Industry Week in Review – July 20, 2018

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Industry Week in Review – July 20, 2018

Aerospace & Defense Update

This week’s Farnborough Airshow saw a great deal of order activity as Boeing and Airbus combined to sell around 900 planes worth $139 billion in total.  More specifically, Boeing won 528 orders worth $87 billion while Airbus won 431 orders worth $57 billion.  Notably, however, over 400 of the planes ordered did not have buyer’s names released.  Airbus blamed ongoing trade tension for the secrecy saying that many firms did not want to appear to take a side in the trade wars.   In the 250 – 300 seat segment, AirAsia provided the struggling Airbus A330neo program a much-needed boost with 100 total jets ordered, while Boeing secured an order for at least 10 787s from Hawaiian Airlines.  In the highly competitive large single-aisle market, Airbus received an order for 50 A321neo jets from Vietnam’s VietJet, a day after the carrier placed an order for 100 737 MAX aircraft from Boeing.  In the smaller single-aisle jet market, an area in which Airbus and Boeing have recently expanded into with their Bombardier and Embraer joint ventures, Airbus sold 60 A220s, and Embraer sold 300 jets, worth about $5.5 billion and $15 billion, respectively at list prices.

America has already surpassed its defense trade total from all of 2017.  Lt. Gen. Charles Hooper said earlier this week that the U.S. has already signed $46.9 billion in weapon sales to foreign allies, already eclipsing 2017’s $41.9 billion.  Hooper specifically pointed to the Trump administration’s Conventional Arms Transfer policy, an initiative to help private U.S. defense firms directly sell certain weapon types to allies without going through the U.S. government.  However, defense sales can be highly volatile as a single order for many planes can significantly balloon any given year’s total.  In the three years prior to 2017, defense sales were $33.6 billion, $47 billion, and $34.2 billion.  Additionally, the recent tariffs placed on traditional European allies could further impact defense sales, although Hooper said that he had not encountered the issue yet.

Government Technology Solutions 

DynCorp International is exploring M&A opportunities to supplement organic growth for the first time in eight years­, rallying from a prolonged earnings drought caused by previously lackluster defense spending.  While other government service contractors were also affected by the reduced defense spending in the early 2000s, DynCorp’s business was acutely impacted by both the Budget Control Act of 2011 and the drawdown of U.S. troops in Afghanistan in 2012, resulting in a 50% decline in revenue over four years.  DynCorp was able to pivot this past year with earnings increasing from $101 million to $153 million, along with top-line growth of 9%.  Driven by the recent improvement in its financial position, DynCorp now plans to invest in growth through acquisitions, looking to expand service offerings and further develop its existing IT and intelligence business lines (the company’s fastest growing subdivisions, according to CEO George Kirvo).  DynCorp’s focus on next-generation IT (“NGIT”) acquisition targets is in line with other dealmakers in the Government Services sector, many of whom cited Cybersecurity and IT Modernization as M&A focus areas in KippsDeSanto’s recent M&A survey.

The Department of Defense (“DoD”) continues to build upon its cloud modernization initiative with its most recent request for information (“RFI”).  On Monday, the Defense Information Systems Agency (“DISA”) released a small business RFI to transition its cybersecurity Acropolis program to a secure cloud environment.  In order to upgrade these virtual cloud capabilities, the DoD is seeking a contractor who can provide cloud infrastructure-as-a-service.  This particular request outlines the department’s overarching goal to integrate the DoD’s current system with next-gen infrastructure provided through a cloud service provider.  This cloud initiative highlights the ongoing trend within the DoD to move legacy systems to the cloud now rather than waiting on the upcoming enterprise-wide Joint Enterprise Defense Infrastructure (“JEDI”) contract, which was recently put on hold this past week to undergo a full program review.  While a final request for proposal for JEDI was originally expected in May, DoD CIO Dana Deasy has been clear that he will not expedite the request process until all details are thoroughly reviewed.  While Deasy has been clear that his goal is to consolidate the department’s cloud capabilities under a consistent infrastructure, DoD departments appear to be moving forward with their cloud implementation projects, reinforcing the critical need for immediate cloud migration and integration throughout the DoD and the rest of the Federal Government.

Big Movers

Esterline Technologies Corp. (up 10.4%) – Share prices were up this week after reports that the aerospace parts maker is exploring a potential sale.

Saab AB (up 9.2%) – Share prices were up this week after the CEO announced discussions to join “Team Tempest”, a UK-led fighter program unveiled this week at the Farnborough Airshow.

Transactions

Acorn Growth Companies has acquired Berry Aviation, Inc., a provider of specialized airlift solutions and other aviation services including intelligence, surveillance, and reconnaissance. Terms of the deal were not disclosed. 

Alleghency Technologies, Inc. has acquired Addaeo Manufacturing, LLC, a provider of metal alloy-based additive manufacturing services for the aerospace and defense industries. Terms of the deal were not disclosed. 

GCR, Inc., a portfolio company of HKW Capital Partners, has acquired MB3 Technologies, Inc., a provider of software development focused on emergency grants management.  Terms of the deal were not disclosed.

KLX, Inc. has acquired John Hassall, LLC, a provider of precision aircraft engine fasteners, consumables, and logistics services to the aerospace industry. Terms of the deal were not disclosed.

Maxar Technologies Ltd. has acquired Neptec Design Group Ltd., a provider of vision solutions for space, industrial, and military applications. Terms of the deal were not disclosed.

