push to gain significant presence in the government contracting market, a strategy reinforced by Amazon CEO Jeff Bezos’ presence at Wednesday’s annual Air, Space and Cyber Conference. Mr. Bezos used the platform to encourage the government to leverage more commercial technology, which tends to provide a broad range of solutions to a diverse population of customers, rather than buying what he views as more narrow, costly solutions from traditional federal contractors. The main discriminator for commercial entities, according to the Amazon CEO, is the number of co-customers and strong ecosystem of users they serve that constantly drive innovation and the product forward. The recent wave of large federal contract wins by commercial companies suggests agencies recognize the benefits Bezos alluded and are increasingly becoming more open to adopting commercial technology for their modernization requirements. Amazon is not the only successful commercial player in the federal contracting space, however; the Air Force announced this week it will award AT&T and Microsoft $121.7 million in cloud Other Transaction Authority (OTA) contracts in an effort to modernize IT infrastructure and create a more efficient workforce within the department. Furthermore, commercial contractors are not only winning awards but also beginning to exert influence and earn meaningful seats at the industry table. This week, White House officials announced they will host representatives from IBM, Alphabet Inc., and AT&T on Monday for a quantum information science (“QIS”) summit as agencies continue to look towards NextGen solutions to improve overall efficiency and mission delivery. As the 2018 government fiscal year draws to a close, commercial companies should expect to see the uptick in market share continue moving into 2019.

Transactions

A portfolio company of H.I.G. Capital has acquired Iron Bow Technologies, LLC, a provider of information technology solutions worldwide that serves clients in the government, healthcare, higher education, legal, and non-profit industries. Terms of the deal were not disclosed.

L3 Technologies has acquired ASV Global, a provider of unmanned surface vessel and autonomous vessel control systems

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Industry Week in Review – September 21, 2018

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KippsDeSanto & Co. Industry Week in Review – September 21, 2018

Summary

Increased defense spending continues to be a primary emphasis for the federal government.  Multiple branches of the military have received or will receive increased funding in the foreseeable future.  Furthermore, IT modernization and heightened security continues to be an ongoing area of focus for the both the commercial and federal end markets.

Aerospace & Defense Update

U.S. Army weapons and munitions technology development is receiving a large-scale cash injection in the recently passed GFY2019 spending bill, which was passed much earlier this calendar year than in 2018.  (“RDT&E”) dollars for weapons and munitions technology increased by $343 million in the bill, representing more than the $40 million in RDT&E funding that the Army had previously requested for 2018.  Even though the Army’s budget request had dropped in February of this year, the service has been proactive by forming cross-functional teams to tackle top modernization priorities.  These teams are essential to rapidly modernize forces to go up against adversaries such as Russia and China with top priorities being long-range precision munitions and small unmanned aircraft systems.

The U.S. Air Force estimates that creating a Space Force will cost a total of approximately $13 billion over the next five years, including an initial $3 billion cost to start up this program.  The proposal, put forth by the Air Force to add a sixth branch of the military, estimates that more than 13,000 personnel will be needed on top of existing space operators to help stand up the Space Force.  In addition, the proposal estimates that the Space Force headquarters would be established in GFY2020, and the services would begin transferring the space personnel and programs the following year.  Under the proposal, there is a possibility of re-integrating the intelligence community within the newly-formed military space community through the use of the National Reconnaissance Office.

Government Technology Solutions

In the ongoing quest for federal IT modernization and security, Microsoft and Amazon have both ramped up their federal cloud pursuits to capture part of this burgeoning market.  Following the integration of Microsoft’s on-premises application software—Azure Stack—with the Azure Government Cloud in August, the Seattle-based software company intends to attract public sector clients with a hybrid cloud approach that addresses latency and connectivity locally.  Along with these capabilities, Azure aspires to accelerate the IT modernization timetable, ensuring that “applications can be moved without making any changes in code, DevOps tools, processes, or people skills.”  Not to be outdone, Amazon Web Services (“AWS”) established a two-part program to guide and facilitate government customers’ transitions to Amazon’s cloud platform.  Amazon understands the inherent competition in such a largescale overhaul and responded to Azure’s announcement with the AWS Public Sector Partner Transformation Program, a 110-day initiative aimed at moving its clients to the cloud.  As the market for modernization continues to heat up, signs point to a showdown between Amazon and Microsoft for meaningful federal cloud market share.

The American Council for Technology and Industry Advisory Council (“ACT-IAC”), a partnership that strives to modernize the government via IT implementation, held a meeting this Tuesday which assessed the potential impacts of automating government agencies’ processes.  The biggest challenge is not the automation itself, but rather the optimization of legacy processes required beforehand, according to General Services Administration (“GSA”) senior advisor Ed Burrows.  Once implemented, however, time and cost savings could be significant.  For National Aeronautics and Space Administration (“NASA”), adopting a robotic process automation (“RPA”) for the agency’s grants management system has resulted in $50,000 in savings so far, on an initial investment of only $7,000.  Further RPA initiatives at NASA are expected to continue to eliminate low-value manual work—efforts the Trump administration deems inefficient and dated.  Shifting away from time-intensive, manual work and towards automation to focus on high-value tasks could potentially attract more technical and skilled graduates into the government space workforce, as evident in initiatives like Harvard’s “Code It Forward” program, which sponsored fellowships performing high-end, “civic tech” work at six federal agencies this past summer.

Transactions:

AEVEX Aerospace, a portfolio company of Trive Capital, has acquired Special Operations Solutions, LLC (“SOS”), a provider of ISR platform modification engineering, custom system design, software development, flight test services and processing, exploitation, and dissemination (“PED”) technical support for special operations in highly complex environments. The terms of the transaction were not disclosed.

BBA Aviation plc has agreed to acquire Firstmark Corp., a provider of highly engineered, proprietary components and subsystems for the aerospace and defense industries.  The deal is worth an estimated $97 million.

Braidy Industries, Inc. has acquired NanoAI, LLC, a provider of the design, development, and commercialization of high-end performance aluminum alloys for a diverse set of industries.  The terms of the transaction were not disclosed.

