Industry Week in Review – July 20, 2018
Aerospace & Defense Update
This week’s Farnborough Airshow saw a great deal of order activity as Boeing and Airbus combined to sell around 900 planes worth $139 billion in total. More specifically, Boeing won 528 orders worth $87 billion while Airbus won 431 orders worth $57 billion. Notably, however, over 400 of the planes ordered did not have buyer’s names released. Airbus blamed ongoing trade tension for the secrecy saying that many firms did not want to appear to take a side in the trade wars. In the 250 – 300 seat segment, AirAsia provided the struggling Airbus A330neo program a much-needed boost with 100 total jets ordered, while Boeing secured an order for at least 10 787s from Hawaiian Airlines. In the highly competitive large single-aisle market, Airbus received an order for 50 A321neo jets from Vietnam’s VietJet, a day after the carrier placed an order for 100 737 MAX aircraft from Boeing. In the smaller single-aisle jet market, an area in which Airbus and Boeing have recently expanded into with their Bombardier and Embraer joint ventures, Airbus sold 60 A220s, and Embraer sold 300 jets, worth about $5.5 billion and $15 billion, respectively at list prices.
America has already surpassed its defense trade total from all of 2017. Lt. Gen. Charles Hooper said earlier this week that the U.S. has already signed $46.9 billion in weapon sales to foreign allies, already eclipsing 2017’s $41.9 billion. Hooper specifically pointed to the Trump administration’s Conventional Arms Transfer policy, an initiative to help private U.S. defense firms directly sell certain weapon types to allies without going through the U.S. government. However, defense sales can be highly volatile as a single order for many planes can significantly balloon any given year’s total. In the three years prior to 2017, defense sales were $33.6 billion, $47 billion, and $34.2 billion. Additionally, the recent tariffs placed on traditional European allies could further impact defense sales, although Hooper said that he had not encountered the issue yet.
Government Technology Solutions
DynCorp International is exploring M&A opportunities to supplement organic growth for the first time in eight years, rallying from a prolonged earnings drought caused by previously lackluster defense spending. While other government service contractors were also affected by the reduced defense spending in the early 2000s, DynCorp’s business was acutely impacted by both the Budget Control Act of 2011 and the drawdown of U.S. troops in Afghanistan in 2012, resulting in a 50% decline in revenue over four years. DynCorp was able to pivot this past year with earnings increasing from $101 million to $153 million, along with top-line growth of 9%. Driven by the recent improvement in its financial position, DynCorp now plans to invest in growth through acquisitions, looking to expand service offerings and further develop its existing IT and intelligence business lines (the company’s fastest growing subdivisions, according to CEO George Kirvo). DynCorp’s focus on next-generation IT (“NGIT”) acquisition targets is in line with other dealmakers in the Government Services sector, many of whom cited Cybersecurity and IT Modernization as M&A focus areas in KippsDeSanto’s recent M&A survey.
The Department of Defense (“DoD”) continues to build upon its cloud modernization initiative with its most recent request for information (“RFI”). On Monday, the Defense Information Systems Agency (“DISA”) released a small business RFI to transition its cybersecurity Acropolis program to a secure cloud environment. In order to upgrade these virtual cloud capabilities, the DoD is seeking a contractor who can provide cloud infrastructure-as-a-service. This particular request outlines the department’s overarching goal to integrate the DoD’s current system with next-gen infrastructure provided through a cloud service provider. This cloud initiative highlights the ongoing trend within the DoD to move legacy systems to the cloud now rather than waiting on the upcoming enterprise-wide Joint Enterprise Defense Infrastructure (“JEDI”) contract, which was recently put on hold this past week to undergo a full program review. While a final request for proposal for JEDI was originally expected in May, DoD CIO Dana Deasy has been clear that he will not expedite the request process until all details are thoroughly reviewed. While Deasy has been clear that his goal is to consolidate the department’s cloud capabilities under a consistent infrastructure, DoD departments appear to be moving forward with their cloud implementation projects, reinforcing the critical need for immediate cloud migration and integration throughout the DoD and the rest of the Federal Government.
Esterline Technologies Corp. (up 10.4%) – Share prices were up this week after reports that the aerospace parts maker is exploring a potential sale.
Saab AB (up 9.2%) – Share prices were up this week after the CEO announced discussions to join “Team Tempest”, a UK-led fighter program unveiled this week at the Farnborough Airshow.
Acorn Growth Companies has acquired Berry Aviation, Inc., a provider of specialized airlift solutions and other aviation services including intelligence, surveillance, and reconnaissance. Terms of the deal were not disclosed.
Alleghency Technologies, Inc. has acquired Addaeo Manufacturing, LLC, a provider of metal alloy-based additive manufacturing services for the aerospace and defense industries. Terms of the deal were not disclosed.
GCR, Inc., a portfolio company of HKW Capital Partners, has acquired MB3 Technologies, Inc., a provider of software development focused on emergency grants management. Terms of the deal were not disclosed.
KLX, Inc. has acquired John Hassall, LLC, a provider of precision aircraft engine fasteners, consumables, and logistics services to the aerospace industry. Terms of the deal were not disclosed.
Maxar Technologies Ltd. has acquired Neptec Design Group Ltd., a provider of vision solutions for space, industrial, and military applications. Terms of the deal were not disclosed.
Thalheimer Brothers, Inc., a portfolio company of Audax Group, has acquired Mega Metals, Inc., a provider of titanium scrap metal recycling, inspection, and testing services. Terms of the deal were not disclosed.