Thalheimer Brothers, Inc., a portfolio company of Audax Group, has acquired Mega Metals, Inc., a provider of titanium scrap metal recycling, inspection, and testing services. Terms of the deal were not disclosed.

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Industry Week in Review – July 13, 2018

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Industry Week in Review – July 13, 2018

Aerospace & Defense Update

Uncertainty regarding Brexit’s impact on the U.K. aerospace industry continues to rise as there have been no withdrawal agreements put in place between the U.K. and the EU.  Amidst the concerns, President Trump visited the U.K. this week to discuss a potential trade deal with Prime Minister Theresa May and put pressure on Brexit negotiations, which will have ramifications for the U.S. aerospace industry as well.  The lack of clarity around a Brexit agreement has been worrisome for some U.S. and U.K. aerospace companies, which could face potential delays in shipments of British-manufactured aircraft components if no regulation and customs arrangements are in place when the U.K. officially exits the EU.  At the Farnborough Airshow this week, the aerospace industry will be looking to the UK government for clarity regarding its vision for the post-Brexit British aerospace industry.

Boeing has won a $1.6B contract with the Royal New Zealand Air Force to supply four P-8 Poseidon patrol planes to replace its Orion aircraft.  New Zealand seeks to strengthen its surveillance capabilities following a defense policy statement last week warning that China’s rising influence in the South Pacific could undermine regional stability.  New Zealand has lost sway over small island nations to China in the South Pacific, where they are responsible for patrol and rescue missions in an area of the Pacific Ocean bigger than Europe.  Last month, South Korea agreed to buy the Poseidon to strengthen anti-submarine capabilities, and Australia will replace its Orion aircraft next year with 15 Poseidon planes.

Government Technology Solutions 

L3 Technologies continues to augment high-end capabilities through M&A, acquiring two information security firms this past week as part of the Company’s ongoing initiative to bolster its defense technology profile.  L3 announced on Wednesday that it would acquire Azimuth Security and Linchpin Labs for approximately $200 million in a move to strengthen C6ISR capabilities and access to classified operations.  The announcement comes just a week after the Company announced its acquisition of Applied Defense Solutions, a supporter of critical space and satellite operations.  Over the past two and a half years, L3 has made 15 acquisitions worth approximately $800 million as part of its ongoing M&A strategy.  L3’s recent acquisitions highlight an industry-wide trend of contractors attempting to expand next-generation IT (“NGIT”) capabilities across DoD, Intel, and space customers via M&A.  In May, Parsons made a similar move when the company acquired national security IT services contractor Polaris Alpha.  For Parsons, this addition was in line with a broader strategy to enhance its offerings with NGIT capabilities in the national security market.  Given strong market conditions and a favorable budgetary environment, this trend is likely to continue.

On Tuesday, CACI International opened the Dr. J.P. (Jack) London Shared Services Center in Oklahoma City in an effort to lower costs and seek out more available talent.  This development is part of a growing trend seen among D.C. area-based contractors, which have been opening long-term operational centers (rather than just contract-specific offices) in less populated metropolitan areas across the country in a strategy known as onshoring.  Other companies that have recently started large operational centers in less traditional areas of the country include Leidos, CGI Federal, CSRA, SAIC, and DXC Technology.  The moves attempt to take advantage of talent pools in parts of the country where the competition for quality labor is less expensive and less intense to lower costs while gaining access to quality talent, either graduating from local universities (such as Leidos’ software development center in West Virginia University’s Morgantown, WV) or currently working in the commercial sector.

Big Movers 

Engility (up 12.1%) – Share prices were up this week after reports that the company is exploring a sale and has attracted interest from companies that include CACI International and Science Applications International Corp (“SAIC”).

Airbus (up 8.2%) – Share prices were up this week after JetBlue Airways replaced Embraer’s E190 fleet with the Airbus A220 fleet.

Transactions

Aptiv PLC has agreed to acquire Snow Phipps Group’s portfolio company Winchester Interconnect, a provider of custom engineered interconnect solutions to the military, aerospace, and other diversified end markets.  The deal is worth an estimated $650 million.

AssetWorks, LLC has acquired E-Innovative Services Group, LLC (E-ISG), a provider of software-as-a-service enterprise asset management software.  Terms of the deal were not disclosed.

Aviation Technical Services, Inc., has acquired Ranger Air Aviation, a provider of inventory management and aircraft components to a variety of commercial airframes and engine platforms.  Terms of the deal were not disclosed.

Cadence Aerospace, a portfolio company of Arlington Capital Partners, has agreed to acquire Perfekta, Inc., a provider of large monolithic structures, and machined components and assemblies to the aerospace, defense, and space markets.  Terms of the deal were not disclosed.

Excelitas Technologies, a portfolio company of AEA Investors, has acquired Research Electro Optics, a provider of high-precision optical components, optical thin film coatings, and optical subassemblies.  Terms of the deal were not disclosed.

L3 Technologies, Inc. has agreed to acquire Azimuth Security and Linchpin Labs.  Azimuth Security is a provider of information security consultation on in-depth analysis of software systems, including threat modelling and design, configuration, and source code review.  Linchpin Labs is a provider of computer network operations, cross-platform and low-level systems development, and IT security services.  The two companies were acquired for around $200 million in total.

Prototek Sheetmetal Fabrication, a portfolio company of CORE Industrial Partners, has acquired Hayes Manufacturing Services, Inc., a provider of rapid prototyping and low-volume precision machining services to the medical, aerospace, robotics, and electronics industries.  Terms of the deal were not disclosed.