Desser Holding Company LLC, a portfolio company of Graham Partners, has acquired AOG Aviation Spares, LLC and Seinus, LLC, providers of component repair, overhaul services, and replacement PMA parts to airline operators.  The terms of the transaction were not disclosed.

Kaiser Aluminum Corp. has acquired Imperial Machine & Tool Co., a provider of multi-material additive manufacturing and machining technologies for aerospace and defense, automotive, high-tech, and general industrial applications.  The terms of the transaction were not disclosed.

Modern Aviation, a portfolio company of Tiger Infrastructure Partners, has acquired the Centennial Airport assets of Xjet Holdings, LLC, an FBO with more than 50,000 square feet of climate-controlled hangar accommodation.  The terms of the transaction were not disclosed.

NewSpring Holdings LLC, the holding company of NewSpring, has acquired The Sentinel Company, a provider of mission-focused consulting and technology-enabled solutions to customers within national security domains. Terms of the deal were not disclosed.

Planned Systems International has acquired KINEX, Inc., a provider of mission-critical technology, modeling and simulation, software development, cybersecurity and data solutions to the Department of Defense (“DoD”) and Intelligence Communities.  The terms of the transaction were not disclosed.

Snow Phipps Group has acquired Blackhawk Industrial Distribution, Inc., a provider of cutting tools, abrasives and industrial MRO products used in manufacturing, aerospace & defense, energy, and many other diverse markets.  The terms of the transaction were not disclosed.

System One has acquired TPGS, a provider of software engineering and IT consulting for the Department of Defense and intelligence agencies. The terms of the transaction were not disclosed.

Timken Co. has acquired Rollon Group, a provider of the design and manufacture of engineered linear guides, telescopic rails, and linear actuators used in a wide range of industries including the aerospace industry.  The terms of the transaction were not disclosed.

Vision Technologies Aerospace, Inc. has acquired MRA Systems, LLC, a provider of the design, development, production, and sale of nacelle systems and their thrust reversers for both narrow-body and widebody aircraft.  The deal is worth an estimated $630 million.

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Industry Week in Review – September 14, 2018

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KippsDeSanto & Co. Industry Week in Review – September 14, 2018

Summary

Boeing CEO Dennis Muilenburg addresses the production slowdown of 737 aircrafts—announcing the company will ramp up monthly production by almost 10% in 2019.  Congress approved an additional 16 F-35 Joint Strike Fighters, increasing the authorized 2019 total by over 20%.  SAIC’s acquisition of Engility, valued at nearly $2.5 billion, continues the trend of public company government contractors turning to mega-mergers and acquisitions to scale.

Aerospace & Defense Update

At Boeing’s September 12th investor conference, Boeing CEO Dennis Muilenburg appeared confident that 737 aircraft production would recover by year-end with no effect on Boeing’s financial forecasts.  As he has mentioned previously, Muilenburg emphasized that the 737 delivery slowdown stemmed from a combination of the latest production-rate ramp-up occurring simultaneously with the production line shift to the MAX variant of the 737.  In response to a possible slowdown, Boeing has added about 600 new 737 production workers in recent months, and these workers are expected to stay on as Boeing looks to ramp up its a production rate from 52 aircraft to 57 aircraft per month by next year.  Muilenburg expressed that the 737-aircraft line will continue its year-over year growth and Boeing will not need to alter its 2018 forecast.

Congress has approved the addition of another 16 F-35 Joint Strike Fighters on top of the 77 authorized by the 2019 defense policy bill.  As usual, appropriators used their annual defense spending bill to offer tweaks to the existing shopping list for military hardware from the previous version of the bill, which President Trump signed into law last month.  This new compromise also adds an extra littoral combat ship and six more Bell-Boeing V-22 Ospreys to build a stronger military force moving forward.  In all likelihood, these measures are expected to pass before the start of the fiscal year on October 1st to avoid the optics of a government shutdown ahead of upcoming midterm elections in November.

Government Technology Solutions

This past week, Science Applications International Corporation (“SAIC”) announced its intentions to acquire Engility Holdings, Inc. (NYSE:EGL).  Engility was spun out from L3 Communications, Inc. (“L3”) in 2012 and proceeded to acquire Dynamic Research Corporation (“DRC”) and The Analytic Sciences Corporation, Inc. (“TASC”) in 2014 and 2015, respectively.  SAIC’s acquisition of Engility, valued at nearly $2.5 billion, will position SAIC as the third-largest contractor by revenue in the Government Technology Solutions space.  SAIC is the latest in a long line of public company government contractors who have turned to mega-mergers and acquisition in order to achieve increased scale and meaningful cost synergies in today’s active, yet competitive, marketplace.  Other notable recent deals of scale in the industry include: DXC Technology’s three-way merger with Vencore and KeyPoint creating Perspecta, Inc., General Dynamics’ $9.7 billion acquisition of CSRA this April, and Leidos’ $4.6 billion acquisition of Lockheed Martin’s IT business in 2016.  This race to acquire scale, contracts, and capabilities, stoked by increased government spending and favorable budgetary dynamics, is expected to continue in the near to medium-term.  In an investor conference call, SAIC CEO Anthony Moraco said that the combination of SAIC and Engility is a strategic move that “take[s] advantage of near-term market opportunities in this federal market environment, but also provide[s] downside protection against perturbations in the longer-term funding profiles of individual customers.”  While integration will likely be the initial focus, the union of these large service providers will also provide SAIC access to Engility’s security cleared labor force.  Adding these extra cleared workers will boost SAIC’s ability to compete for new work and allow it to pursue larger contracts as a result.  Like SAIC, other large government contractors are turning to M&A to broaden capabilities and customer portfolios in order to access more of the broader market.

Big Movers

Triumph Group, Inc. (up 11.2%) – Share prices were up this week due to winning two contract extensions for HELLFIRE Romeo Missile Components, which are expected to generate more than $11 million in revenue.

SAIC (down 11.5%) – Share prices were down this week following an announcement that SAIC has agreed to acquire Engility Holdings, Inc. and will assume Engility’s $900 million in debt.

