Industry Week in Review – January 1, 2016

Aerospace & Defense Update

The Israeli Defense Ministry announced that Israeli firms received ~$770 million worth of work from Lockheed Martin in conjunction with a cooperation package associated with Israel’s F-35I stealth fighter purchase.  Elbit Systems, producer of the F-35 helmet mounted display system, and state owned Israel Aerospace Industries, producer of wing sets, were the two largest recipients of the industrial cooperation package.  The industrial cooperation is expected to exceed $4 billion if Israel opts to procure all 75 aircraft approved by the U.S. for export.

The omnibus spending bill passed on December 18th included an increase in funding authorities for the Special Defense Acquisition Fund (“SDAF”) from $100 to $900 million.  The SDAF program allows the State Department to look ahead at what partner nations need to procure in the coming year, and pre-order the systems.  The increase in funding comes at a time when foreign partners, the Pentagon, and members of Congress are raising concerns that the U.S. foreign military sales (“FMS”) process is moving too slowly to keep up with modern threats.  Although foreign partners will still undergo the FMS process, the SDAF enables faster delivery than if the nation had to wait for Congressional approval of the sale in order to start production.

Government Technology Solutions Update

The White House recently issued a cyber deterrence policy outlining U.S. response to cyber attacks in an effort to define the exact measures which will be taken in response to attacks from malicious actors.  Similar to the rationale supporting nuclear deterrence theories, the push by Congress to establish specific criteria for violations and retaliation measures aims to prevent cyber attacks against the U.S.  The policy leverages several avenues for retaliation using cost imposition processes including law enforcement measures, sanctions, and both offensive and defensive cyber operations aided by military force.  This move comes in tandem with increased U.S. support for other countries attempting to build capabilities to combat cybercrime.  In an effort to coalesce cohesive international support, the U.S. encourages countries to join the Budapest Convention on Cybercrime, an organization that defines a framework for deterring cyber attacks and gives law enforcement agencies the necessary authority to investigate and prosecute cybercrime.   This newly implemented policy highlights the continued emphasis on government agencies to combat cyber attacks and bolster defensive capabilities to protect critical systems and sensitive data.

Despite pressure to replace aging legacy systems with modern technology, analysis of Federal spending still shows agencies spending about 80% of their IT budgets maintaining the outdated systems.  Supported by Senators Jerry Moran and Tom Udall, the Cloud Infrastructure Transition Act of 2015 aims to make it easier for agencies to migrate to the cloud.  Currently, agencies have expressed difficulty financing and obtaining authority to transition to commercial cloud systems.  However, the new bill would give the Federal Risk and Authorization Management Program (“FedRAMP”) the authority to quickly offer accreditation to commercial providers, establish a framework for working capital funds earmarked specifically for IT modernization, and establish strict reporting requirements to expose reliance on obsolete technologies.  Although the bill is still in the early planning stage, it will continue to draw attention to the long-term goal of IT system modernization as Federal agencies attempt to migrate to more secure and cost effective cloud solutions.

Big Movers

Triumph Group (Up 15.6%) – Shares were up this week after the company announced the appointment of its new president and CEO, Daniel Crowley

CSRA (Up 7.1%) – Shares were up this week after the Company was awarded a $247 million GSA ARNG EOSS III Task Order

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