TransDigm Group Incorporated has acquired Graycliff Partners’ portfolio company Skandia, Inc., a provider of highly-seating foam, foam fabrication, flammability testing, and acoustic solutions to the business jet market. The deal is worth an estimated $84 million.

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Industry Week in Review – July 6, 2018

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Industry Week in Review – July 6, 2018

Aerospace & Defense Update

On Thursday, Boeing and Embraer announced their agreement to create a joint venture (“JV”) comprising Embraer’s commercial aircraft and services business.  Boeing has agreed to pay $3.8 billion for an 80 percent stake, valuing Embraer’s commercial division at $4.8 billion, but the transaction is ultimately dependent on approval from the Brazilian government.  While many believe current president Michel Temer will likely approve the deal, he is not running for re-election in October.  However, the agreement has been reviewed by the government, and is expected to be approved if the companies also create a military JV independent from the commercial JV.  The deal will allow Boeing to better position itself in the market for smaller regional aircraft, particularly important following Airbus’ acquisition of Canada’s C Series program.  Following the agreement, Boeing’s commercial aircraft line will range from 70 to 450 seats.  The transaction is expected to close in 12 – 18 months, and upon closing, Brazilian management will lead the joint venture.

Japan has chosen Lockheed Martin’s advanced radar for its multibillion dollar missile defense system, according to a defense ministry official.  Lockheed Martin’s Long-Range Discrimination Radar was ultimately selected because of its search capabilities and lower lifecycle costs, per the official.  In the deal, Japan will buy two Aegis Ashore batteries to be deployed in 2023 as an upgrade to its current missile defense systems designed to counter threats from North Korea and China.  While North Korean leader Kim Jong Un has reiterated his vow to denuclearize the Korean peninsula, Japan still sees North Korea as an immediate threat, and China as a long-term threat due to its growing military power.  The two Aegis Ashore sites will likely end up costing over twice as much as Japan’s original estimate of $2.0 billion, according to industry sources.    The deal will help Japan balance its trade surplus with the U.S., which President Trump has previously urged the country to do through the purchase of U.S. military equipment.

Government Technology Solutions 

The Department of Homeland Security (“DHS”) is currently developing a successor contract to its Security Enterprise Acquisition Gateway for Leading-Edge Solutions II (“EAGLE II”) contract, which expires in 2020.  The new IT services contract will build upon certain elements from the $1.5 billion Flexible Agile Support for the Homeland (“FLASH”) contract.  DHS seeks to include federal category management and “best-in-class” contracting activities in “Flashy Eagle,” the working name for the EAGLE II replacement.  Although FLASH was cancelled last year, the vehicle was effective in its agile approach with short offering papers from vendors, technical demonstrations, and selection processes.  While FLASH ultimately failed due to its documentation approach reverting to conventional waterfall-contracting methods, supporters were eager to retain the more successful components in a future contract, now coming to fruition under Flashy Eagle.

Deltek recently released its annual Federal IT Market Outlook study, which includes expected trends in the “Addressable IT Market” for government contractors.  Deltek is forecasting contractor IT spend to exceed $100.0 billion for the first time in GFY2018 and steadily increase to $116.0 billion by GFY2023.  By contrast, last year’s report forecasted more modest growth, with IT spending expected to hit $100 billion in GFY2019 and grow to $105.0 billion by GFY2022.  The GFY2018 IT budget of $104.2 billion allocated $51.6 billion, or 50%, to the Department of Defense, $42.8 billion, or 41%, to civilian agencies, and $9.8 billion, or 9%, to the Intelligence Community.  Data analytics, cybersecurity, modernization, cloud computing, and IT for veteran care are key drivers of growth in the GFY2018 budget.

Big Movers

KeyW (up 11.1%) – Share prices were up this week after the company announced that it would serve as a subcontractor to Lockheed Martin on a potential $3.53 billion Army contract.

Meggitt (up 10.6%) – Share prices were up this week after the company revised revenue growth guidance upwards.

Transactions

Boeing Co. has agreed to acquire an 80% stake in Embraer’s Commercial Aircraft and Services Division, a provider of innovative regional jets generally with between 70 and 130 seats.  Boeing’s 80% stake is worth an estimated $3.8 billion.

Consolidated Precision Products, a portfolio company of Warburg Pincus, LLC, has agreed to acquire Blue Point Capital Partners’ portfolio company Selmet, Inc., a provider of complex titanium castings and machined components to the aerospace industry.  Terms of the deal were not disclosed.

Derichebourg Atis Aerospace has agreed to acquire Ausgael Aviation Services, Inc., a provider of inspection services to airline and leasing companies.  Terms of the deal were not disclosed.

Kongsberg Gruppen ASA has agreed to acquire Rolls-Royce Holdings’ Commercial Marine Division, a provider of ship design, deck machinery, propulsion, automation, and control.  The deal is worth an estimated $661 million.

L3 Technologies, Inc. has acquired Applied Defense Solutions, a provider of critical support for space exploration for satellite operations, protection, and resiliency.  The deal is worth an estimated $50 million.

