Industry Week in Review – March 31, 2017
Aerospace & Defense Update
Lockheed Martin is expected to receive approval from the Pentagon for the production of 200 CH-53K King Stallion helicopters for ~$29 billion. This new helicopter has the ability to transport three times as much cargo as its predecessor, the Super Stallion. The Defense Acquisition Board met on Thursday to review whether to approve production for the first 24 helicopters. If approved, the King Stallion helicopter would be the first major acquisition decision under Defense Secretary James Mattis. Lockheed’s Chief Financial Officer, Bruce Tanner, stated that the CH-53K’s large revenue potential was an important reason behind Lockheed’s $9 billion acquisition of Sikorsky Aircraft in 2015. Based on a congressional hearing, the King Stallion is currently expected to cost ~$122 million per helicopter, but is expected to drop below $89 million once full-rate production begins.
Thursday’s launch of SpaceX’s used Falcon 9 rocket marked the first time an orbital rocket has launched into space for the second time. This launch highlights the benefits of reusable boosters for rockets after SpaceX reused the Falcon 9’s repurposed lower stage, which included nine refurbished main engines. SpaceX believes reusable rockets will reduce launch prices by ~10% in the initial stages and ~30% in the later years. SpaceX plans to launch up to six reused Falcon 9’s this year.
Government Technology Solutions Update
On Monday, CSC’s shareholders voted to approve the merger of the company with the IT Services business of HP Enterprise. The combined company, called DXC Technology, will begin trading publicly on Monday, April 3rd. DXC Technology is expected to have $24 billion in annual revenues, of which $2.9 billion is expected to be contributed by the company’s U.S. public sector business. The majority of the government work will be brought by HP, as CSC had originally distanced itself from the Federal marketplace in late 2015 when it spun-off its government services business into what would eventually be called CSRA. HP will also bring with it work performed on the Navy’s Next Generation Enterprise Network (“NGEN”) contract. NGEN contributed nearly $700 million in revenue in 2016, which amounted to roughly one third of HP Enterprise’s prime contract revenue in that year. While there has been some speculation that the combined entity will end up shedding its government business, corporate executives have not signaled that this is the case. CSC CEO Mike Lawrie believes that the government services business of DXC Technology will see low single-digit top line growth, implying that he may be willing to hold onto the business in the near term.
On Monday, President Donald Trump signed an executive order creating the White House Office of American Innovation. This new office, to be led by Jared Kushner, will “focus on implementing policies and scaling proven private-sector models to spur job creation and innovation.” According to White House Press Secretary Sean Spicer, the office will have a particular focus on tech procurement aimed at increasing efficiencies within the Department of Veterans Affairs. The office would focus on bringing in data, technology, and ideas from tech leaders in the private sector, as well as modernizing technology and IT throughout the Federal government. Donald Trump’s most recent budget request has included a proposal for creating a centralized fund dedicated to IT modernization. A similar fund was proposed at end of 2016 through the Modernizing Government Technology Act which contained a $3.1 billion price tag for its centralized fund. However, there is as of yet no clarity as to how much Mr. Trump would request in his iteration of this fund.
Big Movers
SAIC (down 13.6%) – Share prices were down this week after the Company’s 4Q17 earnings missed analyst expectations.
Esterline (up 4.2%) – Share prices were up this week after the Company completed its sale of BVR Technologies to Kaney Aerospace.
Transactions
Deloitte Consulting LLP has acquired Day1 Solutions, Inc., a provider of cloud consulting services, systems integration, managed services, and value-added resale of cloud solutions for Federal government customers. Terms of the deal were not disclosed.
GE Aviation has acquired Critical Technologies, Inc., a provider of web-based records management solutions, including aircraft maintenance records. Terms of the deal were not disclosed.
Kaney Aerospace, Inc. has acquired BVR Technologies, a provider of actuation and motion control products. Terms of the deal were not disclosed.
StandardAero Holdings, Inc. has agreed to acquire PAS International Holdings, Inc., a provider of cost-effective original equipment manufacturer (“OEM”) and maintenance, repair, and overhaul (“MRO”) solutions for the aerospace industry. Terms of the deal were not disclosed.
