Aerospace & Defense Update
Congress has decided to extend the Continuing Resolution (‘CR”), which was set to expire on December 9th, causing government and military budgets to be delayed until at least April 2017. This marks the eighth consecutive year where the Department of Defense will not have received an appropriations bill by year end. Many important military programs, such as Northrop Grumman’s B-21 Long Range Strike Bomber, are anticipated to be negatively impacted as a result of the uncertainty of getting long-term funding. Additionally, it is unclear whether the CR will include funding for the Pentagon’s recent supplemental request for additional spending in the Middle East and Afghanistan.
Boeing’s share price dropped after United Continental Holdings announced a deferral of orders valued at $5 billion as part of a cost-saving initiative. United originally planned to convert orders for 61 Boeing 737 jetliners into the newer 737 MAX model over the next two years, but is now unsure which size MAX planes to order and when those jetliners will be delivered. However, Boeing has stated that it will not alter its planned increase to 737 production rates as its large backlog gives it flexibility to meet the order revisions. Boeing also recently announced plans to consolidate its defense and space business over the next four years, resulting in the closure of several facilities. The decision will ultimately result in the elimination of 500 jobs.
Government Technology Solutions Update
On Monday, Arlington Capital Partners announced the formation of a new government services contractor, Polaris Alpha, through the merger of EOIR Technologies, PROTEUS Technologies, and Intelligent Software Solutions (“ISS”). While the acquisition of EOIR Technologies was announced in June, according to Managing Partner Michael Lustbader, all three companies were being actively and concurrently pursued as part of an overarching strategy to create a niche player in the technology solutions market which has strong foundational relationships with customers in the Department of Defense (“DoD”) and Intelligence Community (“IC”). By combining the capabilities of EOIR, ISS, and PROTEUS, Polaris Alpha will be able to offer a full range of cybersecurity, big data analytics, and software development solutions, as well as some additional research and development work, for its DoD and IC clients. The new company will employ roughly 1,100 people and is expected to generate revenue of approximately $250 million next year. According to Michael Lustbader, Polaris Alpha will pursue double digit growth through both organic and inorganic means as it continues to enhance its suite of high-end technology service offerings.
On Wednesday, the Professional Services Council (“PSC”) held its Vision Federal Market Forecast, during which it discussed future growth drivers and opportunities within the Federal marketplace. While roughly 80% of the Federal IT budget is earmarked for maintenance and sustainment of legacy IT systems, according to PSC, new initiatives and government IT modernization legislation may reduce that amount slightly. PSC also noted that the annual growth rate of the civilian IT budget from 2017-2022 will be roughly half of what it was between 2012 and 2017. However, despite the slowdown in overall growth in the Federal IT budget, PSC estimates that there will be several areas in which spending and growth will likely remain strong. Most of these areas are related to IT modernization. The overhaul, upgrade, and replacement of legacy IT systems represents an ideal opportunity for Federal contractors according to PSC. Cybersecurity will continue to remain a critical focus of the government, while the use of cloud computing and “X-as-a-service” is becoming increasingly ubiquitous in Federal agencies. On the defense side, PSC estimates that Health IT, data analytics, and automation are going to be the key growth drivers in the near-term.
TransDigm (down 8.2%) – Shares were down this week after TransDigm’s guidance for FY17 seemed to question whether major commercial aerospace manufacturers will be able to continue their cyclical strength.
AAR (up 7.4%) – Shares were up this week after AAR announced its partnership with Air New Zealand to provide cost-per-flight-hour inventory support to the airline.
American Industrial Acquisition Corp. has acquired Bradford Engineering B.V., a provider of equipment for satellites and spacecraft, including attitude and orbit control systems (“AOCS”), propulsion, avionics, and thermal solutions. The deal is worth an estimated $1.0 million.
Arlington Capital Partners has acquired Intelligent Software Solutions, Inc. and PROTEUS Technologies., a developer of a suite of data analytics solutions for Federal, international, and commercial clients, and a provider of cybersecurity research, remediation, and response services for a variety of Federal customers, respectively. Terms of the deal were not disclosed.
Chengdu Aerospace Superalloy Technology has agreed to acquire Gardner Aerospace Ltd., a provider of metallic aerostructure details, equipment, and engine components. The deal is worth an estimated $405.0 million.
Sysorex Global Holdings Corporation has agreed to acquire the assets of Integrio Technologies LLC, a provider of IT network integration and engineering, application lifecycle, and acquisition services for DoD, IC, and State and Local government clients. The deal is worth an estimated $6.1 million.
ViaSat, Inc. has acquired Arconics Ltd., a provider of wireless In-flight Entertainment (“IFE”), Electronic Flight Bag (“EFB”), Airline Document Management, and Cabin Management solutions. Terms of the deal were not disclosed