Aerospace & Defense Update
Southwest Airlines announced it is postponing the delivery of 67 Boeing 737 Max 8 aircraft for up to six years to focus on technology and operational improvements. The delay of $1.9 billion in spending comes as delivery plans shift back from 2019 – 2022 to 2023 – 2025. To counter, the airline will push up six 737-800 orders one year to 2017 to cover the premature closing of its aging 737s. The order postponement, along with the airliner’s continued purchases of middle-aged 737s, represent the risk for Original Equipment Manufacturers such as Boeing and Airbus, which are introducing new, more efficient versions of the 737 and A320 aircrafts, respectively. Southwest, which will have 723 planes in its fleet at the end of 2016, is expecting to see that number drop to just over 700 next year before expanding to roughly 750 in 2018.
The U.S. Air Force has held firm that it will not disclose the overall contract value of its B-21 bomber development, even as it faces congressional pressure to do so. Randall Walden, the program executive officer of the Air Force’s Rapid Capabilities Office, said that disclosing the cost of the contracts, which were awarded to Northrop Grumman, would compromise the secrecy of the program. Senator John McCain has been one of the program’s biggest critics, and believes the Air Force should reveal the overall contract value as the cost, design, and contractor of the planes have already been revealed. However, Air Force officials fear that providing the total contract value could help enemies reverse engineer the plane. The first set of B-21 bombers could be completed as soon as 2025 at a $550 million cost per plane, although Northrop Grumman believes it can beat that mark.
Government Technology Solutions Update
The Federal Risk and Authorization Management Program (“FedRAMP”) recently came out with its highly anticipated high security baseline which it has been developing since January of 2015. The new baseline provides Federal agencies with over 400 security controls (representing 100 additional security controls compared to the previous baseline established for moderate security). Prior to the new release, Federal agencies could only send moderate and low-impact workloads to these Cloud Service Providers (“CSPs”). However, the improved baseline will allow CSPs to store highly sensitive data such as health records or personally identifiable data. As a result of the CSPs increased capacity for handling highly sensitive data, now more than half of the budget dedicated to Federal IT can explore upgrading outdated and ineffective legacy systems. The late release is primarily attributed to FedRAMP’s collaboration with the Department of Defense (“DoD”) in ensuring the new baseline would meet the DoD’s Level 4 security requirements.
A house appropriations bill would provide the Shell project, an IT overhaul effort undertaken by the Office of Personnel Management (“OPM”), with $37 million in additional funds. An analogous senate bill would offer the same project with $21 million in fiscal year 2017. While government officials understand the importance of the IT infrastructure modernization project, the Shell project’s previous red flags are also fresh in the minds of lawmakers; in May 2016, prime contractor Imperatis abruptly stopped working on the project due to internal financial distress. The $37 million made available to the Shell project though the bill would only become available once OPM officials submit a concrete plan for how the funds will be spent.
CACI International (Down 7.6%) – Shares declined this week after the Arlington-based firm issued a lower-than-expected 2017 fiscal outlook for its revenue and earnings per share.
American Science & Engineering (Up 18.1%) – Shares were up this week after the company announced it has signed a definitive agreement to be acquired by OSI Systems, Inc.
Accurus Aerospace Corporation acquired J&M Machine, LLC, a supplier of precision machined metallic parts and assemblies for the global aerospace industry. Terms of the deal were not disclosed.
Arlington Capital Partners has acquired EOIR Technologies, a Fredericksburg, VA-based provider of cloud computing, big data analytics, advanced visualization, and other technology solutions to the DoD and Intelligence Community. Terms of the deal were not disclosed.
OSI Systems, Inc. to acquire American Science and Engineering, Inc., a developer, manufacturer, and marketer of X-ray inspection and other detection products for defense and security applications. The deal is worth an estimated $187 million.
Spaceflight Industries, Inc. acquired OpenWhere, Inc., a provider of cloud-based machine-to-machine systems. Terms of the deal were not disclosed.
Survitec Group Ltd., a subsidiary of Onex Corp., acquired the Marine Safety Business of Wilhelmsen Maritime Services AS, a provider of safety products and services to the Marine industry. Terms of the deal were not disclosed.