Aerospace & Defense Update
According to a White House official, President Trump’s upcoming budget proposal for GFY2018 will increase the defense budget by $54 billion to $603 billion, a ~10% increase over the spending levels set in the Budget Control Act. This proposed amount is a relatively modest ~$18 billion more than the amount former President Obama had proposed in his final budget. Trump proposed budget cuts, notably to the State Department, to offset this defense spending increase. A portion of Trump’s budget proposal will be submitted to Congress in a few weeks, but the final budget proposal is not expected to be completed until early May. In addition, Trump is expected to request another $20-$30 billion in defense spending this month for the remainder of GFY2017. The Federal government is currently operating under a Continuing Resolution and will need to finalize their spending bills for GFY2017 by April 28th.
According to the Congressional Budget Office, the U.S. Navy’s 2017 shipbuilding plan, submitted to Congress last July, will cost ~$566 billion over a 30-year period, as the Navy aims to increase its fleet from 272 ships to 308 ships. After factoring in the current ship retirement plans, 254 ships must be built over the next 30 years in order to reach the Navy’s target of 308 ships. According to this proposed plan, seven ships will be built in 2017, 38 ships between 2017 and 2021, and 216 ships between 2022 and 2046. The Navy plans to build 56 new submarines, which will consume a majority of the shipbuilding budget due to the high costs of building submarines capable of firing nuclear missiles. This proposed increase will cost ~$19 billion a year, a 36% increase over the historical average that the Navy typically spends. However, the Navy recently indicated that it has increased its’ target goal of 308 ships to 355 ships in anticipation of Trump’s campaign promise to build a 350-ship naval fleet.
Government Technology Solutions Update
Late last week, the Department of Defense (“DoD”) launched a new collaborative, open-source software development website called code.mil. The website was created to promote further collaboration between the public and private sectors. The only requirement for this new site is that potential private developers would read and agree to a document called the Defense Open Source Agreement (“DOSA”), and submit a signed-off Developer’s Certificate of Origin whenever they make a contribution to something on the site. The DOSA is what allows the Federal government to make their projects open source. Work completed by Federal employees cannot normally be patented, and thus cannot be collaboratively developed in an open source format. However, by using the DOSA to establish a contractual framework between themselves and private developers, the DoD is able to form a relationship that allows for open-source development. Many insiders in the private sector have praised open-source methods for leading to increased efficiencies and innovation in the development and improvement of software projects.
The Defense Information Systems Agency (“DISA”) recently issued requests for proposals (“RFPs”) for its 10-year, $7.5 billion Systems Engineering Technology and Innovation (“SETI”) contract. SETI will be a multiple award task order contract (“MATOC”), and is designed to be complementary to procurements made via DISA’s other major upcoming indefinite delivery / indefinite quantity (“IDIQ”) contract, ENCORE-III. According to DISA, SETI will be used to “provide complex IT engineering required to design, develop, and deliver new DISA and DoD-provided IT capabilities.” The plan would be to initially develop and implement new IT solutions using SETI, and then provide for the maintenance of those new systems through ENCORE. More specifically, SETI would be used to address higher-level technical issues, including systems engineering, design analysis, and systems architecture, among others. The contract is initially slated to use a best value tradeoff method for procurement, and in terms of competition will have both a small-business pool as well as a full and open pool.
Aerojet Rocketdyne (up 11.7%) – Share prices were up this week after the Company completed its acquisition of Coleman Aerospace from L3 Technologies.
Meggitt (up 9.3%) – Share prices were up this week after the Company beat profit expectations.
Defense and Government Solutions has acquired Ti-Nanotech, a provider of titanium plating for end products within the aerospace, defense, and commercial sectors. Terms of the deal were not disclosed.
Jabil Circuit, Inc. has acquired Lewis Engineering, Inc., a provider of aerospace products, turbine engine components, and industrial pumps. Terms of the deal were not disclosed.
Veritas Capital has agreed to acquire the Capital Services Business of Chicago Bridge and Iron’s (“CB&I”) Capital Services business, a provider of comprehensive and integrated maintenance services, environmental engineering and remediation, program management, and disaster response and recovery services. The deal is worth an estimated $755 million.