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Industry Week in Review – June 29, 2018

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Aerospace & Defense Update

The Pentagon and Lockheed Martin are closing in on a deal for the 11th lot of F-35s, which includes more than 130 jets.  The deal was initially planned to close by the end of 2017, but negotiations between the two parties stalled delaying finalization.  Negotiations for the F-35’s Lot 9 reached an impasse in November 2016 until the government ultimately forced Lockheed into a $6.1 billion deal by imposing a unilateral contract agreement.  All three F-35 variants for Lot 11 are expected to be cheaper than previous procurements.

On Thursday, the House passed its version of the annual defense appropriations bill, which budgets $675 billion to the Defense Department.  The bill plans for the dual purchase of two aircraft carriers, CVN-80 and CVN-81, but does not include the purchase of additional submarines.  Compared to the Senate Appropriations Committee, the House approved four more F-35 fighter jets, one more littoral combat ship, and the Advanced Battle Management System to replace the JSTARS recapitalization plan.  The dual purchase of the aircraft carriers is expected to save up to $2.5 billion in construction costs.  Despite the savings, each carrier is anticipated to cost $10 billion, which could create problems with budget caps.  These concerns ultimately led to the exclusion of three Virginia-class submarines per year starting in 2022.  The Senate Appropriations Committee advanced its version of the bill on Thursday as well, but it is still unclear as to when the full Senate will vote on it.

Government Technology Solutions

With the 2020 Census quickly approaching, officials have noted concerns around protecting its inherent data, given growing fears about the lack of cyberattack preparedness among many federal agencies.  A recent report by the Office of the Management and Budget (“OMB”) points out 71 of the 96 federal agencies reviewed were “at risk” or “at high risk” of a cyberattack.  Department of Commerce Chief Information Officer (“CIO”) Rod Turk said Tuesday that he hopes that the intelligence community (“IC”) will help monitor potential cyberattacks, particularly given that the 2020 census plans to utilize more technology systems than any previous decennial census.  Turk mentioned that protecting the census’ networks will be critical, as the census is not only used to collect information, but also to help determine federal funding levels for a variety of infrastructure systems.  The 2020 Census will utilize more than 40 IT systems, including new online response and mobile assist functions, increasing the vulnerabilities of the survey and opportunities for a cyberattack.  Turk suggested that the IC could use artificial intelligence and machine learning to identify threats and added that the Commerce Department has already sought out “private sector intelligence gathering services” to help it track threat indicators on the dark web.

The strategy of integrating a federal agency’s engineering and operations (“DevOps”) to perform large-scale cloud migration might soon be replaced by a new strategy, No Operations (“NoOps”).  The concept of NoOps centers around expanding the role of cloud companies to provide infrastructure management services normally overseen by an agency’s IT department.  This shift in federal cloud migration management comes as cloud companies are increasingly providing cloud services where they not only code and update, but also manage the IT infrastructure in the background.  Although NoOps would increase an agency’s dependence on outside cloud providers, it would provide cost savings and allow customer’s engineering teams to focus their efforts on developing mission critical systems.

Big Movers

Safran (up 4.7%) – Share prices were up this week after the company announced a planned collaboration with Bell Helicopter to develop an electric air taxi.

American Outdoor Brands (down 5.0%) – Stock prices continued to slide this week after blaming social activists for its poor performance.

Transactions

Imenco AS has acquired Kongsberg Maritime AS’s Camera Division, a provider of subsea cameras and harsh environments CCTV systems. Terms of the deal were not disclosed.

Zivaro, Inc. (formerly Global Technology Resources, Inc. (GTRI)) has agreed to acquired Network Professionals Group, LLC (NPG), a provider of value-managed service offerings supporting hybrid information technology systems. Terms of the deal were not disclosed.

Goshawk Aviation Limited has agreed to acquire SKY Aviation Leasing International, a provider of full-service leases for premier aircraft. Terms of the deal were not disclosed.

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Industry Week in Review – June 22, 2018

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Aerospace & Defense Update

On Monday, President Trump ordered the Pentagon to create a new Space Force with the signing of an executive order during a meeting of the National Space Council.  The decision would realign the U.S. military by pulling various space functions into the additional sixth military branch.  The U.S. space operations are currently carried out by the Air Force, Navy, and other branches.  A new military service branch would need authorization from Congress, where the Space Force currently lacks substantial support.  A congressionally-mandated report on the addition of a Space Force is expected in August, where the issue will likely be debated.  In the interim, Pentagon officials will begin the process of the laying the groundwork for the future service branch.

Canadian plane-maker Bombardier believes its upgraded CRJ 900 regional jet should gain substantial market share in its competition with Brazil-based Embraer.  Bombardier’s Commercial Aircraft President, Fred Cromer, is aiming to take control of at least half of the 76-seater market, of which Embraer’s E175 accounts for 80% of U.S. orders over the last five years.  Bombardier has employed a new modernization and cost-reduction plan for its regional jets after Airbus bought a majority stake in Bombardier’s flagship CSeries jetliner program.  The CRJ program was launched in the early 1990s and has a 30% share of the U.S. market over the last two years.  However, Bombardier’s global market share has increased to 42% over the same time frame, and the Company recently secured a $1.0 billion order from Delta Air Lines for 20 CRJ 900s.

