Industry Week in Review – May 11, 2018

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Aerospace & Defense Update

The House Armed Services Committee passed its version of the 2019 National Defense Authorization Act (“NDAA”) early Thursday morning.  In total, the bill includes $716 billion in defense spending, which allocates $617 billion to the base budget, $69 billion to the Overseas Contingency Operations account, and $30 billion to defense-related programs at the Department of Energy and other agencies.  The NDAA authorizes spending of $39 billion for military aviation upgrades, $19 billion to replace outdated Army equipment, and $26 billion for equipment maintenance and replacement parts.  The NDAA will now go to a full House vote within the coming weeks and will be debated by the Senate Armed Services Committee starting on May 21st.

Third Point, a New York-based activist investor firm, is pressuring United Technologies to break up into three focused standalone companies, and has expressed this view with the company’s board.  The idea of breaking up the conglomerate began in September when United Technologies announced its $23 billion acquisition of Rockwell Collins.  United Technologies’ current business portfolio consists of jet engine manufacturer Pratt & Whitney, Otis Elevator, and Carrier climate control systems.  In the proposed break-up plans, Pratt & Whitney and Rockwell Collins would merge with United Technologies’ aviation services business to create a standalone aerospace company.  Third Point previously pushed Honeywell to consider the divestiture of its aerospace business, which ultimately resulted in company spinning off two other units.

Government Technology Solutions

Recent first quarter earnings reports have shown that classified revenue is becoming an increasingly high-profile focus area for publicly-traded government contractors.  Raytheon reported almost half of its first quarter contract bookings in its government services business as classified and Leidos booked $1.3 billion in classified intelligence community awards during the quarter.  Bloomberg Government estimates Department of Defense (“DoD”) classified IT budgets will rise to $10 billion in fiscal 2019 from $8.5 billion in fiscal 2017.  The main drivers behind the growth increased funding for cybersecurity, procurement, and research, development, test and evaluation (“RDT&E”) technologies. The RDT&E funds support development of new systems and expansion of classified fielded systems.  To keep the government networks secure, cybersecurity spend is deemed classified in order to maintain the United States’ technological advantage as commercial hacking tools become more readily available.  Government contractors are increasingly focused on IT modernization efforts and capabilities to keep pace with the federal government’s growing spend on classified IT services.

On Thursday, the White House announced the creation of a Select Committee on Artificial Intelligence (“AI”) during an organized AI summit of industry and academic partners.  The new committee’s mission is to improve the coordination of Federal efforts related to AI to ensure continued U.S. leadership in this area.  The group will operate within the technology committee at the National Science and Technology Council, and will be comprised of senior R&D officials from across the federal government.  The Trump administration’s investment in AI plans to further define AI R&D goals, coordinate agency R&D plans, and encourage agency partnerships. The creation of the Select Committee on AI shows the government’s confidence in this technology and recognition of the potential cost savings available through automated processes.

Big Movers

Kratos Defense & Security Solutions (up 13.9%) – Share prices were up this week after the company beat earnings expectations and reported a 78% increase in revenue for Kratos’ Unmanned Systems business from this period last year.

Jacobs Engineering (up 11.8%) – Share prices were up this week after the company reported adjusted second-quarter earnings ahead of analyst expectations.

Transactions

Axon Enteprise, LLC has acquired Kander & Company’s portfolio company Safariland’s subsidiary, VIEVU, LLC, a provider of wearable video cameras and data management software for law enforcement and private security professionals.  Terms of the deal were not disclosed.

LookingGlass Cyber Solutions, Inc. a portfolio company of NewSpring Capital, has acquired the Sentinel threat intelligence platform of Goldman Sachs Group, Inc.  The Sentinel threat intelligence platform facilitates the ingestion, extraction, and organizational workflow of cyber threat intelligence.  Terms of the deal were not disclosed.

Quality Technology, Inc. has acquired privately held Fusion PPT, LLC, a provider of IT consulting and system integration services.  Areas of focus are cloud computing, big data, cybersecurity, and IT support services.  Terms of the deal were not disclosed.

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Industry Week in Review – May 4, 2018

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Aerospace & Defense Update

On Tuesday, Boeing announced its intention to acquire KLX, Inc., a provider of aerospace fasteners, consumables, and logistics services to customers worldwide for $4.2 billion.  The acquisition will include KLX’s Aerospace Solutions Group, but will not include KLX’s Energy Services Group, which Boeing plans to divest.  KLX Aerospace will be integrated as a subsidiary of Aviall, which manufactures aerospace parts within Boeing’s Global Services business unit.  The Global Services unit was launched last year as part of Boeing’s broader strategy of expanding into the higher-margin aviation aftermarket business by providing maintenance, spare parts, and other services.  Boeing’s CEO, Dennis Muilenberg, has set the goal of tripling the division’s sales to $50 billion over the next decade, which will likely fuel consolidation amongst the current aviation aftermarket providers.

Spirit AeroSystems has agreed to acquire the parent company of aerospace-components maker, Asco Industries, for $650 million.  The Belgian-based company is a supplier of high-lift wing structures, mechanical assemblies, and major functional components to original equipment manufacturers and Tier-1 suppliers within global commercial aerospace and military markets.  The acquisition is in line with Spirit AeroSystems’ strategy of diversifying its main focus away from aerostructures manufacturing.  Asco will help Spirit AeroSystems expand into parts manufacturing for the Airbus A320 and A350, as well as Lockheed Martin’s F-35 fighter jet, and provide greater access to commercial customers to expand its fabrication business.