Transactions

SAIC has agreed to acquire Engility Holdings, Inc., a provider of technical services to the U.S. Department of Defense, U.S. Department of Justice, U.S. Department of State, Federal Aviation Administration, Department of Homeland Security, and space-related and intelligence community agencies.  The deal is worth an estimated $2.5 billion.

Argosy Capital has acquired Capewell Aerial Systems, a provider of engineering products for aerial delivery, life support, and tactical gear for military, law enforcement, and humanitarian agencies.

Coriolis Composites has acquired MF Tech, a provider of robotic filament winding, a technique used to manufacture a wide variety of composite parts.

TAE Aerospace Pty. Ltd acquired Kiddie Aerospace and Defense Australia Pty Ltd., a provider of automatic fire extinguishing systems for military vehicles used by armed forces.

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Industry Week in Review – September 7, 2018

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KippsDeSanto & Co. Industry Week in Review – September 7, 2018

Summary

Near the end of the government fiscal year, budgetary spending remains a primary emphasis for commercial and federal enterprises.  Although Boeing has secured a significant increase in orders, it must deal with an excessive backlog and simultaneously meet customer demands.  Also, the U.S. continues to firm up its military relationship with India.  In the government technology landscape, modernization remains at the forefront especially with issues of cybersecurity and federal agencies must deal with the “use-it-or-lose-it” spending binge as the fiscal year closes.

Aerospace & Defense Update

A surging global base of airline passengers, with more than 100 million new passengers per year, has created nearly $500 billion worth of new plane orders for Boeing.  This increased backlog had led to logistical challenges for Boeing, especially with respect to storage of unfinished aircraft as the company attempts to keep pace with robust demand.  As a result of engine and fuselage supply bottlenecks, Boeing has several unfinished 737s at its production facilities in Seattle and lacks sufficient factory space to store them.  The company is currently relying on local airports to host excess aircraft to provide short term relief, but it does not plan on this being a long-term solution.  Boeing’s management team is developing an overarching recovery plan to match production rates with deliveries to settle these challenges and prevent future production issues.

On Thursday, the United States and India signed a breakthrough security accord that would allow India to purchase advanced U.S. weaponry.  With this agreement, India wants to participate in joint military exercises with the U.S. and increase its role in regional naval security.  The U.S. sees its alliance with India as a critical measure in countering growing Chinese influence in the region.  This deal caps off a budding military relationship between the two countries; over the past decade, weapons sales from the U.S. to India increased from relatively insignificant amounts prior to 2008 to a cumulative $15 billion by 2018.  India has already purchased Apache and Chinook helicopters, maritime patrol aircrafts, and M777 howitzers from the U.S. Looking ahead, India is expected to order several F-16 and F-18 fighter jets from Lockheed Martin to modernize its aircraft capabilities, which would replace its existing Russian models.  

Government Technology Solutions

On Thursday, the Justice Department charged Park Jin Hyok, a North Korean spy, with conspiracy to commit fraud due to his involvement in both the attack on Sony in 2014 and the Wannacry ransomware attack in 2017, along with a series of other cybercrimes.  The accusations came the day after the House of Representatives passed the bipartisan Cyber Deterrence and Response Act of 2018, which calls on the White House to publicize known advanced persistent threat (“APT”) groups in an effort to deter future cyberattacks from state-sponsored operatives.  These events substantiate DoD CIO Dana Deasy’s emphasis on the importance of cybersecurity at the 9th Annual Billington Cybersecurity Summit on Thursday.  Deasy said that while cloud, AI, and Communications, Command, and Control (“C3”) technologies are key focus areas for modernizing the Department, their integration “will only be fully successful with a robust cybersecurity environment.”  As government agencies continue to integrate forward-leaning solutions such as cloud and AI, cybersecurity implementation will continue to be the foundation and first step in these modernization efforts.

The potential increase in year-end government spending continues to be a topic of debate as the government’s fourth quarter draws to a close.  Billions of dollars remain unallocated, and the “use-it-or-lose-it” mentality of budget authorities has received considerable criticism.  A study by the American Economic Association (“AEA”) hints that this yearly spending binge typically leads to low-value investments and a waste of government funds.  Although these spikes in federal spending are not uncommon, this year could see unprecedented levels of fourth quarter spending, as some top federal agencies have yet to spend as much as 40% of their annual budget.  Last year, federal agencies spent nearly five times their average weekly spend in the last week of 2017.  To curb the potential waste of government funds, several senators contacted CFOs at 13 agencies, warning them to re-evaluate their spending habits and provide evidence against frivolous spending.  While this action is unlikely to have a material effect on government spending for the current fiscal year, a more conscious effort to change this established spending trend could shift government contracting and budgeting landscapes in future years.

Transactions:

ByteCubed, LLC has acquired CHIEF, a provider of brand, technology, and communications solutions to government agencies, nonprofits, and corporations.  Terms of the deal were not disclosed.

CORE Industrial Partners, LLC has acquired Midwest Composite Technologies, Inc., a prover of additive manufacturing of prototype and low-volume production components for a variety of end markets, including the aerospace market.  Terms of the deal were not disclosed.

Coriolis Composites, a subsidiary of Coriolis Group has acquired MF Tech, a provider of robotic filament winding, a technique used to manufacture a wide variety of composite parts.  Terms of the deal were not disclosed. 

Gooch & Housego plc has acquired Gould Technology, LLC., a provider of research, development and manufacturing of highly reliable fiber optic components and integrated assembly solutions.  The deal is worth $16.4 million.

One stop Systems, LLC has acquired Concept Development, Inc., provider of custom high-performance computing systems for airborne in-flight entertainment (IFE) systems.  CDI’s capabilities include electrical, mechanical and software design.  The deal is worth $5.9 million.

Polaris Industries, Inc. has agreed to acquire WSI Industries, a provider of complex, high-precision parts for a wide range of industries.  The deal is worth $23.9 million.

PrecisionHawk, Inc. has acquired InspecTools, Inc., a provider of high-fidelity machine vision software and data analysis tools built for the renewable energy market.  Terms of the deal were not disclosed.

