Industry Week in Review – August 12, 2016

Aerospace & Defense Update

With the looming Continuing Resolution (“CR”), Air Force Secretary, Deborah Lee James, warned congressional members that up to 60 program budgets would be impacted.  The potential long-term CR would underfund the Air Force by an estimated $1.3 billion compared to its requested FY2017 budget.  Many new upgrade programs such as the MQ-9 Reaper unmanned system, C-130 cargo transport, and the B-52 and B-2 bomber fleets will be underfunded.  Other key programs such as the B-21 bomber and the KC-46A tanker would be capped and potentially experience timing delays.  While the CR is likely, the Air Force may be able to request additional Overseas Contingency Operation (“OCO”) funding for munitions programs.

Boeing expects to decide whether to cut its current 777 production rate of 8.3 jets per month in the next two months.  The Company has only received eight orders this year for the current 777 wide body, and must garner 40 – 50 orders per year in order to maintain its current production rate.  Other factors in this decision include Boeing’s current development of the 777-X, Airbus’ recent release of the A-350, and the current glut of wide body aircraft in the market.  Boeing executives have hinted they would rather cut production of the 777 than sell more at lower margins.

During its 2Q16 earnings call, Orbital ATK announced it will restate earnings due to accounting errors that buried operating losses of up to $450 million and overstated revenue by ~$100 million.  The losses stem from Orbital’s ten-year, $2.3 billion contract to supply small caliber ammunition to the U.S. Army.  Orbital management believes most of the financial impact will apply to FY2015 earnings, estimating operating income to change from a profit of $232 million to a loss of ~$200 million.  In reaction to this news, Orbital’s shares dropped 20.2% for the day, but have since rebounded slightly to be down 15.7% for the week.

Government Technology Solutions Update

According to a recent report, worldwide demand for cybersecurity services and solutions will continue to experience rapid growth in the near-term.  The cybersecurity services and solutions market is expected to increase from $122.45 billion in 2016 to $202.36 billion in 2021, representing a 10.6% compound annual growth rate (“CAGR”).  While the financial sector is likely to see the fastest growth rates, both the Federal government and government contractors are generating significant growth for the sector as well.  The Federal cybersecurity market has expanded 66% since 2011 to $5.5 billion in 2015.  Rapid growth in the sector, as well as an increasing push to both modernize and protect Federal technology infrastructure, has led to a string of acquisitions in the cybersecurity sector.  There have been 38 M&A transactions since the beginning of 2015 involving selling companies engaged in cybersecurity, including the recent noteworthy $4.65 billion acquisition of Blue Coat by Symantec, which closed on August 1st of this year.

On Monday, the Office of Management and Budget (“OMB”) released a memo advising Federal agencies on how they should properly go about obtaining software solutions for their departments.  The policy set forth by the OMB lists a three-step process for software procurement, which states that agencies should first seek software solutions within the Federal government, then in the commercial market, before considering developing an internal solution.   Additionally, the OMB will require that the agencies release a minimum of 20% of proprietary code to the public in an effort to encourage collaboration between public and private sectors, and that doing so might enable “the best and brightest minds inside and outside government” to “work together to ensure that the code is reliable and effective.”  The Federal government spends approximately $6 billion on 42,000 transactions annually. The OMB hopes that, in addition to promoting transparency and interoperability between government agencies, this initiative will help reduce the amount of money spent on software.

Big Movers

Orbital ATK (Down 15.7%) – Shares were down this week after the company reported a restatement of their financials due an accounting error that obscured operating losses of ~$400 million

Smiths Group (Up 4.6%) – Shares were up this week after the company raised guidance on FY2016 revenue and operating profit


Exchange Income Corp. has acquired CarteNav Solutions, Inc., a provider of Intelligence, Surveillance, and Reconnaissance (“ISR”) and situational awareness software solutions for the maritime, land, and air environments to defense, security, and commercial clients.  The deal is worth an estimated $12 million.

KBR, Inc. has acquired Honeywell Technology Solutions, Inc., a provider of satellite mission lifecycle support services, military equipment prepositioning and logistics services, and cybersecurity solutions primarily to Federal government clients.  The deal is worth an estimated $266 million, after adjustments worth $34 million for acquired tax benefits.

LightPath Technologies has agreed to acquire ISP Optics Corporation, a manufacturer and provider of advanced infrared optical components, coatings and subsystems.  The deal is worth an estimated $18 million. KippsDeSanto & Co. served as the exclusive financial advisor to ISP Optics.

PlanetRisk, Inc. has acquired Analytic Strategies LLC, a provider of data analytics solutions and consulting services for commercial and government clients.  Terms of the deal were not disclosed.

Tribalco, LLC has acquired Intelligent Decisions, Inc.’s U.S. Army Communications and Transmissions Systems business, a provider of a wide range of transmissions and communications solutions as well as ancillary support services.  Terms of the deal were not disclosed.

Trident Maritime Systems has agreed to acquire Callenburg Technology, a designer and supplier for heating, ventilation, and air-conditioning to the passenger, offshore and navy markets.  The net sale price was approximately $ 64 million.

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