Government Technology Solutions

The White House’s National Security Council is pushing to rescind the Presidential Policy Directive 20 (“PPD-20”), a memorandum that guides the approval process for government-backed cyberattacks, with a more streamlined channel for military leaders to get their offensive cyber operations greenlit.  The move comes as lawmakers openly question whether the U.S. Cyber Command, the nation’s premier cyber warfare unit, is hamstrung from responding to Russian meddling due to bureaucratic red tape.  Currently, PPD-20 requires government agencies to run approvals for offensive operations through a chain of command that stretches across the Federal Government, even requiring the direct blessing of the President for operations of “significant consequence”.  However, the move faces resistance from the Intelligence Community (“IC”) and several federal agencies, particularly as intelligence officials express concern over whether rescinding the directive will affect their own active missions.  It remains unclear whether giving military leaders more leeway to conduct hacking operations will lead to more effective missions.

As the Department of Homeland Security (“DHS”) prepares a new cybersecurity strategy, lawmakers have called on the DHS to improve its information-sharing program.  DHS has worked to quicken the pace at which it shares information with the private sector, touting its Automated Indicator Sharing program.  However, Rep. Dutch Ruppersberger argued in a report released Monday that U.S. networks can no longer rely solely on such reactive, indicator-based sharing programs.  President Trump’s fiscal 2019 budget includes $1.7 billion for cybersecurity at DHS, which Ruppersberger hopes will be put towards investing in information-sharing.  The report comes as DHS awaits congressional approval of a reorganization that would change the National Protection and Programs Directorate, its bureau for protecting the cyber and physical security of critical infrastructure, into a dedicated cybersecurity bureau renamed the Cybersecurity and Infrastructure Security Agency.  The focus of DHS’ new strategy will be to curb the “systemic” cyber risk of the nation’s infrastructure by using private and public sector collaboration to better connect the dots on threats.

Big Movers 

Fluor (down 24.0%) – Share prices were down this week after the company reported a net loss per share in the first quarter and reduced its full-year EPS guidance range from $3.10 – $3.50 to $2.10 – $2.50 per share.

Spirit AeroSystems (up 4.4%) – Share prices were up this week after the company agreed to acquire Asco Industries for $650 million.

Transactions

American Industrial Partners has agreed to acquire L3 Technologies’ subsidiary, Vertex Aerospace, a provider of sustainment & support and aviation & aerospace technical services for the DoD, government agencies and foreign governments.  The deal is worth an estimated $540 million.

Boeing Co. has agreed to acquire KLX, Inc., a provider of aerospace fasteners, consumables, and logistics services worldwide through its Aerospace Solutions Group.  The deal is worth an estimated $4.2 billion.

Ontario Systems, LLC, a portfolio company of Arlington Capital Partners, has acquired Justice Systems, Inc., a provider of court case management, prosecutor and public defender case management, and electronic payments software for state and municipal court systems.  Terms of the deal were not disclosed.

Pinewell Capital, LLC has acquired Avon Engineered Fabrications, Inc., a provider of military-grade performance inflatable products to various DoD and US military branches, as well as the other commercial clients worldwide.  Terms of the deal were not disclosed.

Spirit AeroSystems Holdings, Inc. has agreed to acquire Asco Industries N.V., a provider of high lift wing structures, mechanical assemblies, and components to OEMs and Tier-1 suppliers.  The deal is worth an estimated $650 million. 

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Industry Week in Review –April 27, 2018

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Aerospace & Defense Update

Numerous aerospace and defense companies have announced positive 1Q18 earnings throughout the past week.  Boeing reported a strong quarter, beating consensus earnings per share (“EPS”) estimates by $1.05 (28.8%) and reported revenue growth of 6.6% year-over-year (“YoY”) to $23.4 billion, driven by a 9% increase in commercial aircraft deliveries and a 13% increase in Defense, Space, & Security segment revenues.  Lockheed Martin also reported a solid quarter, beating EPS estimates by $0.60 (14.9%) and increasing revenue by 3.8% YoY to $11.6 billion.  Lockheed’s highlight of the quarter was the conclusion of the System Design and Development phase of the F-35 program.  Northrop Grumman also had a favorable quarter and beat EPS estimates by $0.57 (13.5%) while increasing revenue by 5.1% YoY to $6.7 billion, driven by higher Manned Aircraft volume at Aerospace Systems and higher Sensors and Processing volume at Mission Systems.  All three companies beat consensus revenue estimates and raised EPS guidance for 2018, citing industry tailwinds from the ramp up in defense spending and a lower tax rate environment.

United Technologies beat EPS estimates by $0.26 (14.7%) and increased revenue by 10.1% YoY to $15.2 billion due to robust military sales and strong aftermarket sales from its large installed base of engines.  General Dynamics beat EPS estimates by $0.17 (6.4%) and raised its revenue by 1.3% YoY to $7.5 billion, citing growth in its defense business revenues, particularly within its Combat Systems segment.  Lastly, Raytheon beat EPS estimates by $0.09 (4.1%) and increased its revenue by 5.0% YoY to $6.3 billion.  Both United Technologies and Raytheon beat consensus revenue estimates and raised 2018 EPS guidance.  While General Dynamics missed quarterly revenue estimates, the company reaffirmed previous 2018 EPS guidance, expecting continued strength in global demand for its integrated air and missile defense systems.