PrecisionHawk, Inc. has acquired HAZON, Inc., a prover of extensive aviation experience, standards-based operating procedures, certified drone flight operations, inspection services.  Terms of the deal were not disclosed.

Transcat, Inc. has acquired Angel Instrumentations, Inc., a provider of calibration services including RF & electronic test equipment, physical, dimensional, thermal, flow and torque calibrations.  Terms of the deal were not disclosed.

Valence Surface Technologies has acquired Triumph Processing, Inc., a provider of metal finishing on parts up to 110 ft in length and 14 feet in width / depth.  Terms of the deal were not disclosed.

Big Movers: 

Engility Holdings, Inc. (up 4.4%) – Share price were up this week following news that the Company won a prime spot and two task orders on the Army Software Engineering Services contract.

The KeyW Holding Corporation (up 4.5%) – Share prices were up this week after the company was awarded a short-term research, development, and design-related contracts, highlighting KeyW’s ability to develop affordable and timely sensing solutions.

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Industry Week in Review – August 31, 2018

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KippsDeSanto & CO. Industry Week in Review – August 31, 2018

Summary

Modernization within the government contracting arena continues to be a primary emphasis for both commercial and federal enterprises. Boeing and Lockheed Martin have made significant investments in their capabilities to best fulfill fluctuating customer demands. In the government landscape, entities including the VA and Coast Guard are upgrading their IT infrastructure and software systems to become operationally more efficient and effective.

Aerospace & Defense Update

Lockheed Martin’s venture capital business doubled down on its 2017 investment in Ocean Aero, a producer of autonomous and unmanned undersea and surface level vehicles, through a multi-million-dollar strategic investment.  The additional capital will enable Ocean Aero to scale its production and widen its footprint within its growing customer base, especially with respect to its ocean observation and data collection capabilities.  Considering that Navy officials have lobbied to increase spending for unmanned systems to $3.7 billion in fiscal 2019, the industry is primed for significant growth opportunities and will continue to be a high-priority area for aerospace and defense companies.

Satellite producers are transitioning away from the production of geosynchronous satellites, now preferring small satellites due to their increased cost efficiencies, information relay speeds, and resiliency to harsh space conditions.  By 2028 over 7,000 smallsats, worth nearly $38 billion, are expected to be launched, marking over a 600% proliferation from the 1,200 units launched throughout the past decade.  Over the last few weeks, both Lockheed Martin, with its investment in Terran Orbital, and Boeing, with its acquisition of Millennium Space Systems, have expanded their smallsat presence in an attempt to keep pace with evolving market dynamics. 

Government Technology Solutions

In a positive sign for the Veteran Affairs’ (“VA”) and the Department of Defense’s (“DoD”) Electronic Health Record’s (“EHR”) overhaul, VA Secretary Robert Wilkie affirmed on Wednesday the department’s commitment to the modernization initiative. Through the VA’s $10 billion MHS GENESIS contract, the department is seeking to create a continuous healthcare record for service people and Veterans, which it hopes will minimize administrative inefficiencies.  This initiative is part of a broader effort at the VA to improve customer service, a point Mr. Wilkie also highlighted during his address to the American Legion this week.  The VA has also launched the Office of Electronic Health Record Modernization to oversee the fulfillment of Cerner’s modernization activities. Not all at the VA are aligned with this effort, however, as the Office of EHR Modernization’s chief health information officer and implementation lead both resigned last week, citing disagreements over the direction of the program. While these resignations may create some uncertainty, the department plans to press forward with the initiative, indicating yet another instance of federal departments making substantial IT investments to upgrade cumbersome legacy systems in the name of more efficient and effective mission delivery.

The trend of government agencies increasing their reliance on commercial IT companies for higher-end, next generation IT (“NGIT”) solutions continues as the Coast Guard considers commercial software as a replacement for its auxiliary management system. The current system, AuxData, accounts for the operational and administrative activities of its auxiliary members, including safety patrols, search and rescue, aids to navigation, public education, and public affairs. The information obtained by AuxData is then used to make budgetary preparation and manage operations. The Coast Guard is seeking to relocate this data to the cloud, in an effort to make the software more efficient and accessible than their current system, which has become cumbersome and cost-inefficient over the years. Despite the fast-growing IT market, the Coast Guard’s consideration of a commercial solution is another example of large commercial IT companies like Amazon, Microsoft, IBM, and Google becoming key government solutions providers for front-end implementation, while traditional government contractors continue to provide back-end operations and maintenance support. 

Transactions:

Inertial Aerospace, a subsidiary of Heico Corp, acquired Optical Display Engineering, LLC, a provider of LCD screen and display module repairs for aviation displays used in civilian and military aircrafts. Terms of the deal were not disclosed.

MAG Aerospace, a portfolio company of New Mountain Capital, has acquired Ausley Associates, a provider of advanced procurement and program development services, as well as unmanned aviation systems lifecycle and configuration management to the NAVAIR community. Terms of the deal were not disclosed. 

Omni-Lite Industries Canada, Inc. has agreed to acquire Monzite Corporation, a provider of multi-chip microelectronic components for high performance electronic sensors. Terms of the deal were not disclosed.

SpeedCast International Limited has agreed to acquire Globecomm Systems, Inc., a provider of satellite-based managed network solutions to government, communications service providers, commercial enterprises, and media and content broadcasters in the United States, Europe, South America, Africa, the Middle East, and Asia. The deal is worth an estimated $135.0 million.

Big Movers: 

American Outdoor Brand (up 45.4%) – Share price were up this week as company announced it had beat earnings per share estimates for the quarter by over 80%.

KeyW (up 6.4%) – Share prices were up this week after company announced it secured a $$135 Million Remote Sensing, Command Control Communications and Computer IDIQ Contract from the GSA

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Industry Week in Review – August 24, 2018

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Industry Week in Review – August 24, 2018

Aerospace & Defense Update

While the Pentagon is increasing its focus on intercepting hypersonic and cruise missiles to keep pace with Chinese and Russian advances, the Missile Defense Agency (“MDA”) is continuing to invest in its ballistic missile defense (“BMD”) program.  Currently, the MDA is looking for new ways to improve its BMD by utilizing Lockheed Martin’s F-35 to be used as a sensor and also deliver kinetic weapons to intercept such ballistic missiles.  While space-based interceptor technology might be on the horizon to protect against ballistic missiles, the technology could be very costly and take a long time to fully develop.  Therefore, the MDA is prioritizing air, land, and sea- based terminal interceptors such as the Aegis Ashore site for the time being.

