Aerospace & Defense Update
The House Armed Services Committee passed its version of the 2019 National Defense Authorization Act (“NDAA”) early Thursday morning. In total, the bill includes $716 billion in defense spending, which allocates $617 billion to the base budget, $69 billion to the Overseas Contingency Operations account, and $30 billion to defense-related programs at the Department of Energy and other agencies. The NDAA authorizes spending of $39 billion for military aviation upgrades, $19 billion to replace outdated Army equipment, and $26 billion for equipment maintenance and replacement parts. The NDAA will now go to a full House vote within the coming weeks and will be debated by the Senate Armed Services Committee starting on May 21st.
Third Point, a New York-based activist investor firm, is pressuring United Technologies to break up into three focused standalone companies, and has expressed this view with the company’s board. The idea of breaking up the conglomerate began in September when United Technologies announced its $23 billion acquisition of Rockwell Collins. United Technologies’ current business portfolio consists of jet engine manufacturer Pratt & Whitney, Otis Elevator, and Carrier climate control systems. In the proposed break-up plans, Pratt & Whitney and Rockwell Collins would merge with United Technologies’ aviation services business to create a standalone aerospace company. Third Point previously pushed Honeywell to consider the divestiture of its aerospace business, which ultimately resulted in company spinning off two other units.
Government Technology Solutions
Recent first quarter earnings reports have shown that classified revenue is becoming an increasingly high-profile focus area for publicly-traded government contractors. Raytheon reported almost half of its first quarter contract bookings in its government services business as classified and Leidos booked $1.3 billion in classified intelligence community awards during the quarter. Bloomberg Government estimates Department of Defense (“DoD”) classified IT budgets will rise to $10 billion in fiscal 2019 from $8.5 billion in fiscal 2017. The main drivers behind the growth increased funding for cybersecurity, procurement, and research, development, test and evaluation (“RDT&E”) technologies. The RDT&E funds support development of new systems and expansion of classified fielded systems. To keep the government networks secure, cybersecurity spend is deemed classified in order to maintain the United States’ technological advantage as commercial hacking tools become more readily available. Government contractors are increasingly focused on IT modernization efforts and capabilities to keep pace with the federal government’s growing spend on classified IT services.
On Thursday, the White House announced the creation of a Select Committee on Artificial Intelligence (“AI”) during an organized AI summit of industry and academic partners. The new committee’s mission is to improve the coordination of Federal efforts related to AI to ensure continued U.S. leadership in this area. The group will operate within the technology committee at the National Science and Technology Council, and will be comprised of senior R&D officials from across the federal government. The Trump administration’s investment in AI plans to further define AI R&D goals, coordinate agency R&D plans, and encourage agency partnerships. The creation of the Select Committee on AI shows the government’s confidence in this technology and recognition of the potential cost savings available through automated processes.
Kratos Defense & Security Solutions (up 13.9%) – Share prices were up this week after the company beat earnings expectations and reported a 78% increase in revenue for Kratos’ Unmanned Systems business from this period last year.
Jacobs Engineering (up 11.8%) – Share prices were up this week after the company reported adjusted second-quarter earnings ahead of analyst expectations.
Axon Enteprise, LLC has acquired Kander & Company’s portfolio company Safariland’s subsidiary, VIEVU, LLC, a provider of wearable video cameras and data management software for law enforcement and private security professionals. Terms of the deal were not disclosed.
LookingGlass Cyber Solutions, Inc. a portfolio company of NewSpring Capital, has acquired the Sentinel threat intelligence platform of Goldman Sachs Group, Inc. The Sentinel threat intelligence platform facilitates the ingestion, extraction, and organizational workflow of cyber threat intelligence. Terms of the deal were not disclosed.
Quality Technology, Inc. has acquired privately held Fusion PPT, LLC, a provider of IT consulting and system integration services. Areas of focus are cloud computing, big data, cybersecurity, and IT support services. Terms of the deal were not disclosed.