Government Technology Solutions

According to the International Data Corporation (“IDC”), spending on artificial intelligence (“AI”) and machine learning is expected to grow from $12 billion in 2017 to $57.6 billion in 2021.  This growth is attributed to the increased efficiencies and cost-cutting opportunities delivered through AI that government personnel are beginning to realize.  The greatest need for AI is in cybersecurity defense because agencies are currently spending significant resources and manhours to defend against potential cyber threats, while hacker technology is consistently evolving.  AI will be able to improve security measures and protect against malware without requiring people to reprogram layers of code.  While the technology is not currently available for implementation throughout the government, 79% of respondents in a survey conducted by Meritalk believe that AI and machine learning will have a place within the government once the technology is safe and effective.

The Global Cyber Alliance’s (“GCA”) recent survey shows that only one of the fifty largest federal IT contractors have adopted an email security measure to protect against phishing.  Engility is the only firm using the Domain-based Message, Authentication, Reporting, and Conference (“DMARC”) protocol to guard against this type of cyberattack.  DMARC creates a public record for verifying whether an email sender is authorized to send or receive messages within the domain.  The Department of Homeland Security (“DHS”) ordered federal agencies to implement DMARC by January 15th of this year.  While the agencies have complied, hackers will continue to target federal contractors to collect sensitive U.S. government information until their systems are better protected.  For example, a 2014 investigation by the Senate Armed Services Committee found that Chinese hackers had breached contractors to the U.S. Transportation Command approximately twenty times, however the command was only aware of two intrusions.

Big Movers

Safran (up 4.3%) – Share prices were up this week after the company reported strong first quarter revenue growth of 12% and expects to reach the high-end of its 2018 EPS target. 

Raytheon (down 10.3%) – Share prices were down this week as a result of easing tensions within the Korean peninsula.

Transactions

Ducommun, Inc. has acquired Certified Thermoplastics Co., a provider of precision profile extrusions and extruded assemblies of engineered thermoplastic resins, compounds and alloys for aerospace, defense, medical, and industrial applications.  Terms of the deal were not disclosed.

Ian, Evan & Alexander Corp. (IEA), a portfolio company of Enlightenment Capital, acquired RAI Government Services, LLC, a subsidiary of Maxar Technologies Ltd., a provider of intelligence services to clients in the U.S. Intelligence Community, local and federal law enforcement and the Department of Defense.  Terms of the deal were not disclosed

Peraton Corp., a portfolio company of Veritas Capital, has acquired Strategic Resources International, Inc., a provider of highly-adaptable communications infrastructure in anticipation of critical, global communications needs.  Terms of the deal were not disclosed.

QinetiQ Group plc has agreed to acquire E.I.S. Aircraft GmbH, a provider of aerial training services, threat representation, and combat battle simulations.  The deal is worth an estimated $85.5 million.

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Industry Week in Review –April 20, 2018

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Aerospace & Defense Update

In response to evolving threats from Russia and China concerning hypersonic missiles penetrating existing U.S. missile defense systems, the U.S. Air Force has revealed it will spend close to $1 billion to develop its own hypersonic missile. The Air Force awarded a $928 million contract to Lockheed Martin for the design, development, and testing of an air-launched hypersonic strike weapon capable of easily exceeding the speed of sound.  The contract furthers Pentagon efforts to develop state-of-the-art hypersonic technologies (defined as those capable of traveling faster than Mach 5) and would bolster existing missile defense systems which may be ill-equipped to handle such speeds.  This Air Force-led effort through the Hypersonic Conventional Strike Weapon program, along with the Tactical Boost Glide program joint-led by the Air Force and the Defense Advanced Research Projects Agency (“DARPA”), are aimed at protecting the U.S. from the possibility of a nuclear first strike.

The U.S. Federal Aviation Administration (“FAA”) this week ordered the inspection of certain CFM International jet engines following the engine explosion on Southwest Airline flight 1380, the first fatal U.S. airline accident in nearly a decade.  CFM International, a joint venture between Safran and General Electric, produces the approximately 8,000 CFM56-7B engines currently in operation on Boeing 737s, a pillar of the aerospace industry which has logged over 350 million hours of safe travel.  While Southwest and other airlines have vowed to accelerate inspections on similar engines over the next 30 days, the U.S. National Transportation Safety Board (“NTSB”) is launching an investigation into the cause of the accident.  The NTSB, along with French investigators, plans to complete its investigation within 15 months, but early efforts focus on metal fatigue of the fan blade.

Government Technology Solutions

The Internal Revenue Service (“IRS”) announced late Tuesday that it would allow tax payers to submit their returns a day late, through Wednesday, without penalty after technical problems impaired the agency’s ability to process tax returns filed electronically.  The IRS described Tuesday’s glitch as hardware-related, and the agency announced later that day that its systems were back online and able to process returns.  However, the episode raised fresh questions of whether the IRS’ antiquated computer systems are prepared for the massive overhaul mandated by last year’s tax reform.  The IRS has over 60 different IT systems for managing the cases of individual tax payers, most of whom file electronically.  A report submitted to Congress by an internal IRS watchdog noted that many of the IRS’ systems have not been updated in decades, including two of them that are nearly six decades old.  Senior IRS officials stated that replacing the agency’s aging IT infrastructure is a high priority.

A Council of the Inspectors General on Integrity and Efficiency (“CIGIE”) report identified IT security and management as one of the top management and performance challenges faced by federal agencies.  The CIGIE report was produced by compiling information from 61 top management and performance challenges reports written by the offices of various inspector generals at agencies across the federal government.  The report specifically identified data security, ongoing IT modernization, contingency planning, and building a qualified workforce as the primary difficulties faced in the IT realm.  Among examples, the CIGIE report noted existing backup challenges in the Department of the Interior (“DOI”) that could leave the DOI without access to important data should a computer fail or its systems be compromised.  Federal IT management was also on the Government Accountability Office’s (“GAO”) latest high-risk list, released in 2017.

