KippsDeSanto & Co. Industry Week in Review – November 16, 2018

Summary

International and domestic defense spending continues to increase as Australia has chosen General Atomics Aeronautical Solutions to provide its next remotely piloted aircraft and the Pentagon has amended its F-35 contract vehicle to allow block purchases.  In addition, Amazon has confirmed its highly-anticipated HQ2 will be split between Crystal City, VA and Long Island City, NY.  The pre-award protest for the JEDI contract was denied by the Government Accountability Office.

Aerospace & Defense Update

Australian Defense Minister, Christopher Pyne, announced that General Atomics Aeronautical Systems has been selected to supply the medium altitude long endurance (“MALE”) remotely piloted aircraft (“RPA”) for the Australian Defense Force.  However, the Australian Defense Force has yet to decide which variant of General Atomics’ RPA solution they want to move forward with.  Pyne stated that the requested 12 to 16 air vehicles will cost approximately $1 billion and is looking at initial deliveries in the 2020 – 2021 timeframe.  Interestingly, the Australian Defense Force used the single source acquisition methodology rather than open competition to award this contract, which was a blow to many viable vendors, most notably Israel Aircraft Industries.  Pyne stated that going through a full-tender process would not have been practical as General Atomics was best-suited to fulfill their needs.  In addition, under the Australian Defense Organizations’ First Principal review, single source supply is permitted if the purpose and capabilities of the single source supplier can deliver to par with the minimum resources necessary.

The Pentagon took first steps toward initiating a block buy for future F-35 orders last week, amending the department’s existing contract vehicle to allow international customers to buy in block purchases.  In order to reduce costs, the F-35 joint program office has advocated grouping international orders together, and possibly future U.S. orders, to allow prime contractor Lockheed Martin and its suppliers more time and resources to make necessary investments.  This contracting funding strategy provides stability and steady production rates, which enables suppliers to plan and make investments that reduce costs and achieve greater efficiencies.  This amendment will provide at least $6 billion to Lockheed Martin but also sets a cap of $22.7 billion for the initial production for international military sales.  The finalization of the contract is expected to take place in 2020 — a key year for the F-35 program, in which the Pentagon expects to see prices for the F-35A model reach $80 million per plane — with deliveries starting in 2022.

Government Technology Solutions

On Tuesday, Amazon (NYSE: AMZN) confirmed that its highly-anticipated second headquarters (“HQ2”) will be split between two locations: Crystal City, VA and Long Island City, NY.  While initially expected to be in a single location with 50,000 employees, now HQ2 will be spread across two locations, each expected to have approximately 25,000 employees.  The move to Crystal City is believed to help Amazon in its drive to increase its share of the Federal market.  Amazon’s presence will have many positive implications on the local economy by creating jobs, enlivening the Northern Virginia area as an entrepreneurial hub, and building infrastructure to support the numbers.  Amazon will also spark competition amongst federal contracts as the government pushes onward in its modernization efforts.  Perspecta Inc.’s CEO (NYSE: PRSP), Mac Curtis, noted in his second quarter earnings call that the introduction of Amazon to the area will, “push together the government customer and industry.”

The pre-award protest of the JEDI contract that Oracle filed in August was denied this week by the Government Accountability Office (“GAO”).  Oracle, among various other tech giants that have expressed their displeasure with the winner-take-all award structure, claimed the 10-year contract is anticompetitive and locks the Department of Defense (“DoD”) into a single cloud provider for the foreseeable future.  GAO reaffirmed its initial stance that a single-award is in the government’s best interest – notably, the Office mentioned the decision was in part a matter of national security.  While the DoD has avoided a potential conflict with Oracle’s protest, IBM’s protest is still outstanding, with a decision deadline of January 18.  Like Oracle, IBM criticized the contract structure for restricting the field of competition.  Additionally, IBM believes the requirements of JEDI were tailored to match AWS’ internal processes, giving the Company an unfair advantage.

Big Movers

Boeing (down 9.1%) – Share prices were down this week due to reports that the company had failed to properly brief pilots on the features of its 737 MAX jet.  This is the model that was involved in the Lion Air plane crash in Indonesia last month.

Bombardier (down 39.0%) – Share prices were down this week as regulators said they were reviewing the company’s executive stock-sale program in the wake of an earlier share rout.

Transactions

Advantest Corp. has acquired Astronics Corp.’s Semiconductor System Level Test Technology, a provider of semiconductor test solutions.  The deal is worth an estimated $185 million.

BEI Precision Systems & Space Company, Inc., a portfolio company of J.F. Lehman & Company, has acquired Thistle Design (MMC) Limited, a provider of positioning and measurement sensors for the defense and industrial markets.  The terms of the transaction were not disclosed.

Novetta Solutions, LLC, a portfolio company of The Carlyle Group, has acquired Berico Technologies, LLC, a provider of innovative, technology-enabled cloud engineering, data analytics, and IT modernization solutions to customers in the Intelligence Community.  The terms of the transaction were not disclosed.

SMTC Corp. has acquired MC Assembly Holdings, Inc., a provider of electronic components serving the aerospace, industrial, telecommunications, networking, and medical markets.  The deal is worth an estimated $65 million.

Wencor Group, LLC has acquired Silver Wings Aerospace, Inc., a provider of electric power and hydraulic component repair with unique capabilities in Used Serviceable Material.  The terms of the transaction were not disclosed.

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