Aerospace & Defense Update
Congress is currently discussing the 2018 military budget, which is centered around two main ideas: the human capital component and equipment element. The human capital portion is comprised of increasing military pay and growing the number of active troops. Several house members are advocating for a 2.1% pay raise, while others are proposing a 2.9%, which is intended to compensate for years of not keeping par with private-sector wage increases. Furthermore, the House plans to add nearly 19,000 more troops than President Trump’s original budget request. From an equipment standpoint, the F-35 Joint Strike Fighter is the headline product with an expected purchase order that ranges from 70 to 94 new aircraft, while the Navy is expected to receive anywhere from 5 to 13 new ships. The various budget proposals in House and Senate are ~$700 billion, which are well above the $549 billion cap mandated by Congress for fiscal 2018. Congress plans to work towards a solution to either revise or revoke these caps in the coming months.
Last week’s biennial Paris Air Show highlighted the ever-increasing presence of data-analytics to predict aircraft’s maintenance schedules. Boeing foresees its Boeing Global Services (“BGS”) business to benefit greatly from the trend, predicting sales to reach $50 billion by 2020. BGS serves defense and commercial customers with over 300 locations and approximately 20,000 employees. This move toward providing airlines data services is one example of the recent trend of original aircraft manufacturers (“OEM”) insourcing work. At the show, Boeing launched its operations system AnalytX, which combines the work of hundreds of its analytic experts and data tracking products to help airlines save time and money with a better understanding of when its aircraft are due for the shop. Currently, BGS has 7% share of the commercial support market and 9% of the defense support market. BGS hopes to take advantage of its broad customer base to become a leader in providing data-analytic services to both commercial and government customers.
Government Technology Solutions Update
On Monday, NCI, Inc. announced that it had signed a definitive agreement to be acquired by private equity firm H.I.G. Capital. NCI provides IT and professional services and solutions, to defense, intelligence, healthcare, and civilian government agencies worldwide. Following this announcement, a tender offer will commence on July 17th to acquire all outstanding shares of NCI’s class A and Class B common stock for $20 per share. Despite a somewhat turbulent first quarter during which NCI announced that it had launched an investigation into the embezzlement of $19 million by its controller, NCI has since turned in a strong second quarter performance. Following a handful of new award wins, including a prime position on the Army’s $35 billion Responsive Strategic Sourcing for Services (“RS3”) contract, the company boosted its full-year sales outlook and expects the “first organic sales increase in six years.” H.I.G. hopes to help NCI accelerate its sales growth, enhance its solutions to its customers, and create new opportunities for employees.
Washington Technology recently released its second quarter Contractor Confidence Index, gauging expectations from the government contracting community in areas such as revenue growth, hiring, and job satisfaction. With a base value of 100, the index measured at 112.9 in the second quarter, slightly down from the all-time high of 113.3 in the first quarter, but still indicating an overall bullish sentiment. Over 47% of respondents indicate that the government contracting market is headed in a positive direction, and 44.5% of survey respondents expect their firms to increase hiring, while job satisfaction remained high at 67%. Many in the industry feel that current conditions are still very conducive to growth in the market, and are expecting the Federal government to prioritize spending in key areas such as defense and IT modernization. 56% of survey respondents expect their firm revenue to grow compared to 10% expecting a decline in sales.
Sparton Corporation (up 5%) – Share prices were up this week after the company announced that it agreed to be acquired by Ultra Electronics
Booz Allen Hamilton (up 3.7%) – Share prices were up this week after the company was awarded a $40 million single-award BPA by the Defense Information Systems Agency (“DISA”).
Data Systems Analysts, Inc. has acquired Project Performance Company LLC, a provider of knowledge and information management, energy management and environmental sustainability, enterprise systems development and operations, and cyber security and information assurance solutions. Terms of the deal were not disclosed.
H.I.G. Capital has agreed to acquire NCI, Inc., a provider of IT and professional services and solutions, primarily big data and data analytics, agile development, and intelligence-to-operations initiatives to defense, intelligence, healthcare, and civilian government agencies worldwide. The deal is worth approximately $290 million.
Mercury Systems, Inc. acquired Richland Technologies, LLC, a provider of safety-critical and high integrity systems, software, and hardware development as well as safety-certification services for mission-critical applications. Terms of the deal were not disclosed.
National Technologies Associates, Inc. has acquired V1 Analytical Solutions, a provider of intelligence and information solutions, special activity support, and specialized training for defense, intelligence, and other government customers. Terms of the deal were not disclosed
Odyssey Investment Partners, LLC has agreed to acquire CPI International, Inc., a provider radio frequency, microwave, power, and control products for defense, communications, medical, and scientific purposes. The deal is worth approximately $800 million.
Smith & Wesson Corp. agreed to acquire Gemini Technologies, a provider of high quality suppressors and accessories for the consumer, law enforcement, and military markets. Terms of the deal were not disclosed.
StandardAero Holdings, Inc. has agreed to acquire Vector Aerospace Corporation, a provider of aviation maintenance, repair, and overhaul (“MRO”) services. Terms of deal were not disclosed.
Ultra Electronics Holding Plc has agreed to acquire Sparton Corp., a provider of services for complex electromechanical devices, as well as sophisticated engineered products. The deal is worth approximately $235 million.