From 2012 to 2017, more than 1,000 small satellites were launched into orbit, however this number is to be significantly surpassed in the next couple years as the Federal Communication Commission has approved the deployment of 5,264 small satellites.  These new satellites are manufactured primarily by four main companies: OneWeb, Space Norway, Telesat, and SpaceX.  Currently, the satellites are primarily used for Earth observations, but that business is expected to be eclipsed as broadband operators roll out mega-constellations to provide services such as high-speed internet, weather forecasting, encryption keys, and even extrasolar planet detection.  This shift in space technology marks an important inflection point moving forward regarding the future of the space industry.

Government Technology Solutions

On Wednesday, Booz Allen Hamilton (“Booz Allen”) was awarded a six-year, $1.03 billion task order to provide agency-tailored cyber platforms for the Continuous Diagnostic and Mitigation’s (“CDM”) Dynamic and Evolving Federal Enterprise Network Defense (“DEFEND”) program.  This task order, under the General Services Administration’s (“GSA”) Alliant contract, engages Booz Allen to provide cyber tools for the five “Group D” agencies: GSA, Department of Health and Human Services, NASA, Social Security Administration, Department of the Treasury and the US Postal Service.  Booz Allen’s ability to provide “monitoring-as-a-service” dashboards and solutions will allow these agencies to understand, detect, and make informed decisions to combat potential cyber threats.  This award is Booz Allen’s second on the DEFEND program, having previously won a task order to provide similar services to the “Group B” agencies in February.  With these two wins, Booz Allen now oversees approximately 80% of .gov web domains, translating to about 1.75 million users and establishing the firm as a pre-eminent federal cybersecurity service provider.

In recent weeks, the Pentagon’s Joint Enterprise Defense Infrastructure (“JEDI”) single-source cloud contract has gained significant attention, prompting a pre-award protest from Oracle, filed on August 6.      Much of the controversy stems from the fact that the entirety of the $10 billion JEDI contract is being structured as one award given to a single company.  Other cloud providers expected to compete for the JEDI contract are comprised mostly of large, commercial IT companies, among them Microsoft, IBM, and Google.  These commercial IT companies have become more prominent and increasingly competitive in the federal contracting space in recent years­, highlighted in part by awards like JEDI and Amazon’s win of a $600 million private cloud computing contract with the CIA in 2013.  Over the last several years, the increased presence of these major commercial IT companies has pushed many government contractors to partner with these commercial firms to perform back-end services work rather than compete directly against them head-to-head.  Per former CSRA CEO Larry Prior: “When you’ve got an Oracle and an Amazon squaring off, a lot of us just want to get out of the bursting radius and be prepared to support customers whichever way they go.”

Big Movers

CACI International Inc. (up 3.3%) – Share prices were up this week due to the completion of its acquisition of the systems engineering and acquisition support services business of CSRA LLC, a unit of General Dynamics Information Technology Inc. 

Safran S.A. (up 4.8%) – Share prices were up this week after production plans for its LEAP engine are estimated to be higher than previously thought.

Transactions

An unidentified private equity firm has agreed to acquire the Federal Government IT Services Business (“The Federal Business”) of Black Box Corp., a provider of leading-edge data and physical network solutions, including device control and storage, visualization, collaboration, and cabling, for civilian agencies, the armed services, state and local governments, and educational institutions.  The deal is worth an estimated $75 million.

Communications & power Industries (CPI) has acquired related companies Orbital Systems, Ltd. and Quorom Communications, Inc., both are providers of design and manufacture antenna positioners and front-end system products that play a key role in communications applications.  Terms of the deal were not announced.

Tech Mahindra Ltd. has agreed to acquire Inter-Informatics spol. S.r.o, a provider of aerospace design engineering services.  The deal is worth an estimated $6.3 million.

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Industry Week in Review – August 17, 2018

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Industry Week in Review – August 17, 2018

Aerospace & Defense Update

Lockheed Martin was awarded a $2.9 billion contract to produce three next-generation geosynchronous nuclear missile-warning satellites.  This follows Northrop Grumman win of a contract for two polar-orbiting satellites.  Together, the two sole-sourced contracts mark the first major development for the construction of the Air Force’s Next-Generation Overhead Persistent Infrared (“OPIR”) constellation, which is set to supplant the existing Space-based Infrared Satellite System (“SBIRS”) beginning in 2023.  The OPIR constellation system boasts improved missile warning capabilities that more adequately suited to combat the world’s evolving threats.  The Air Force is now targeting a 2029 completion date, four years ahead of the original timeline.

The global space industry has continued its rapid growth, expanding to $384 billion in 2017, and nearly doubling in value over the last decade.  The industry is expected to reach $1 trillion in value by 2030.  The private sector is driving much of this growth, with companies such as Blue Origin and SpaceX investing millions of dollars to gain market share in the growing and largely untapped space industry.  The growth and high expectations have rendered an uptick in commercial spacecraft launches from U.S based spaceports over the past few years.  In the U.S.’s most active states (California, Florida, and Texas), launches have increased from 4 in 2012 to 21 in 2017 and are on target for 25 launches in 2018.  Existing spaceports are undergoing massive expansion to accommodate this increasing launch cadence, with plans for new launch site locations on the horizon.