Big Movers

Textron (up 12.0%) – Share prices were up this week after the company beat first quarter earnings estimates and agreed to sell its tool unit to Emerson Electric.

Tyler Technologies (up 5.8%) – Share prices were up this week after the company announced it has signed a definitive agreement to acquire Socrata, Inc.

Transactions

Arsenal Capital Partners has acquired Fralock, a provider of components and subassemblies designed and engineered using specialty materials for the semiconductor, aerospace, satellite, and life sciences industries.  Terms of the deal were not disclosed.

Fastener Distribution Holdings, a portfolio company of Audax Private Equity, has acquired Blue Sky Industries, a provider of c-class parts to aerospace and defense MRO and OEM customers.  Terms of the deal were not disclosed.

HEICO Corporation’s subsidiary Dukane Seacom, Inc. has acquired Instrumar Limited’s Emergency Locator Transmitter Beacon product line, a provider of safety-critical devices such as location and distress beacons for commercial aviation and defense markets.  Terms of the all cash deal were not disclosed.

Polaris Alpha has acquired Fourth Dimension Engineering, LLC, a provider of electronic product development services in multiple engineering disciplines to government and commercial clients.  Terms of the deal were not disclosed.

Tyler Technologies has acquired Socrata Inc., the venture-backed industry leader in open data and data-as-a-service solutions for government, providing cloud-based data integration, visualization, analysis, and reporting solutions.  Terms of the deal were not disclosed.

Valiant Integrated Services has acquired Cubic Global Defense Services, a provider of training, operations, intelligence, maintenance, technical, and other support services to the U.S. government and other nations.  The deal is worth an estimated $138 million.

Vantage Specialty Chemicals Holdings, Inc. a portfolio company of H.I.G. Capital, LLC has acquired B&B Tritech, Inc., a provider of military grade surface treatment solutions engineered for defense and commercial aviation markets.  Terms of the deal were not disclosed.

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Industry Week in Review –April 13, 2018

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Aerospace & Defense Update

A report released earlier this week by Space Angels, a fund that invests in early-stage space companies, found that space ventures have raised close to $1 billion from non-government equity investors during the first quarter of 2018.  Approximately $500 million of this funding came from Fidelity’s investment in SpaceX, which is intended to drive the development of Starlink, SpaceX’s satellite communications network.  Other notable investments include Searchlight Capital’s $150 million investment in Global Eagle, a provider of satellite connectivity, and Spaceflight’s announcement of a $150 million Series C funding round.  Space Angels noted that 2018 is expected to be a strong year for the space sector, citing the emergence of small launch vehicles, in conjunction with the growth of small satellite systems, as key growth areas.

At the Navy League’s Sea-Air-Space conference, several companies pitched possible initial-entry, rotary-wing training helicopters to serve as replacements to the aging TH-57 Sea Ranger fleet.  The TH-57 has been in active service since the 1970s, and the Navy has recently been putting out requests for information for potential replacement options.  Airbus, Bell, and Leonardo each brought an example of a training helicopter to the Navy trade show.  The Navy has announced that it plans to purchase a new training helicopter by GFY2020.

Government Technology Solutions

In his testimony before the Senate Judiciary and Commerce committees on Tuesday, Mark Zuckerberg revealed more details regarding Facebook’s response to the Russian tampering in the 2016 presidential elections.  Zuckerberg stated that Facebook notified the DNC and RNC, telling the parties that the two presidential campaigns were targets of Russian hackers.  Previously, it was reported that Facebook had only notified the FBI of Russia’s tampering in the elections.  Zuckerberg stated that APT28, or Fancy Bear, a hacking group linked to Russia’s Main Intelligence Directorate, had previously attempted to hack Facebook in the past, but Facebook’s security team saw unusual activity in months leading up to the election and notified the DNC and RNC.  In the summer before the election, Facebook’s security team noticed increased activity from Russian hackers when APT28-related accounts created fake personas to funnel stolen information to journalists.  Even though Facebook eventually notified the DNC and RNC, Zuckerberg claimed responsibility and stated that Facebook was too slow in identifying the Russian cyber-attacks.

According to a new Deltek analysis, the federal health IT budget is expected to grow to $8.5 billion in 2022 from $6.1 billion in 2018, driven heavily by the spending at the Department of Veterans Affairs (“VA”) and Department of Defense (“DoD”).  Deltek divides the health IT budget into agencies who protect people from health risks, provide health care services, and pay for health care services.  Agencies that provide health care services, such as the VA and several DOD organizations, will receive the biggest spend, with Deltek estimating it to grow from $3.3 billion in 2018 and $5.4 billion in 2023.  The $2.1 billion in growth is expected to be solely allocated to the VA, as the agency is the biggest prover of health care services and is also performing its own electronic health record (“EHR”) implementation.  Major health IT contracts such as CIOSP3, T4NG, and SEWP V expect to receive a large portion of this increase in funding.

Big Movers

 Elbit Systems (up 4.8%) – Share prices were up this week after the company completed the acquisition of the assets and operations of Universal Avionics Systems for a purchase price of approximately $120 million.

