KippsDeSanto & Co. Industry Week in Review – November 02, 2018

Summary

This week the U.S. Department of Defense announced its end of year budget numbers for the Military Intelligence Program.  In the commercial Aerospace sector, narrow-body aircraft orders took a back seat as several Asian airlines considered alternate makes and models to compensate for lack of fleet growth.  In the government sector, Leidos’ CEO, Roger Krone, discussed the implications of the U.S. labor shortage and shortfalls in end of year government spending.

Aerospace & Defense Update

The U.S. Department of Defense announced its top-line budget for its secretive intelligence program for FY18 this past week.  The total Military Intelligence Program (“MIP”) budget, including base budget and Overseas Contingency Operations appropriations, was $22.1 billion for FY18.  The department releases this figure at the end of each fiscal year because it does not want to jeopardize any classified activities within the MIP.  No other MIP figures of program details will be released, for classified reasons.  However, this amount is greater than the $20.7 billion the Pentagon requested for FY18 and even the $21.2 billion requested for FY19.  FY18’s $22.1 billion appropriation is the most the MIP has been granted since 2012.  In total, all intelligence programs were appropriated $78.4 billion in FY18, accounting for approximately 11 percent of the total base budget.

While massive orders for narrowbody aircraft often dominate headlines in the fast-growing Asia-Pacific airline industry, some of the region’s major legacy carriers are considering new widebody orders to replace aging fleets.  Among the legacy, Asian carriers assessing widebody replacement orders are Thai Airways, Malaysia Airlines and Korean Air.  These airlines are having trouble keeping up with competitors as lack of fleet growth has forced consolidation among existing markets rather than expansion into new routes.  Leaders and senior executives of the carriers discussed fleet growth plans at the Asia Pacific Airlines annual assembly this past week.  Boeing and Airbus have been paying close attention to these talks as these orders could provide significant revenue for their twin-aisle aircraft programs.  However, even if an acquisition plan is approved soon, the first order would likely be placed in the first half of 2019 with deliveries starting the following year.

Government Technology Solutions

Notwithstanding the benefits of low unemployment to the overall economy, this dynamic remains a challenge for many government technology solutions companies.  Competitive talent markets – especially for cleared and / or highly technical professionals – have made it increasingly difficult to respond to the evolving needs of customers especially with now funded and growing requirements for which they rely on the contracting community to execute.  Last week, Leidos CEO, Roger Krone, said on an earnings call that the decrease in hiring activity has “had a regulating effect on Leidos’ growth in the third quarter and likely into the fourth quarter as well.”  Others including Booz Allen Hamilton and ManTech expressed similar feelings on their recent earnings calls.  In response, many government contractors, such as SAIC and CACI, have continued to expand their footprint outside the DC-Metro area in order to tap into new talent pools and selectively realize cost advantages of less competitive regional labor markets.

As end-of-year spending information is released, agencies’ GFY18 budget to actual results are at the forefront of the government contracting community. While some contractors were able to take advantage of the abundant funding environment, it has been speculated that Civilian agencies were unable to deploy nearly $70 billion in allocated funds.  As has been often noted by the press towards the close of the government fiscal year, the late passage of the budget this past March created a significant time crunch for agencies and contractors alike. Although leaving funds on the table could potentially have negative connotations, it is to government agencies’ credit that they did not fall prey to fickle year-end spending and were remarkably prudent, considering the uncertainty of future spending environments.

Big Movers

Bombardier (up 6.1%) – Share prices were up this week after the Company announced its plans to protest the Transport for London’s (“TfL”) $3.2 billion contract to build 94 new London Underground trains.

L3 Technologies (down 9.0%) – Share prices were down this week after Lifshitz & Miller LLP announced the launch of an investigation regarding a potential breach of fiduciary duties in the sale of L3 to Harris Corporation.

Transactions

Akoya Capital Partners, LLC, and Hillcrest Holdings have partnered to acquire Evolver and eVigilant, two Northern Virginia security companies that together will form Converged Security Solutions (“CSS”) and offer both cyber and physical security services.  Terms of the deal were not disclosed.

AMETEK, Inc. has acquired Forza Silicon Corp., a provider of high-performance imaging sensors used in medical, defense, commercial, and industrial applications.  The deal is worth an estimated $40 million.

ANSER Services, Inc. has acquired Domain X Technologies, a provider of program management, DoD acquisition, systems engineering, software engineering, and modeling & simulation support.  Terms of the deal were not disclosed.

EverWatch, a portfolio company of Enlightenment Capital, has acquired Analysis, Computing and Engineering Solutions, Inc. (“ACES”), a provider of intelligence analysis, software development, and system engineering to the intelligence community and the U.S. DoD. Terms of the deal were not disclosed.

HEICO Corp. has acquired Specialty Silicone Products, Inc., a provider of silicone materials for a variety of application, used in aerospace, defense, research, oil and gas, testing, pharmaceuticals, and other markets.  Terms of the deal were not disclosed.

J.F. Lehman & Co. acquired International Marine & Industrial Applicators, LLC / Craft and Technical Solutions, LLC, a provider of critical vessel preservation services to the U.S. Navy; commercial maintenance, repair, and overhaul (MRO); and new construction markets.  Terms of the deal were not disclosed.

Nanometrics, Inc. has acquired 4D technology Corp., a provider of high-performance interferometric and inspection systems for variety of industries including aerospace, astronomy, and defense, among others.  The deal is worth an estimated $40 million.

Textron, Inc. has agreed to acquire Howe & Howe Technologies, Inc., a provider of extreme vehicle production and advanced robotics for extreme conditions and for a multitude of industries including defense.  Terms of the deal were not disclosed.

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