Industry Week in Review – August 5, 2016
Aerospace & Defense Update
After overcoming cost overruns and development concerns, the F-35A has officially been declared ready for combat, 15 years after Lockheed Martin originally won the contract. As a result of achieving the initial operational capability (“IOC”) milestone, the first F-35 operational formation can now be deployed anywhere in the world. The Air Force plans to purchase 1,763 F-35As, which will make it the largest customer of the program. The fleet is expected to be eased into combat with Red Flag exercises and deployments to Europe and Asia-Pacific occurring over the next 18 months. The F-35’s stealth, electronic warfare, and sensor fusion capabilities provide the Air Force with improvements urgently needed given the current national security environment.
As the U.S. Treasury Department contemplates whether to license Boeing and Airbus commercial aircraft sales to Iran, many groups are lobbying against the deal. The proposed sales are worth an estimated $50 billion for ~200 aircraft, aimed at modernizing Iran Air’s aging fleet. Opponents hold the position that the deal effectively legitimizes “State Sponsor of Terror” and argue that sales would allow Iran to utilize the passenger aircraft to transport soldiers for military purposes. However, supporters of the deal believe Boeing and other U.S. firms will lose out on business as foreign competitors will most likely provide Iran with its requests for the 200 aircraft. The deal will likely not be decided upon until after the U.S. presidential election.
Government Technology Solutions Update
On Wednesday, the Government Accountability Office (“GAO”) ruled that the manner in which the Defense Information Systems Agency (“DISA”) conducted the contracting process for the ENCORE III vehicle was “inconsistent with procurement law and regulations”. Booz Allen Hamilton (“BAH”) and CACI initially filed award protests in April, citing the inconsistent, arbitrary, and opaque manner in which DISA conducted the procurement process. The protests claimed that DISA failed to provide the requisite information regarding the quantities the agency was planning to purchase and in which categories of the contract they were to be made. As a result, attorneys claimed, the contractors were unable to accurately price their proposals, despite the awards being doled out on a Lowest Price Technically Acceptable (“LPTA”) basis. Furthermore, the GAO found that DISA’s method of carrying out the LPTA process “didn’t have a reasonable basis,” and as a result, DISA will have to reconsider how ENCORE III awards are made. ENCORE III is a five-year, multiple award contract supporting 19 IT-related categories and has a ceiling value of $17.5 billion.
Harris Corporation revealed on Tuesday that hedge fund JANA Partners LLC had taken a 1.9% stake in the company, raising suspicions that Harris may divest its Government Communications Systems division. JANA has a reputation for taking similar positons, having acquired a 5.9% stake in Computer Sciences Corporation in February of 2015, which ultimately helped drive CSC’s divestiture of its public sector IT division. Harris also has a history of divesting assets which were “not core to [their] strategy to drive shareholder value,” such as the $210 million sale of its aerostructures business in May of 2015, the sale of a commercial healthcare business in 2015, and the sale of a broadcast communications business in 2013. If Harris eventually divests its Government Communications Systems division, it would continue the trend of businesses shedding non-core government services assets. Since the beginning of 2015, companies have made 25 similar divestitures.
Big Movers
Kratos Defense & Security Solutions (Up 22.0%) – Shares were up this week after the company reported a 19.1% increase in revenue during its 2Q16 earnings announcement, driven by a strong performance from its Satellite, Technology, and Training division
Esterline Technologies Corp. (Up 14.0%) – Shares were up this week after the company reported a 6.7% increase in revenue this year during its 3Q16 announcement
Transactions
Accurus Aerospace Corporation has acquired ZTM, Inc., a provider of complex metallic parts and assemblies for the global aerospace industry. Terms of the deal were not disclosed.
Emergency Communications Network, LLC (ECN) has acquired MIR3, Inc., a provider of intelligent notification and response software, business continuity and disaster recovery solutions and mass / emergency notification services for government and commercial clients. Terms of the deal were not disclosed.
Mission Essential Personnel, LLC has acquired Information Management Corporation (IMT), a provider of information management, large system integration, and information dissemination solutions primarily for the Department of Defense. Terms of the deal were not disclosed. KippsDeSanto & Co. served as exclusive financial advisor to IMT.
Shape Technologies Group, Inc. has acquired Aquarese Industries S.A., a provider of advanced robotic waterjet machining and materials processing systems and ultra-high pressure (“UHP”) process solutions to aerospace and other industries. Terms of the deal were not disclosed.
Trijicon, Inc. has acquired IR Defense Corp., a provider of optical aiming solutions for military and law enforcement markets. Terms of the deal were not disclosed.
Wipro Infrastructure Engineering has agreed to acquire H.R Givon Ltd., a provider of metallic parts and assemblies for the aerospace industry. Terms of the deal were not disclosed.