 Analogic (down 12.4%) – Share prices were down this week after the law office of Brodsky & Smith announced it is investigating potential claims against Analogic’s Board of Directors for possible breaches of fiduciary duty in connection with the sale of the company to Altaris Capital Partners.

Transactions

 General Dynamics’ subsidiary Jet Aviation has agreed to acquire Hawker Pacific Pty. Ltd., a provider of a wide range of aviation services, including civil MRO services, government fleet management, FBO services, aircraft sales and parts sales.  The deal is worth an estimated $250 million.

 Luminar Technologies, Inc. has acquired Black Forest Engineering, LLC, a provider of high-performance receivers used in LiDAR systems.  Terms of the deal were not disclosed.

 SOS International has acquired STG Group Holdings, Inc., a provider of mission-critical technology, cyber, and data solutions.  The deal is worth an estimated $83 million.

 UmbraGroup S.p.A. has acquired Meggitt plc’s subsidiary Thomson Aerospace & Defense, a provider of highly engineered ball screws and electromechanical systems to defense and commercial clients.  Terms of the deal were not disclosed.

Woodward, Inc. has acquired Rolls Royce plc’s subsidiary L-Orange GmbH, a provider of fuel injection systems for industrial diesel, heavy fuel oil and dual-fuel engines.  The deal is worth an estimated $859 million.

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Industry Week in Review –April 6, 2018

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Aerospace & Defense Update

In response to the recent trade dispute between the U.S. and China, Boeing announced that it will engage in talks to help prevent the dispute from harming the global aerospace industry.  Chinese authorities said that aircraft will be included amongst the products targeted by the tariffs, however the tariffs will only be applied to smaller planes, such as Boeing’s existing single-aisle 737 and the smallest version of the 737 Max, which only have a limited number of Chinese clients.  Overall, the tariffs will impact only 5% of Boeing’s 737 aircraft backlog.  Even if the U.S. and China are unable to reach a trade agreement, deliveries under contract with Chinese customers are still likely to go ahead under the existing terms without having a material impact on Boeing’s short-term financial performance.

Major General David Thompson has been appointed to the newly created position of Vice Command of the Air Force Space Command and will be responsible for promoting military space operations within the Pentagon.  This is the first time that a uniformed leader based in the Pentagon will be solely focused on promoting space operations, demonstrating the increasing prioritization of space within the Air Force.  Major General Thompson will be tasked with increasing the role of the Air Force Space Command, elevating it into a major command.

Government Technology Solutions

In a March 26th letter, the Department of Homeland Security (“DHS”) for the first time acknowledged the existence in Washington, D.C. of rogue devices that foreign spies and criminals could be using to track individual cellphones and intercept calls and messages.  Foreign powers’ use of such cellphone-site simulators, also known as Stingrays, has long been a concern, but intelligence and law enforcement agencies have been silent on the issue until recently.  DHS said it has not determined the type of devices in use or who may be operating them.  The devices work by tricking mobile phones into locking onto them instead of legitimate cell towers, revealing the exact location of a particular cellphone.  Shutting down rogue Stingrays is an expensive endeavor that would require wireless network upgrades for which the industry has been unwilling to pay.  Security-company researchers first located Stingrays in 2014 near the White House, Supreme Court, and Pentagon, among other locations, but there has been little political will to tackle the issue.

The Treasury Department’s Fiscal Service is reporting positive results from its five-month long test project using blockchain for potential fiscal asset management activities.  In September 2017, the Office of Financial Innovation and Transformation began a proof concept aimed at discovering if blockchain could improve oversight and management of physical assets like computers and cellphones.  Despite a significant startup effort, the results indicated that using blockchain resulted in marked improvement in both transparency and efficiency for asset management.  Fiscal asset management is currently a manual, spreadsheet-based process for reconciling physical assets with status descriptions.  Blockchain could streamline the process and enable property custodians to see where assets are in real time, instead of just at a moment in time, as a traditional spreadsheet does.  The next step of the concept is to determine how blockchain will work once it is placed into the actual federal context and whether the added efficiency and effectiveness is worth the upfront investment.

Big Movers

ICF International (up 9.1%) – Share prices were up this week after the company was awarded two contracts to support the U.S. Department of Agriculture’s IT modernization efforts.

GKN (down 8.4%) – Share prices were down this week after the company announced it is facing a credit rating downgrade due to new debt that Melrose, the company’s new owners, is raising to finance the transaction.

 

Transactions

Alvarez & Marsal (“A&M”) Capital Partners has acquired Client Network Services, Inc. (“CNSI”), a provider of IT and business process outsourcing solutions to federal, state, and local government agencies.  Terms of the deal were not disclosed.

Aviation Technical Services has acquired American Cooler Service Inc., a provider of heat exchangers, fuel systems, pneumatics, and electromechanical products.  Terms of the deal were not disclosed.

Day & Zimmermann has acquired M2 Services Corporation, a provider of aviation and vehicle heavy maintenance, modification, painting, component repair, and overhaul services.  Terms of the deal were not disclosed.

GenNx360 Capital Partners has acquired Subsea Global Solutions, a provider of underwater ship maintenance, inspection, repair, and marine construction services.  Terms of the deal were not disclosed.

LDI, Ltd. has acquired Polygon Company, a provider of composite bearing, non-gelcoat composite pneumatic cylinders, and dielectric motor insulation, among others.  Terms of the deal were not disclosed.

Orolia SA has agreed to acquire Talen-X, Inc., a provider of hardware and software development for GPS and Global Navigation Satellite System.  Terms of the deal were not disclosed.

