Industry Week in Review – February 5, 2016

Aerospace & Defense Update

This week, Defense Secretary Ash Carter previewed the GFY2017 defense budget request in anticipation of the full release next week.  According to Carter, the $583 billion budget takes a “long view” approach, as the U.S. prepares for challenges decades down the road.  The planning of the budget was driven by several key factors including the rise of Russia and China, the threat of North Korea, Iran’s influence in the Gulf Coast, and the current fight against the Islamic State.  For example, Carter stated that the Pentagon will request $7.5 billion for the fight against the Islamic State, representing a 50% increase over GFY2016 levels.  Further budget shifts include cutting five of 48 F-35As from the U.S. Air Force’s original GFY2017 plan.  It remains unclear whether the initial plan to purchase a total of 1,763 aircraft will be reduced.  Despite these changes, the Air Force will fully fund the Long Range Strike Bomber and the KC-46 tanker programs.  Moreover, the budget also includes the Pentagon’s $2 billion request over the next five years to purchase 4,000 Tomahawk weapons and fund the development of more advanced capabilities for ship-based weaponry.  Overall, the GFY2017 budget request marks a “major inflection point” for the department as it looks for new ways to combat challenges in the short, medium, and long term.  To combat all of the outlined challenges, the U.S. will not only focus on air, land, and sea methodologies, but will also increase efforts in areas of cyber, space, and electronic warfare.

Government Technology Solutions Update

Xerox has announced that it intends to split into two separate publicly-traded companies, an $11 billion document technology company and a $7 billion business services company.  The announced split, which will separate Xerox’s hardware business from its services business, effectively reverses Xerox’s $6.4 billion acquisition of Affiliated Computer Services in 2010.  The transaction follows similar strategic moves by Science Applications International Corp. and Hewlett-Packard, and more recently Computer Science Corp. and Lockheed Martin Corporation.  Consistent with these portfolio-shaping activities, Xerox believes that the split will allow both companies to refocus on core capabilities and subsequently be more competitive in the marketplace and increase shareholder value.  Names and management teams of the new entities have not yet been announced, but the tax-free separation is expected to close by year end.

The Department of Defense (“DoD”) GFY2017 budget preview, which was released on February 2nd, includes approximately $7.0 billion for cyberspace operations.  This represents a 27.3% increase over the $5.5 billion GFY16 request.  Defense Secretary Ash Carter has cited the need to bolster network defenses, improve training for personnel, and develop the tools and infrastructure required to provide offensive cyber operations.  The DoD cyber budget is expected to exceed $35.0 billion over the next five years and represents only a fraction of the DoD’s broader IT expenditures.  The Pentagon’s request also includes $71.4 billion for Research and Development (“R&D”), marking the second straight year R&D budgets have grown.  Carter has emphasized that the increased cyber budget and continued growth in R&D marks an inflection point for the DoD, in which the department aims to address long-term strategic challenges posed by U.S. competitors, particularly in cyberspace, electronic warfare, and space.

Big Movers

Esterline Technologies Corporation (Down 32.6%) – Shares were down this week after the Company reported disappointing earnings for the quarter in addition to news breaking out of a pending investigation for potential violations of federal security law

CACI International, Inc. (Up 9.6%) – Shares were up this week after the Company reported positive earnings and increased guidance for 2016


Arlington Capital Partners acquired iRobot Corporation, Defense & Security Business, a provider of robotic technologies for defense, public safety, and industrial markets.  The deal is worth an estimated $45 million, which includes a $15 million contingent payment based on 2016 revenue.

Braxton Science & Technology Group LLC to acquire Space/Ground System Solutions Inc., a provider of command-and-control software maintenance.  Terms of the deal were not disclosed.

Liberty Hall Capital Partners acquired AIM Aerospace Inc., a provider of interiors, composites, and ducting and tooling products to airlines and original equipment manufacturers worldwide.  The deal is worth an estimated $220 million.

The Cadmus Group, Inc. acquired Obsidian Analysis, Inc., a provider of management consulting services to decision makers across the full range of homeland security and business resilience domains.  Terms of the deal were not disclosed.

Ball Aerospace & Technologies Corp. acquired Wavefront Technologies, Inc., a provider of systems and network engineering, software development, and analytical services for cyber and mission-focused programs.  Terms of the deal were not disclosed.

FireEye, Inc. acquired Invotas International Corporation, a provider of security automation and orchestration solutions for enterprises worldwide.  Terms of the deal were not disclosed.

Click here to review comparable company analysis.