Government Technology Solutions

The Defense Information Systems Agency (“DISA”) on Monday awarded 14 companies a position on its $7.5 billion Systems Engineering, Technology, and Innovation (“SETI”) contract vehicle.  SETI is an indefinite delivery, indefinite quantity (“IDIQ”) contract that aims to streamline the Department of Defense’s (“DoD”) process for ordering various IT engineering services.  The contract has a five-year base period with a single five-year option.  SETI is designed to provide the DoD with a more flexible alternative to the Encore III commodity IT services vehicle.  SETI is split into two pools, an unrestricted competition pool and a small business pool.  The 14 unrestricted awardees were selected from 35 proposals.  The small business pool has not been awarded yet.  While soliciting proposals, DISA released two statements describing the type of work to be done for those in the unrestricted pool.  The first describes the creation of an internal personnel management system capable of managing aspects of the DoD’s Hire-to-Retire program.  The second focused on improving the architecture of DISA’s mobile ecosystem.

New research by Symantec revealed that at least two different U.S.-based satellite companies, a contractor for the Department of Defense (“DoD”), and a private company selling geospatial imaging technology were targeted by a Chinese-linked hacking group in late 2017.  The origin of the hacking operation coincides with the initial talks of the U.S.-China trade war.  Symantec has said that they alerted the U.S. government about the attacks approximately four months ago, noting that they decided to notify the government because the hackers attempted to gain access that would allow them to physically control the satellites.  The same hackers were also active prior to 2015, but had ceased activities following an agreement between former President Barack Obama and Chinese President Xi Jinping.  While that agreement outlawed economic espionage, it left more conventional targets, such as defense contractors and federal agencies, unprotected.  Symantec said that while they have monitored the group since 2013, this attack was more targeted and aggressive than in the past.

Big Movers

Bombardier (up 6.9%) – Share prices were up this week after the company secured a $1.0 billion order from Delta Air Lines for 20 CRJ 900s amid optimistic outlooks for future competition against rival Embraer.

Boeing (down 5.3%) – Share prices were down this week as a result of possible retaliation from foreign governments over international trade disputes.

Transactions

MAG Aerospace Corporation has acquired North American Surveillance Systems, Inc., a provider of integration of ISR systems onto fixed- and rotary-wing platforms and undertakes other aircraft modification and upgrades.

Cerberus Capital Management has agreed to acquire Worldwide Flight Services, a provider of aviation and aircraft ground support services such as cargo handling, technical contracting, and ramp and passenger services.

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Industry Week in Review – June 15, 2018

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Aerospace & Defense Update

Embraer’s stock saw its largest increase in two months after its joint venture with Boeing received a major endorsement this past week.  Brazilian President Michel Temer endorsed the partnership, which is essential given the government’s “golden share” in Embraer, which gives it veto power over strategic decisions around its military programs and any change in control.  The commercial joint venture between Embraer and Boeing would combine their marketing, manufacturing, and engineering capabilities.  Boeing would control the joint venture, but Embraer’s defense unit would remain a separate entity.  Embraer provides Boeing with the necessary resources and a lower-cost manufacturing center outside the U.S. as Boeing begins plans for a new mid-range airliner.

Raytheon won a major contract with Lockheed Martin’s F-35 joint strike fighter to provide a new distributed aperture system (“DAS”), which is one of its signature capabilities.  Northrop Grumman previously supplied the DAS but chose not to compete for the new contract.  The DAS allows fighter pilots to see through the bottom of the aircraft onto the ground below with advanced sensory technology.  Northrop decided the DAS production was no longer a successful business venture, which led to its decision to drop the project.  However, Northrop will remain a part of the F-35 program through production of the APG-81 radar and sustaining the legacy DAS.  Raytheon’s system was an attractive fit for the F-35 due to its affordability, as cost reductions continue to be a key focus of the F-35 program.

Government Technology Solutions

Looking to automate its mobile device management, the Defense Information Systems Agency (“DISA”) has issued a request for information (“RFI”) for an automated provisioning tool to support classified mobile access for devices used in the Department of Defense Mobility Classified Capability (“DMCC”) program.  The antiquated infrastructure currently used to access the Secret Internet Protocol Router Network (“SIPRNet”) poses a substantial risk to mission readiness and creates gaps in mobile security and communication with its rigid, manual processes. The RFI outlines DISA’s search for an existing commercial tool that can automate the installation and management of user certificates for key infrastructure and set up.  The new automated provisioning tool will mitigate security risks by using a virtual private network and setting device passwords.  The Senate version of the 2019 National Defense Authorization Act (“NDAA”) criticized the department’s failure to have infrastructure in place with automated device management capabilities.  In order to comply with the NDAA’s request, DISA intends to move quickly with this acquisition, anticipating a period of performance beginning in July 2018.

The Department of Veterans Affairs (“VA”) is seeking industry input on new technology solutions to support its operations centered around network security and efficiency.  The VA’s RFI issued last Thursday seeks industry input on how blockchain ledger technology can be leveraged to bring efficiency to contract closeouts, including retroactively applying them to all pending contract closeouts.  Blockchain solutions will be able to streamline the repetitive contract closeout processes and eliminate almost all labor involved in government contract close-out procedures.  The second RFI, issued Tuesday, calls for a cloud-based endpoint protection system to centralize the VA’s anti-virus capabilities and protect its network of approximately 575,000 workstations and 32,000 servers.  The VA calls for a solution that will be able to isolate ransomware and detect advanced threats before they infect the system, utilizing machine-learning to create an automated process.

Big Movers

Rolls Royce (up 12.8%) – Share prices were up this week after the company announced that it was “well-placed” to reach its target 1 billion pounds in free cashflow by 2020.

NIC (up 4.5%) – Share prices were up this week after the company announced a partnership with Grand Canyon National Park to offer electronic entrance passes.