Superion, LLC has acquired Public Safety Corporation, a provider of technology and technology-enabled services focused on state and local government public safety projects and programs.  Terms of the deal were not disclosed.

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Industry Week in Review – March 30, 2018

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Aerospace & Defense Update

On Thursday, shareholders of GKN plc, a British manufacturer of aerospace and auto parts, narrowly voted to accept an acquisition offer from turnaround specialist, Melrose Industries plc.  Melrose had previously submitted a hostile takeover bid of ~$9.5 billion in January, which was initially rejected.  In response to Melrose’s hostile approach, GKN announced a plan to split its aerospace and automotive businesses into separate companies through the sale of its automotive business to Dana Corp. for ~$6.1 billion; however, this sale is no longer expected to occur.  Since its initial hostile bid, Melrose has sweetened its offer to an estimated value of ~$11.1 billion.  As part of the purchase agreement, Melrose has guaranteed that it will not sell GKN Aerospace for the next five years and that GKN will maintain its UK listing and headquarters.

The National Aeronautics and Space Administration (“NASA”) is undergoing final preparations for its Transiting Exoplanet Survey Satellite (“TESS”), which will launch from Space Launch Complex 40 at Cape Canaveral Air Force Station in Florida on April 16th.  TESS will be launched and encapsulated within the payload fairing of a SpaceX Falcon 9 rocket.  Sixty days after launch, and following a series of instrumentation tests, the satellite will begin a two-year survey mission during which it will monitor more than 200,000 stars for the presence of exoplanets.  The survey is the first-ever all-sky transit survey, and will seek to identify planets that range from Earth-sized to gas giants.

Government Technology Solutions

Anticipation for the Navy’s $3.4 billion Next Generation Enterprise Network-Recompete is hitting a boiling point, as the solicitation is expected to drop any day now.  The three companies fighting for the services track of the contract are DXC Technology (the incumbent), Leidos, and CSRA.  While the winner of this contract will certainly earn a massive pay day, the real value in this victory lays in how the Navy envisions this contract to fit into its larger network modernization effort.  The winner will gain a major foothold in IT modernization, an area of priority for the Trump administration, and set themselves up for more opportunities based on the Navy’s strategy to upgrade a global network that supports 700,000 Navy and Marine Corps users at 2,500 sites.  DXC looks to be the front-runner to win the contract based on almost two-decades of incumbency and a strong continuing partnership with AT&T.  Leidos and CSRA, however, are not sitting idly by; Leidos is partnering with IBM, Unisys, and Verizon, while CSRA plans to include team members once its acquisition with General Dynamics matures.

West Virginia is set to become the first state to allow Internet voting by blockchain in a Federal election when the state holds its primary elections on May 8th.  Deployed and overseas military service members and their families in two counties will be part of the pilot test.  West Virginia is using Voatz, a Boston startup, and anticipates a few dozen voters to participate in the pilot test.  Voatz’s technology works by recording all votes on a blockchain, where each vote is ultimately verified by a third-party participant.  This technology will be able to accurately count all votes and allow voters to participate from anywhere in the world, a feature particularly beneficial for members of the military.  While some critics cite that cyberattacks could be an issue, any manipulation to the data would be easy to spot since blockchain is publicly accessible. Though there are no plans to expand the voting technology to the general public yet, West Virginia’s innovation may lead to other states quickly following suit.

Big Movers

Maxar Technologies (up 6.0%) – Share prices were up this week after the company was chosen to build Spacecom’s AMOS-8 advanced communications satellite.

AAR (up 5.2%) – Share prices were up this week after the company beat earnings per share estimates for the quarter.

Transactions

Melrose Industries plc has agreed to acquire GKN plc, a provider of design, development and manufacturing of aerospace and defense products as well as automotive and agrotechnical components.  The deal is worth an estimated $11.1 billion.

White Wolf Capital’s portfolio company Consolidated Machine & Tool Holdings, LLC has acquired LCP Machine, Inc., a provider of CNC precision machining serving a number of industries, including aerospace, defense, energy and industrial.  Terms of the deal were not disclosed.

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Industry Week in Review – March 23, 2018

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Aerospace & Defense Update

On Friday morning, Congress passed a $1.3 trillion budget deal, which prevents another government shutdown and gives Federal agencies the full government fiscal year spending allotment.  The defense bill is touted as the largest increase in defense spending in over 15 years and will increase the budget to $700 billion.  The increase is anticipated to add additional funding for ships, aircraft, and missile defense in addition to boosting military readiness and modernization efforts.  President Trump raised the possibility of vetoing the spending bill Friday afternoon, but ultimately signed the legislation, referencing that the defense funding within the bill made it too important to veto.

As mandated by the GFY2018 spending bill, the U.S. Army will conduct a competition to procure its Ground Mobility Vehicle (“GMV”), which serves as an ultra-light variant of the Joint Light Tactical Vehicle (“JLTV”).  Currently, General Dynamics’s Flyer 72 is serving as the interim GMV and has been purchased for five airborne infantry brigade combat teams.  However, a large pool of GMV manufacturers exist, including industry players General Dynamics, Boeing, Polaris, Hendrick Dynamics, Vyper Adamas, and Lockheed Martin.  The manufacturers will be competing to provide a total of 1,700 GMVs for this phase of the Army’s procurement process.