Government Technology Solutions

On Thursday, CACI closed its $84 million acquisition of CSRA’s Systems Engineering and Acquisition Support Services Business Unit (“SEABU”) from General Dynamics (“GD”), who was forced to divest the contracts due to a conflict of interest with its US Navy (“USN”) ship operations.  The business that CACI acquired provides complementary engineering services for the USN to its legacy USN work.  The acquisition comes in the aftermath of a bidding war between GD and CACI for CSRA earlier this year, which GD ultimately won.  CACI expects the acquisition to add $150 million in revenue to its 2019 fiscal year, increasing estimated annual revenue to approximately $4.8 billion.  Additionally, CACI intends to grow its engineering work and expand its solutions and services offerings with the USN through SEABU.  Notably, the deal will position CACI to capture part of the USN’s accelerated shipbuilding timeline, a result of the growing importance of reconnaissance, maritime border security, and nuclear deterrents amidst Chinese and Russian developments in undersea technology and fleet capacity.

With legacy customer relationship management (“CRM”) systems becoming outdated and cumbersome, federal agencies increased attention to improving back office functions and overhauling the overall customer experience.  Similarly, higher GFY18 appropriations, coupled with pressure to respond more quickly to proposals, have incentivized agencies to allocate funding towards modernizing their CRM systems.  A 2018 Deltek study on the state of the Government IT market indicates that 26% of surveyed contractors are investing in their CRM capabilities, in order to be able to deliver solutions to federal agencies in need.  This emphasis on modernizing CRM tools in the hopes to be more agile in the bidding process should pave the way for agencies to both deliver a better customer experience and allocate more time and resources to their mission performance.

Big Movers

Triumph Group, Inc. (down 9.1%) – Share prices were down this week due to first quarter fiscal year 2019 earnings coming in at 34 cents per share, missing the Zacks Consensus Estimate of 36 cents by 5.6%.

ICF (up 6.2%) – Share prices were up this week due to an announcement that ICF’s CRM division was awarded multiple new and incremental retainer funding during the first half of 2018 to provide loyalty marketing and CRM services.

Transactions

Boeing has agreed to acquired Millennium Space Systems, Inc., provides agile, flight-proven small-satellite solutions. Terms of the deal were not announced.

CACI International, Inc. has acquired the Systems Engineering & Acquisition Services Business Unit (“SE&A BU”) of CSRA LLC, a provider of comprehensive engineering services to the U.S. Navy.  The deal is worth an estimated $84 million.

Lentech, Inc. acquired Edge Space Systems, Inc., provides aerospace thermal engineering solutions for space and launch systems, high altitude balloon missions, and terrestrial instruments. Terms of the deal were not announced.

Zen Technologies Ltd. has agreed to acquired Unistring Tech Solutions Pvt. Ltd., develops electronic warfare (EW) solutions, advanced communication systems for defense, telemetry systems and simulators for radar and EW system evaluation. Terms of the deal were not announced.

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Industry Week in Review – August 10, 2018

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Industry Week in Review – August 10, 2018

Aerospace & Defense Update

The British Defense Security Organization reported that British defense companies secured exports valued at £9.0 billion ($11.6 billion) in 2017, recording a 53% increase over 2016 exports.  This is the nation’s second largest export success in the last decade and moved the UK to the third largest defense exporter in the world.  In line with positive trends, the United States achieved its highest market-share ever, estimated at 53% of global defense exports, with Russia following behind at 16% and the UK at 12% in 2017.  This increase in the global defense export market reflects uncertainties regarding on-going strategic threats, driving demand and rising prices in the sector.  The British air sector drove defense exports with notable equipment sales related to the F-35 strike jet program, Rolls-Royce engine sales to Germany, and work with Turkey on a possible next-generation fighter jet.

The Pentagon has sent Congress a report proposing a four-pronged approach for the U.S. military’s future in space that includes the creation of a Space Force as a sixth branch of the armed forces.  As Russia and China emerge as potential U.S. adversaries in space, the formation of a Space Force has increased in prominence.  The report’s first phase is the Department of Defense (“DoD”) would establish a Space Development Agency to develop and field space capabilities.  Next, the Pentagon would develop a Space Operations Force to support combatant commanders.  The third prong is the DoD would create the governance, services, and support functions of the Space Force to be approved by Congress.  And finally, the Pentagon would create the U.S. Space Command, led by a four-star general.  The DoD recommends that the president revise the plan to create the new U.S. Space Command by the end of 2018 and evaluate the need for any additional personnel and budget elements by then.

Government Technology Solutions

The Joint Enterprise Defense Infrastructure (“JEDI”) contract continues to be a hot topic of discussion within the government contracting space, given that the contract – which has a $10 billion ceiling value over 10 years – is expected to be single award.  As a result, many industry groups have not shied away from criticism of the Department of Defense (“DoD”).  Of particular note, Oracle filed a pre-award protest with the General Accountability Office (“GAO”) on Monday.  The nature of Oracle’s protest revolves around whether the DoD is acting reasonably and in accordance with procurement laws by looking to make a single award, given the size and nature of the JEDI contract.  With the GAO’s 100-day window to review the protest, this latest development could impact JEDI’s expected September bid due date.

In the latest development of the U.S.-China trade war, China announced it would place a 25% retaliatory tariff on approximately $16 billion worth of U.S. imports.  The announcement follows a recent announcement by the U.S. listing approximately $16 billion of Chinese goods that will be tariffed.  This latest development brings the total amount of Chinese goods that face tariffs in the U.S. to $50 billion, in the wake of U.S. President Donald Trump’s instruction to the U.S. Trade Representative Office to consider tariffing up to $200 billion in Chinese products.  China’s most recent tariff announcement targets U.S. passenger cars, motorcycles, medical instruments, materials, and waste products, among others, in a move meant “to defend the nation’s dignity”, per a Chinese state media report.  These updated tariffs have already had severe impacts on the U.S. and Chinese markets as the Chinese Yuan fell 6% to the U.S. dollar and Qualcomm lost a merger opportunity due to Chinese disapproval.  Experts say China’s retaliatory measures may be just the beginning of a much larger trade war as tensions continue to mount.

 Big Movers

Maxar Technologies (down 14.3%) – Share prices were down this week due to a short attack launched as a result of “brazen intangible asset accounting,” despite a big quarterly earnings beat in the second quarter.

 Vectrus (up 15.2%) – Share prices were up this week after revenue increased 24% year-over-year, with 12% growth coming from the Vectrus base business and the remainder coming from the SENTEL acquisition.