Transactions

Viasat, Inc. has acquired Horsebridge Defence and Security, a provider of design, system integration, and support of deployable secure networks. Terms of the deal were not disclosed.

TGP Investments II, LLC has agreed to acquire Mid-America Precision Products, LLC,  a provider of highly-engineered, precision-machined components for missiles, aerospace, and maritime products. Terms of the deal were not disclosed.

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Industry Week in Review – June 8, 2018

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Aerospace & Defense Update

On Tuesday, Northrop Grumman received U.S. antitrust approval to complete its acquisition of rocket maker Orbital ATK, which will help Northrop expand and compete in the space market.  With the $9.2 billion Orbital deal, Northrop is projecting 2018E revenue of $30.1 billion, a 17% increase over 2017 revenue.  The transaction was approved by the Federal Trade Commission (“FTC”) on the condition that the companies provide solid fuel rocket motors on a nondiscriminatory basis to competitors for missile contracts.  Orbital is currently working on the Air Force’s Ground Base Strategic Deterrent contract for both Boeing and Northrop, and this FTC mandated firewall will help to ensure competitiveness between the two prime contractors.  Post-acquisition, Orbital will operate as Northrop’s fourth business segment named Northrop Grumman Innovation Systems.

Lockheed Martin invested an additional $100 million into its venture capital fund with the purpose of gaining early access to critical technologies in areas such as artificial intelligence and autonomous systems.  Chris Moran, the executive director and general manager of Lockheed Martin Ventures, seeks to expand the fund’s investment portfolio into companies in the UK and Australia and increase the fund’s annual investments from around four deals to six or eight.  The venture fund’s goal is to add new platforms and capabilities to Lockheed while also exploring new technologies that have lacked significant investment.  Lockheed Martin Ventures began around 2007 with $100 million in cash and has since invested in more than 20 companies.

Government Technology Solutions

After winning a protest battle in the U.S. Court of Federal Claims, the General Services Administration (“GSA”) can move forward with its $50 billion Alliant 2 Unrestricted contract for government-wide IT services.  GSA anticipates the effective date to be July 1 with a five-year base period through June 23, 2023 followed by a five-year option period through June 2028.  Alliant 2 was initially awarded to 61 large businesses last November.  Shortly thereafter, five unsuccessful bidders, including four Alliant 1 incumbents, protested but ultimately had their challenges dismissed by the Government Accountability Office (“GAO”) in December after OBXtek took up the issue with the Court of Federal Claims.  The court ruled against CenTech Group, Dynetics, OBXtek, and Octo Consulting, although Octo’s decision has not been officially released.  Alliant 1 incumbents Capgemini and Peraton both withdrew their cases from the court before a ruling.  Alliant 2‘s $15 billion small business contract is also currently being protested, preventing GSA from moving forward with that contract until the Court of Federal Claims issues a decision.

The Senate Armed Services Committee (“SASC”) has laid out guidelines for the Department of Defense’s (“DoD”) Joint Enterprise Defense Infrastructure (“JEDI”) initiative in its version of the 2019 National Defense Authorization Act (“NDAA”).  While the House has threatened funding for JEDI, the Senate’s proposal is much more supportive.  The bill states that if the DoD is committed to JEDI as a means of modernization, then it should be all-in and prepare accordingly.  The Senate’s bill also hints that the SASC would rather the DoD issue more than one award for the procurement rather than issuing it as a single award, as the DoD has proposed.  The House Appropriations Committee on Wednesday also released its preliminary spending bill, which would restrict funding for JEDI until 90 days after Secretary of Defense Jim Mattis proposes a budget accounting system for all funds spent on DoD cloud computing, including the Defense Information Systems Agency’s (“DISA”) $8 billion Defense Enterprise Office Solutions (“DEOS”) contract.  The Pentagon still has not confirmed a final request date for proposals for the JEDI contract, although it could drop any day after it was originally expected in May.

Big Movers

AeroVironment (up 4.3%) – Share prices were up this week after the company announced it will sell German auto parts supplier, Webasto, to become a pure-play maker of unmanned aerial vehicles.

OSI Systems (up 5.4%) – Share prices were up this week after the company received a contract to provide multiple units of its explosive detection system to be installed at European Union airports.

Transactions

ACR Electronics, Inc. has agreed to acquire Flight Data Systems, a provider of flight data recorders, ground support equipment, and electronics manufacturing for the global aviation industry.  Terms of the deal were not disclosed.

Culmen International, LLC has acquired Analytics Strategies (PlanetRisk Federal Services), a provider of enterprise analytics services to the federal government.  Terms of the deal were not disclosed.

Leidos has acquired Aranea Solutions, Inc., a provider of IT products and services to government customers. Terms of the deal were not disclosed.

Patria Oyj has agreed to acquire by Patricomp Oy, a provider of aircraft sheet metal part manufacturing, surface treatments and assemblies.  Terms of the deal were not disclosed.

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Industry Week in Review – June 1, 2018

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Aerospace & Defense Update

On Friday, the Trump administration announced the enactment of tariffs on steel and aluminum imports from Europe, Mexico, and Canada.  Though the American defense industry buys the majority of its steel and aluminum from domestic suppliers, the tariffs are expected to allow those suppliers to raise prices unhindered by foreign competition.  Because of retaliatory tariffs, defense firms may face weaker demand from abroad and rising prices at home.  For products with no European competition, such as heavy-lift helicopters or C-130J cargo aircraft, European customers will still purchase from U.S. suppliers.   Alternatively, other reports speculate that the interdependence of NATO allies will prevail against a trade war since many European countries rely on U.S. suppliers.