Government Technology Solutions

Roughly a month after General Dynamics (“GD”) agreed to acquire CSRA for $40.75 per share in cash, GD sweetened its offer this week to $41.25 per share following a counter bid by CACI.  On Sunday, CACI surpassed GD’s original $6.8 billion offer with a $7.2 billion bid of their own, offering $44 per share in cash and stock.  However, despite CACI’s increase in valuation, CSRA’s board has accepted the new GD offer, just as they did before the original February 12th announcement when CSRA reportedly also held bids from CACI and SAIC.  GD’s valuation represents a $9.7 billion enterprise value as the company will also assume $2.8 billion of CSRA’s debt.  GD ultimately prevailed in the bidding war in large part due to their all-cash offer while CACI offered both cash and shares, which closed down 7% Monday after their counter-bid was made public.  CACI’s offer was worth just $42.20 per share when the market closed Friday.  GD and CSRA received clearance from federal anti-trust officials last week, and the deal is still expected to close in the first half of this year.

The White House released its 2018 President’s Management Agenda on March 20th, highlighting IT modernization, reshaping the federal workforce, and a reorganization of the government.  The report highlights 14 priority areas for cross-agency transformation, including improving federal customer experience, category management, transparency for IT spending, acquisition management, and security clearance reform.  The three main drivers of this transformation will be IT modernization, data and transparency, and reforms to the federal workforce.  Using a combination of executive orders, legislation, and the newly-created central modernization fund established by the Modernizing Government Technology (“MGT”) Act, the agenda emphasizes IT modernization through security improvements, modernizing citizen-facing services, and cost-effective tech infrastructure.  Additionally, the agenda takes aim at the federal personnel system, outlining plans to partner with Congress to overhaul the civil service system’s statutory and regulatory rules.  Other focus areas for reform include human capital management, cutting unnecessary political positions, and expanding the use of shared services.

Big Movers

CACI International (down 6.8%) – Share prices were down this week after the company made a $7.2 billion bid for CSRA that was ultimately rejected in favor of GD’s all-cash offer.

Smith’s Group (down 6.2%) – Share prices were down this week after the company announced weaker than expected earnings, with revenue falling 4.3% and pretax profit falling 12% for the six months ending January 31.

Transactions

CPI Aerostructures, Inc. has agreed to acquire Air Industries Group’s subsidiary Welding Metallurgy, Inc., a provider of specialty welded products and assemblies, large diameter tube bending and integrated electronic assemblies, among other capabilities, to defense and aerospace markets.  The deal is worth an estimated $9 million.

Elbit Systems, Ltd. has agreed to acquire Universal Avionics Systems Corp., a provider of integrated flight management systems and navigation management systems, navigation sensors, flight recorders, and cabin display systems.

Hanover Partners has acquired Blast Deflectors, Inc., a provider of jet blast deflectors, ground run-up enclosures, and end-around taxiway screens for aviation infrastructure applications.

Phoenix East Aviation (Renovus Capital) has acquired Superior Flight School, Inc., a provider of highly engineered aerospace elastomers commercial transport airframes as well as defense aerospace applications.  Terms of the deal were not disclosed.

TransDigm Group, Inc. has agreed to acquire Extant Aerospace, a provider of proprietary, aftermarket products as well as repair and overhaul services for aerospace and defense markets.  The deal is worth an estimated $525 million.

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Industry Week in Review – March 16, 2018

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Aerospace & Defense Update

The SpeedNews 2018 conference was held this week in Beverly Hills, CA.  The conference brings together members of the aviation industry, which include commercial, defense, business and general aviation, aerospace manufacturing, raw materials, and M&A stakeholders.  Overall, the conference demonstrated strong tailwinds for the commercial aviation industry, highlighted by record backlog levels and rising delivery schedules.  The conference also posed questions around Boeing and its New Midmarket Airplane (“NMA”) strategy and its potential launch in 2018.  Other key topics included Airbus and Boeing’s strategy of growing into the aftermarket and how this strategy will impact both acquisitions made by original equipment manufacturers (“OEMs”) in the sector as well as supplier relationships with OEMs.

On Wednesday, the Air Force announced its plans to split $641 million in contract awards for satellite launch operations between SpaceX and United Launch Alliance (“ULA”), a joint venture between Boeing and Lockheed Martin.  Of the $641 million, SpaceX was awarded $290 million in a fixed price contract to launch three GPS satellites into orbit on its Falcon 9 rocket by the end of 2020.  ULA was awarded the remaining $351 million for two launches of Air Force spacecraft on its Atlas V rockets. The Pentagon expressed that the awards were parts of its continuous efforts to reduce costs as well as maintain access to space through multiple launch providers that are able to compete over the long-term for national security payloads.

Government Technology Solutions

On Thursday, the Trump administration announced sanctions against Russian entities for a multitude of actions, including meddling in the 2016 presidential election, the NotPetya attack, and persistent attempts to break into the U.S. energy grid.  The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) sanctioned five entities along with 19 individuals with ties to the Kremlin.  Treasury Secretary Steven Mnuchin described the targeted sanctions as part of a broader effort to address ongoing “nefarious” acts from Russia.  Many of those sanctioned were responsible for attempts to breach industry control systems tied to the U.S. energy grid, where the Kremlin conducted a multi-stage campaign to penetrate power company IT networks through spearphishing and watering-hole domains. Additional sanctions were passed against a list of people linked to the Internet Research Agency for spreading election-related propaganda on social media during the 2016 presidential election.