Transactions

American Systems Corporation has acquired DDL OMNI Engineering, LLC., a provider of alteration design and installation services; environmental services; materials and structures engineering; program and strategic management; sensor and electronics development; software, web and systems development; Technical Documentation; and Training and Simulation to the Federal Government and commercial customers.  The terms of the deal were not disclosed.

 Avenu Insights & Analytics, a portfolio company of Mill Point Capital, has agreed to acquire the assets and operations of the Local and Municipal Constituent Government Software Solutions business of Conduent Incorporated, a provider of solutions used by jurisdictions to manage service delivery across multiple agencies.  The terms of the deal were not disclosed.

Element Materials Technology Group, a portfolio company of Bridgeport Capital Ltd., has acquired Orbit Industries, Inc., a provider of specialization in ultrasonic, liquid penetrant, magnetic particle and chemical processing for raw materials, semi-finished and finished products, including landing gear components, airfoils and, aluminum wheels.  The terms of the deal were not disclosed.

 Shipbuilder Fincantieri S.p.A. and MERMEC, a portfolio company of the Angel group of Vito Pertosa, has agreed to acquire Vitrociset S.p.A, a provider of training and support in the information and communications technology (ICT) field in the defense and security market, as well as in logistics, transport and space sectors.  The terms of the deal were not disclosed.

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Industry Week in Review – August 03, 2018

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Industry Week in Review – August 3, 2018

Aerospace & Defense Update

One week after the House of Representatives approved the conference report of the National Defense Authorization Act (“NDAA”) for fiscal year 2019, the Senate decisively passed the bill on Wednesday in an 87-10 vote.  President Trump is expected to sign the 2019 NDAA into law later this month.  The bill provides authorization for up to $717 billion in total national defense spending which includes a 2.6% military pay raise; adds 15,600 more troops across the Army, Navy, Air Force, and Marine Corps; and increases aircraft and ship purchases above the President’s initial budget request.  This is the earliest Congress has approved the NDAA since 1978; Congress will now begin preparing legislation for a final defense policy bill, with the goal for it to become law before the beginning of the next fiscal year on October 1st.

The Israeli Air Force is prioritizing the expansion of its Boeing F-15 fleet as part of an effort to better position itself against evolving threats from its two most immediate adversaries – Syria and Iran. Despite its planned acquisition of the Lockheed Martin F-35, Israel is negotiating the purchase of 20-25 F-15s with the U.S Department of Defense.  The Israeli Government views the F-15 as the center of the country’s attacking capabilities and prefers it to the F-35 due to the F-15’s greater flexibility with respect to its ability to be upgraded with advanced, Israeli-developed systems.  Details regarding the specific configuration these F-15s have not been announced, but it is believed that the order may focus on capabilities such as additional missile capacity and special communications pods designed to securely send and receive data from other aircraft.  If the order is eventually placed, it could keep the F-15 production line in operation through 2025.

Government Technology Solutions

This past week the Department of Defense (“DoD”) awarded Booz Allen Hamilton (“BAH”) an $885 million task order to deliver Artificial Intelligence (“AI”) and machine learning capabilities across multiple systems and agencies. This award is indicative of a larger shift in focus by federal agencies towards emerging technologies, as current systems become obsolete and AI in particular provides a vastly accelerated platform to analyze data. The 32% increase in AI, cloud computing, and big data spend by the DoD over the past five years also highlights the federal governments shift towards emerging technologies.  BAH’s CEO, Horacio Rozanski, recently remarked that, “it’s clear that artificial intelligence is an area of focus and an area of investment [for the DoD]”.  Given this shift, buyers in the government services marketplace have increased their focus on acquiring companies that provide emerging technology capabilities and past performance.   A recent example of this is Alion Science and Technology’s recent agreement to acquire MacAulay-Brown, Inc.  Steve Schorer, president and CEO of Alion, stated in a press release announcing the pending transaction that the acquisition provides “inroads into emerging technologies…in electronic warfare, artificial intelligence, cybersecurity, and cloud solutions” for the company.

The Transportation Security Administration (“TSA”) is considering removing the extensive passenger screening process—put in place following the terror attacks of September 11th—currently implemented at smaller airports. The proposal indicates luggage traveling from these airports to major cities for connecting flights should be screened upon arrival to the larger airports that have greater capacities for extensive bag checks. The move is expected to cut costs by over $100 million, with minimal impact to safety risks. The TSA faced heavy criticism following the announcement, however, as some expressed concerns of vulnerability at not only these smaller airports, but also at larger hubs, which often allow passengers to board other flights without re-clearing security. The news comes shortly after an announcement of the TSA’s intention to implement computed tomography (“CT”) scanners—which should allow the TSA to more effectively detect threats within carry-on bags—in 15 major airports. This is good news for passengers, who may not be required to remove their liquids or laptops from carry-on if these changes are implemented. The decision by TSA reveals a preference towards further securing the country’s larger airports, funded in part by the savings generated from reduced security screening procedures at smaller airports.

Big Movers

Mercury Systems (up 17%) – Share prices were up this week after the company’s earnings surpassed Wall Street estimates, in addition to its announcement that it had acquired Germane Systems.

Harris Corporation (up 5.5%) – Share prices were up this week after the company announced that it beat earnings per share estimates for the quarter. Revenue for the quarter increased 8% year over year driven by strong growth in communication systems and electronic systems.

Transactions

Alion Science and Technology Corporation, a portfolio company of Veritas Capital, has agreed to acquire MacAulay-Brown, Inc., a provider of advanced engineering and technology solutions to the Department of Defense, Intelligence Community, Special Operations Forces, and the Department of Homeland Security. KippsDesanto & Co. was the sell-side advisor on the deal. The terms of the deal were not disclosed.

CAE, Inc. has acquired Alpha-Omega Change Engineering, a provider of operational test and evaluation, aircrew training, and engineering support services for U.S. intelligence agencies and the Defense Department through several contracts. The terms of the deal were not disclosed.