The U.S. military has held early talks about implementing a Terminal High Altitude Area Defense (“THAAD”) system in Germany to boost European missile defenses.  European allies and the U.S. are weary of potential adversaries developing ballistic missiles capable of reaching southern Europe.  In particular, the German defense ministry has been looking to bolster its short and medium-range missile defenses.  The U.S. withdrawal from the Iran nuclear accord has accelerated the efforts to install the THAAD system in Europe.  In early June, the Pentagon is expected to further acknowledge the issue in a new missile defense review.  Additionally, Germany plans to review its territorial defense needs later this year, specifically looking at the THAAD system and the Arrow 3 anti-missile system.

Government Technology Solutions

The White House is against the idea of shuttering the Defense Information Systems Agency (“DISA”), as was proposed in the House version of the fiscal 2019 National Defense Authorization Act (“NDAA”).  The proposal would shift Pentagon IT acquisition services from DISA to other Department of Defense (“DoD”) components and eliminate the agency by 2021 in an effort to promote efficiency, reduce redundancy, and streamline bureaucracy across the DoD’s 28 4th Estate support agencies.  The White House responded by pledging its support for keeping DISA as the DoD’s centralized IT acquisition arm.  The Executive Office of the President stated in a memo that closing and transferring DISA’s responsibilities elsewhere would increase the cost of acquiring IT, weaken the DoD’s ability to secure its cyber networks, and inhibit DISA’s mission to provide seamless communication to warfighters and senior leaders.  Under the House proposal, all DISA functions and personnel not transferred elsewhere by 2021 would be eliminated.

As the U.S. and North Korea engage in peace talks, North Korean hackers have continued, or even ramped up, cyberattacks across Asia, Europe, and the U.S., focusing on financial and digital theft.  The Department of Homeland Security (“DHS”) and Federal Bureau of Investigation (“FBI”) released a joint alert Tuesday regarding the spread of a particular malware variant linked to North Korea.  The alert served as a reminder that North Korea remains highly dependent on cybercrime for both financial and geopolitical gain.  For example, in South Korea, hackers have targeted select victims, using phishing lures to glean information relevant to the current peace process.  As peace talks move forward, experts are unsure whether North Korea will reduce its hacking activities due to their decentralized nature.  North Korean and U.S. officials met Wednesday to organize the potential summit between Kim Jong-un and President Donald Trump, although cybersecurity was not discussed.

Big Movers

Bombardier (up 10.8%) – Share prices were up this week after the company announced its plans to build two new private planes in response to growing demand for large-cabin business jets

Booz Allen Hamilton (up 7.3%) – Share prices were up this week after the company reported strong fiscal fourth quarter and fiscal 2018 results.

Transactions

BBA Aviation has agreed to acquire EPIC Aviation, LLC, a provider of fuels and services to FBOs, commercial airlines, airports, ground fueling operators, the U.S. Defense Logistics Agency (DLA) and other government agencies.  Terms of the deal were not disclosed.

Cache Creek Industries, LLC has acquired Mountain Secure Systems, a provider of proprietary, ruggedized and highly engineered electronic solutions to defense contractors.  Terms of the deal were not disclosed.

Madison Dearborn Partners and CoVant Management have jointly acquired LinQuest Corp., a provider of space systems technology solutions to the U.S. defense and intelligence communities.  Terms of the deal were not disclosed.

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Industry Week in Review – May 26, 2018

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Aerospace & Defense Update

On Thursday, the House of Representatives approved the $717 billion defense authorization bill for Government Fiscal Year 2019 following several days of debate.  The bill focuses on restoring military readiness, including authorization for over $39 billion on military aviation upgrades, $18.5 billion to replace aging Army equipment, and $25.5 billion for equipment maintenance and replacement parts.  The House also supported plans for an additional 77 F-35 fighter jets, two additional Virginia-class submarines and littoral combat ships, and upgrades for almost 3,400 Joint Light Tactical Vehicles.  The White House has offered a preliminary list of objections to the House plan with respect to increases to surveillance aircraft and aircraft carriers, reorganization of the current space forces, and the shuttering of the Defense Information Systems Agency.  The White House anticipates that some of these issues will be nullified by the Senate version of the legislation, which is anticipated to be released later this summer.

Citing the growing prominence of drone technology and the potential threats it can manifest, Department of Homeland Security (“DHS”) Secretary, Kirstjen Nielsen, has asked Congress for the authority to “identify, track, and mitigate drones that could pose a danger to the public and to DHS operations.”  Secretary Nielsen would like to have the power to use the wide range of actions outlined in the “Preventing Emerging Threats Act of 2018” to counter these drones.  Currently, the counter-drone market features over 200 commercially available products, which could potentially provide the DHS with a wide range of off-the-shelf counter-drone capabilities.

Government Technology Solutions

The Pentagon is looking to implement a new contract to run continuous bug bounty contests on a full range of its networks.  The winning commercial bug bounty company will partner with the Department of Defense (“DoD”) to conduct crowdsourced vulnerability discovery and disclosure services.  In recent years, the DoD has hosted individual bug bounty programs, lasting several weeks and rewarding cash prizes for hackers reporting security vulnerabilities.  This new contract will transform the former short-term hacking contests into year-long efforts, strengthening the DoD’s security network though continuous monitoring.  Additionally, this program will give hackers access to closed networks and internal systems that were not previously made available during the short-term hacking events.

