Industry Week in Review – September 16, 2016
Aerospace & Defense Update
The constant dynamic of Continuing Resolutions (“CR”) and looming budget sequestration over the last eight years hinders the U.S. military by shifting focus from modernization efforts to fulfilling current combat needs. Ironically, spending caps and budget requirements under CRs increase cost inefficiencies and waste for the Armed Forces. For example, the Air Force has resorted to repairing airframes instead of acquiring new frames in order to keep short term costs down; however, this increases long-term repair costs. Similarly, the military has been making smaller total dollar purchases of parts at higher prices to satisfy spending caps. To properly fund Department of Defense (“DoD”) future operations, Senate Armed Services Committee Chairman John McCain stated the country needs to fill a $250 billion budget shortfall. With only two weeks until the start of the new Government Fiscal Year and an administration change in January, it seems unlikely any substantial budgetary change will occur in the near-term.
Boeing plans to militarize its 737-700 jet to replace the Air Force’s current aging Airborne Warning and Control System (“AWACS”) fleet of E-3 AWACS, EC-130H, and RC-135 aircraft. The company sees a fit due to the 737’s increased weight and power capabilities. While the Air Force has not officially requested a replacement aircraft and is currently assessing prospects of eliminating the aircraft system all together, Boeing believes a manned aircraft will continue to be an integral part of the future iteration of AWACS. Brigadier General Alexus Grynkewich noted the future AWACS product may be a “more survivable airborne platform” or another platform completely. The Air Force will decide on how to move forward and estimates a clear outline of its needs released in the early 2020s.
Government Technology Solutions Update
The House Oversight and Government Reform Committee has passed legislation which combines the IT Modernization Act and the MOVE-IT Act under one bill, to be called the Modernizing Government Technology Act. Under the original IT Modernization Act, the General Services Administration (“GSA”) would house a $3.1 billion revolving fund to be used for the purchase of critical IT systems without having to face the constraints of Federal budgetary uncertainty. However, this new bill would not require any up-front costs, and instead would be financed by working capital funds set up within government agencies wishing to purchase IT solutions. Spending under these various agency funds – which would have a three-year lifespan – will be mainly limited to the retirement of legacy systems and transitioning of current systems to the cloud.
The Internal Revenue Service (“IRS”) has come under increased scrutiny recently for failing to implement the EINSTEIN cybersecurity platform to protect its networks. EINSTEIN, which is made available via the Department of Homeland Security (“DHS”), was mandated for implementation in the wake of critical data breaches of the Office of Personnel Management (“OPM”) in 2015. Agencies have until December of this year to implement Einstein, but due to the sensitive nature of information collected by the IRS, there has been mounting pressure for that agency to make the transformation sooner. Such criticism comes at a volatile time for the IRS. Commissioner John Koskinen has been facing efforts aimed towards his impeachment, with a vote on the matter potentially taking place after the Presidential election.
Big Movers
Airbus (Down 6.0%) – Shares are down this week after Singapore Airlines, the launch customer of the A380, declined to renew its superjumbo leases.
SAAB AB (Up 4.0%) – Shares were up this week after SAAB and Boeing unveiled their entry for the T-X trainer program.
Transactions
CALIBRE Systems, Inc. has acquired Fusion Technology, LLC, a provider of instructional systems design, application development services, and strategic consulting solutions for intelligence community clients. Terms of the deal were not disclosed. KippsDeSanto & Co. acted as exclusive financial advisor to Fusion Technology.
Golden Gate Capital has acquired Tronair Parent, Inc., a provider of designing, manufacturing, and distributing of aircraft ground support equipment for the aerospace industry. Terms of the deal were not disclosed.