ICF International, Inc. has agreed to acquire DMS Disaster Consultants, a provider of pro-active approaches to pre-disaster planning, responding, identifying, and pursuing all eligible projects, using funds from FEMA and the Department of Housing and Urban Development for federal, state, and local agencies. The terms of the deal were not disclosed.

Integrity Applications Incorporated, a portfolio company of Arlington Capital Partners, has acquired Dependable Global Solutions, a provider of cybersecurity and counterintelligence solutions to intelligence and defense customers in the federal government. Terms of the deal of the deal were not disclosed

First Israel Mezzanine Investors, has acquired Aitech Rugged Group, Inc., a provider of embedded computing subsystems and modules for defense, aerospace, and space electronics markets. KippsDeSanto & Co. was the sell-side advisor on the deal. Terms of the deal were not disclosed.

Mercury Systems, Inc. has acquired Germane Systems LC, a provider of rugged servers, computers and storage systems for command, control and information applications. KippsDeSanto & Co. was the sell-side advisor on the deal. The deal is worth an estimate $45 million.

GenNX360 Capital Partners has acquired Precision Aviation Group, a provider of maintenance, repair and overhaul (MRO) and supply chain solutions for fixed and rotary-wing aircrafts serving diverse end markets. KippsDeSanto & Co. was the buy-side advisor on the deal. Terms of the deal were not disclosed.

Vance Street Capital Partners has acquired Jet Parts Engineering, Inc., a provider of proprietary aftermarket replacement components and complementary proprietary component repair services for commercial airline and MRO customers. Terms of the deal were not disclosed.

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Industry Week in Review – July 27, 2018

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Industry Week in Review – July 27, 2018

Aerospace & Defense Update

Numerous aerospace and defense companies announced positive 2Q18 earnings this past week.  Boeing beat EPS estimates by $0.06 (1.8%) and increased revenue 5% year-over year (“YoY”) to $24.3 billion, reflecting a higher volume of commercial deliveries and defense contract volume.  General Dynamics (“GD”) beat EPS estimates by $0.13 (5.2%), while increasing its revenue 19.7% YoY to $9.2 billion.  GD’s strong quarter was driven by a lower tax rate and increased aerospace margins despite the non-recurring costs related to the CSRA transaction.  Lockheed Martin also beat EPS estimates by $0.13 (3.2%) and increased its revenue by 6.6% YoY to $13.4 billion.  Lockheed’s strong revenue and earnings growth was led by its Missile & Fire Control business unit.  Raytheon’s earnings also beat EPS estimates by $0.43 (18.3%) and grew revenue 0.6% YoY to $6.6 billion, reflecting strong growth in domestic bookings.

The House passed its final version of the $716 billion John S. McCain National Defense Authorization Act (“NDAA”) in a 395-to-54 vote on Thursday, sending the bill to the Senate floor for final congressional approval on Tuesday, July 31st.  Earlier drafts of the bill mentioned the shuttering of the Department of Information Systems Agency (“DISA”) and other “fourth estate” agencies, although these agencies were spared in the final version passed by the House.  Lawmakers backed plans for 77 F-35s and authorized $40.8 billion to purchase and repair worn out military aviation equipment. The bill also delayed the delivery of F-35s to Turkey and pushed off President Trump’s plans to create a Space Force as a sixth standalone branch in the military.

Government Technology Solutions

As the Government fiscal year draws to a close, federal agencies have only two months to spend billions of funding dollars allocated under the 2018 spending bill.  While spending pushes are common at the end of every government fiscal year, agencies have even more unspent dollars this year as the budget bill was passed several months late and included significant increases.   Most federal agencies received a budget increase in GFY18 and collectively defense and civilian agencies received $80 billion and $63 billion of net increases, respectively.   Despite being the recipients of greater funding increases, defense agencies are better positioned to spend their end-of-the-year money as they were anticipating such increases and were spending accordingly even before the budget was finalized in March.  Civilian agencies, on the other hand, spent more conservatively before the budget was finalized, as they were expecting budget cuts, which were initially proposed for GFY18.  As a result, contracting obligations at the end of the third quarter revealed that civilian agencies had spent 6% less year-to-date in GFY18 than over the same time period in GFY17, despite receiving a 12% increase in funding.  These dynamics should result in a flurry of contract award activity over the next two months.

On Thursday, the Department of Defense (“DoD”) released the final solicitation for its Joint Enterprise Defense Infrastructure (“JEDI”) contract without changing its award structure.  The $10 billion IDIQ cloud contract will be awarded to a single contractor, with an initial two-year period of performance and option periods extending it to as many as ten years.  The single source nature of the contract was a point of contention throughout the industry; in their April 30th letter to Congress, the IT Alliance for Public Sector (“ITAPS”), comprised of several large technology companies, expressed concern that a single award would ultimately hurt the quality of performance on the contract.  Nevertheless, the DoD is proceeding with the JEDI contract as a single award, with questions regarding the proposal now due on August 16th and bids due on September 17th.  Many observers view ITAPS member, Amazon Web Services (“AWS”), as the favorite to win the award, seeing the JEDI program as a logical fit for the cloud provider’s capabilities.  Fellow ITAPS members, Microsoft (through their Azure platform) and Google (with its Google Cloud platform), are also expected to compete for the contract.

Big Movers

Leidos Holdings (up 6.4%) – Share prices were up this week after the company announced that it beat earnings per share estimates for the quarter.

Cobham (down 6.3%) – Share prices were down this week after the company announced that Boeing was withholding payments for its work on the KC-46 aerial refueling program.

Transactions

Hitachi Vantara, a subsidiary of Hitachi, Ltd., has agreed to acquire REAN Cloud LLC, a provider of global cloud systems integration, managed services, and developed solutions of cloud-native applications. Terms of the deal were not disclosed.

ISR, Inc., a subsidiary of Cubic Corporation, has acquired Shield Aviation, Inc., a provider of autonomous aircraft systems for intelligence, surveillance, and reconnaissance services. Terms of the deal were not disclosed.

Staple Street Capital and the Senior Management Team of Dominion Voting Systems has acquired Dominion Voting Systems, a provider of election tabulation solutions to government customers. Terms of the deal were not disclosed.

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