Big Movers

Engility (up 5.8%) – Share prices were up this week after the company was awarded a $41 million Marine Corps Global Command and Control Systems task order.

Embraer (up 4.4%) – Share prices were up this week after amidst growing optimism over Embraer consummating a deal with Boeing.

Transactions

Fishtech Group has agreed to acquire Haystax Technology, a provider of advanced security analytics and risk management solutions.  Terms of the deal were not disclosed.

New Mountain Partners has agreed to acquire Clairvest Group’s portfolio company, MAG DS Corp., a provider of manned aerial sensing, unmanned aerial sensing, aviation training, and aviation logistics services to federal, global, and commercial customers.  Terms of the deal were not disclosed.

Parsons Corp. has agreed to acquired Polaris Alpha Holdings, LLC, a provider of innovative mission solutions for complex defense, intelligence, and security customers, as well as other U.S. federal government customers.  Terms of the deal were not disclosed.

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Industry Week in Review – May 18, 2018

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Aerospace & Defense Update

President Trump’s decision to withdraw from the Iranian nuclear deal announced on May 8th has significant implications for the commercial aircraft landscape and sales volume.  The U.S. Treasury Department is revoking all formal licenses that Airbus, Boeing, and other original equipment manufacturers (“OEMs”) needed to sell commercial aircraft to Iran.  After the original Iranian nuclear accord was reached in 2015, OEMs eagerly lined up sales to Iranian airlines for hundreds of large civil aircraft in deals that totaled tens of billions of dollars.  While notable for the potential long-term ramifications, the loss of Iranian orders is not expected to have a material, detrimental impact on Boeing and Airbus’s backlog, representing under 2% of the companies’ combined order backlogs.

Remington Outdoor, a U.S. based weapons manufacturer, announced on Thursday that it had emerged from Chapter 11 bankruptcy.  The company now has less debt and more stable financing, which will help it maintain course under a market that has slowed for firearms sales under the current administration, driven in part by major headline risk.  Under the Chapter 11 Reorganization Plan, J.P. Morgan Chase and Franklin Advisors will forgive more than $775 million of debt in exchange for equity ownership stakes in the company.  Seven banks, including Bank of America, have also provided Remington with a $193 million revolving credit facility, which will refinance its prior asset-based loan facility along with a new $55 million last-in, first-out term loan and a new $100 million term loan.

Government Technology Solutions

President Donald Trump signed an executive order on Tuesday that will require agency Chief Information Officers (“CIOs”) to report directly to their agency head and will also make them voting members of the bureau-level IT governance board.  The executive order is designed to empower CIOs by both increasing their enterprise awareness and giving them increased hiring powers.  Senior administration officials said they were compelled to make this move after meeting last June with private sector tech CEOs, who described the empowerment of the CIO as a major difference between the private and public sectors.  Giving CIOs more influence has long been a popular idea, and the 2014 Federal Information Technology Reform Act (“FITARA”) was designed to give CIOs responsibility for agency spending.  However, only half of the agencies subject to FITARA have managed to make this happen, often drawing lawmakers’ frustrations.  Administration officials believe the executive order will ultimately prove more effective and allow agencies to build the capacity to conduct change on an ongoing basis.

The House of Representatives introduced a measure this week that would direct the Department of Homeland Security (“DHS”) to give lawmakers more information on potential cybersecurity threats posed by Chinese telecommunications firm ZTE.  The resolution would ask DHS to provide the House Homeland Security Committee with any documentation that the agency has on cyber risks introduced by the use of ZTE products on federal, state, and local government networks.  U.S. intelligence officials have warned of ZTE’s alleged links to the Chinese government, and the Pentagon earlier this month told vendors on military bases to stop selling devices from ZTE.  The House measure comes as President Trump attempts to reach a U.S.-China trade deal with Chinese President Xi Jinping, potentially complicating the House’s move.  Still, the resolution has the support of many in the intelligence community, including FBI director Christopher Wray, who affirmed his belief on Tuesday that state-linked firms, like ZTE, pose a cyber-espionage threat.

Big Movers

Aerojet Rocketdyne (up 5.0%) – Share prices were up this week after United Launch Alliance announced it will use an Aerojet Rocketdyne engine for the upper stage of its new Vulcan rocket.

AeroVironment (down 6.3%) – Share prices were down this week after the company was accused of trying to conceal that employees transported a drone rigged with explosives on a commercial flight and firing the manager who told the government.

Transactions

Aerostructures Long Island, Inc. has acquired Triumph Structures – Long Island, LLC, a subsidiary of the Triumph Group, Inc., a provider of aircraft structural components and dynamic parts and assemblies for commercial and military aerospace programs.  Terms of the deal were not disclosed.

Spell Capital Partners, LLC has acquired 3P Processing, Inc., a provider of metal finishing, testing, and inspection process services to the aerospace & defense sector, specializing in complex geometric and high-precision parts.  Terms of the deal were not disclosed.

Trive Capital’s portfolio company, Valence Surface Technologies, LLC, has acquired Triumph Structures – Los Angeles, Inc. and Triumph Processing, Inc., providers of manufacturing and assembly of large structural components and non-destructive testing, chemical processing, and paint services to the global aerospace industry, respectively.  Terms of the deal were not disclosed.

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