Although paper ballots may seem like an antiquated voting practice, hacking fears are now pushing an increasing number of states toward a return to the basics.  Heeding warnings from Washington regarding potential cyber threats, including the Kremlin, that may target electronic voting systems in the 2018 midterm elections, state legislatures are taking action to strengthen election cybersecurity measures.  The primary focus has been doing away with direct-recording electronic voting machines (“DREs”) that do not produce a paper, auditable ballot to systems that do.  Voting systems vary state-by-state, as five exclusively use DREs, a select few use only paper-based voting systems, and the majority use a combination of the two.  Kentucky moved last month to require that all future voting equipment provide a paper record, while Virginia decertified all of its paperless systems in December 2017.  President Trump recently endorsed the notion of transitioning to paper-based ballots and Congress has recently introduced two such bills, although neither have seen much progress.

Big Movers 

Kongsberg Gruppen (up 4.8%) – Share prices were up this week after the company announced it has signed a letter of intent to supply equipment for military vehicles to Qatar worth up to $1.9 billion.

Kratos Defense & Security Solutions (down 18.5%) – Share prices were down this week after the release of a highly-critical research report this week by a third-party investment manager.

 

Transactions

Elbit Systems, Ltd. has agreed to acquire Israel Military Industries, Ltd., a provider of arms, ammunition, explosives and propellants, military support systems and equipment, and aircraft accessories as well as develops remote-control mobile robots.  The deal is worth an estimated $540 million.

Odyssey Investment Partners portfolio company CPI International Inc. has agreed to acquire Viasat’s Large-Diameter GEO Satcom Antenna Product Line, which includes limited motion antennas, all designed for multi-band operation at various frequency bands.  Terms of the deal were not disclosed.

StereoVision Imaging, Inc. has acquired Digital Signal Corp., a provider of facial intelligence sensors, software, systems, and services.  Terms of the deal were not disclosed.

 TransDigm Group, Inc. has agreed to acquire Esterline Corporation’s subsidiary Kirkhill Elastomers, a provider of highly engineered aerospace elastomers commercial transport airframes as well as defense aerospace applications.  The deal is worth an estimated $50 million.

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Industry Week in Review – March 9, 2018

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Aerospace & Defense Update

On Monday, British-based defense electronics manufacturer, Ultra Electronics plc, announced it had terminated its $235 million acquisition of Sparton Corp.  Back in 2014, Ultra and Sparton formed a joint venture, ERAPSCO, which designs and manufactures sonobuoys used by the U.S. Navy to track and detect submarines.  ERAPSCO was awarded an indefinite delivery indefinite quantity (“IDIQ”) contract in 2014, which will run into 2019, and received $664 million in purchase orders during the contract’s first four years.  Through acquiring Sparton, Ultra would have transitioned into the U.S. Navy’s sole-provider of sonobuoys.  However, anti-trust concerns were raised by the Department of Justice and supported by the Navy, leading Ultra to terminate the deal.

Estimates from the Pentagon were released this week projecting costs of F-35 joint strike fighter fleet modernization at $16 billion.  Pentagon officials will use these estimates to weigh the decision of commencing a bulk buy of the F-35’s from Lockheed Martin or modernizing the current fleet instead.  Overall, the modernization efforts are anticipated to cost at least $10 billion over the next seven years, and the U.S. will have a 70% share of the development costs.  The detailed Pentagon plan for F-35 bulk procurement is set to be released later this month.

Government Technology Solutions

While a high theme within the government services market is mega-mergers and consolidation, highlighted by the recent GDIT acquisition of CSRA among others, several large publicly traded companies in the sector are instead turning towards M&A for smaller and more focused strategic tuck-ins.  Specifically, Booz Allen and CACI International recently stated that they do not feel the need to increase size in order to keep pace with competition.  For instance, Booz Allen’s recent acquisitions of SPARC and Aquilent augmented its organic growth strategy by increasing emerging technology and higher-end engineering capabilities, two focus growth areas.  Similarly, CACI’s CEO Ken Asbury recently stated that his company’s size, which is currently fourth in total annual revenue, has not hindered their market positioning.  While CACI does not feel the need to make a scale-driven acquisition in the near future, the company’s number one priority for cash is M&A.  Both Booz Allen and CACI will continue to strategically use acquisitions to steadily improve capabilities without disrupting corporate dynamics.

A recent report from the Brennan Center for Justice has found that the government has made minimal progress fortifying U.S. voting machines against cyberattacks.  The report states that 41 states have voting systems that are at least a decade old and approximately 43 states and Washington D.C. plan to use machines that are no longer manufactured for the 2018 midterm elections, the same number used in 2015.  With recent cyberattacks making headlines around the world, the government’s legacy systems could be at serious risk during this election season.  In addition to being more vulnerable to cyberattacks, legacy systems pose an increased risk because vendors may no longer be able to write security patches for them.  While it is nearly impossible to improve voting systems before the midterm elections, the report calls on the federal government to grant states appropriate funding to replace equipment for voter security ahead of the 2020 presidential election.

Big Movers

Rolls Royce (up 14.0%) – Share prices were up this week after the company announced it is on track to meet 2020 goals and will introduce a new cost-cutting program.

Comtech Telecommunications (up 32.2%) – Share prices were up this week after the company reported a strong order backlog and raised its fiscal 2018 forecast for earnings per share.

Transactions

The Acacia Group, who acquired privately held Intelligent Decisions, Inc. (ID) in May of 2017, has split the firm into two standalone companies, Applied Insight, LLC and ID Technologies, LLC.

Compagnie de Saint-Gobain S.A.’s Performance Plastic business has acquired SMS Group’s subsidiary HyComp, LLC, a provider of advanced proprietary components for the aerospace and industrial markets.

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