Industry Week in Review – August 3, 2018
Aerospace & Defense Update
One week after the House of Representatives approved the conference report of the National Defense Authorization Act (“NDAA”) for fiscal year 2019, the Senate decisively passed the bill on Wednesday in an 87-10 vote. President Trump is expected to sign the 2019 NDAA into law later this month. The bill provides authorization for up to $717 billion in total national defense spending which includes a 2.6% military pay raise; adds 15,600 more troops across the Army, Navy, Air Force, and Marine Corps; and increases aircraft and ship purchases above the President’s initial budget request. This is the earliest Congress has approved the NDAA since 1978; Congress will now begin preparing legislation for a final defense policy bill, with the goal for it to become law before the beginning of the next fiscal year on October 1st.
The Israeli Air Force is prioritizing the expansion of its Boeing F-15 fleet as part of an effort to better position itself against evolving threats from its two most immediate adversaries – Syria and Iran. Despite its planned acquisition of the Lockheed Martin F-35, Israel is negotiating the purchase of 20-25 F-15s with the U.S Department of Defense. The Israeli Government views the F-15 as the center of the country’s attacking capabilities and prefers it to the F-35 due to the F-15’s greater flexibility with respect to its ability to be upgraded with advanced, Israeli-developed systems. Details regarding the specific configuration these F-15s have not been announced, but it is believed that the order may focus on capabilities such as additional missile capacity and special communications pods designed to securely send and receive data from other aircraft. If the order is eventually placed, it could keep the F-15 production line in operation through 2025.
Government Technology Solutions
This past week the Department of Defense (“DoD”) awarded Booz Allen Hamilton (“BAH”) an $885 million task order to deliver Artificial Intelligence (“AI”) and machine learning capabilities across multiple systems and agencies. This award is indicative of a larger shift in focus by federal agencies towards emerging technologies, as current systems become obsolete and AI in particular provides a vastly accelerated platform to analyze data. The 32% increase in AI, cloud computing, and big data spend by the DoD over the past five years also highlights the federal governments shift towards emerging technologies. BAH’s CEO, Horacio Rozanski, recently remarked that, “it’s clear that artificial intelligence is an area of focus and an area of investment [for the DoD]”. Given this shift, buyers in the government services marketplace have increased their focus on acquiring companies that provide emerging technology capabilities and past performance. A recent example of this is Alion Science and Technology’s recent agreement to acquire MacAulay-Brown, Inc. Steve Schorer, president and CEO of Alion, stated in a press release announcing the pending transaction that the acquisition provides “inroads into emerging technologies…in electronic warfare, artificial intelligence, cybersecurity, and cloud solutions” for the company.
The Transportation Security Administration (“TSA”) is considering removing the extensive passenger screening process—put in place following the terror attacks of September 11th—currently implemented at smaller airports. The proposal indicates luggage traveling from these airports to major cities for connecting flights should be screened upon arrival to the larger airports that have greater capacities for extensive bag checks. The move is expected to cut costs by over $100 million, with minimal impact to safety risks. The TSA faced heavy criticism following the announcement, however, as some expressed concerns of vulnerability at not only these smaller airports, but also at larger hubs, which often allow passengers to board other flights without re-clearing security. The news comes shortly after an announcement of the TSA’s intention to implement computed tomography (“CT”) scanners—which should allow the TSA to more effectively detect threats within carry-on bags—in 15 major airports. This is good news for passengers, who may not be required to remove their liquids or laptops from carry-on if these changes are implemented. The decision by TSA reveals a preference towards further securing the country’s larger airports, funded in part by the savings generated from reduced security screening procedures at smaller airports.
Mercury Systems (up 17%) – Share prices were up this week after the company’s earnings surpassed Wall Street estimates, in addition to its announcement that it had acquired Germane Systems.
Harris Corporation (up 5.5%) – Share prices were up this week after the company announced that it beat earnings per share estimates for the quarter. Revenue for the quarter increased 8% year over year driven by strong growth in communication systems and electronic systems.
Alion Science and Technology Corporation, a portfolio company of Veritas Capital, has agreed to acquire MacAulay-Brown, Inc., a provider of advanced engineering and technology solutions to the Department of Defense, Intelligence Community, Special Operations Forces, and the Department of Homeland Security. KippsDesanto & Co. was the sell-side advisor on the deal. The terms of the deal were not disclosed.
CAE, Inc. has acquired Alpha-Omega Change Engineering, a provider of operational test and evaluation, aircrew training, and engineering support services for U.S. intelligence agencies and the Defense Department through several contracts. The terms of the deal were not disclosed.
ICF International, Inc. has agreed to acquire DMS Disaster Consultants, a provider of pro-active approaches to pre-disaster planning, responding, identifying, and pursuing all eligible projects, using funds from FEMA and the Department of Housing and Urban Development for federal, state, and local agencies. The terms of the deal were not disclosed.
Integrity Applications Incorporated, a portfolio company of Arlington Capital Partners, has acquired Dependable Global Solutions, a provider of cybersecurity and counterintelligence solutions to intelligence and defense customers in the federal government. Terms of the deal of the deal were not disclosed
First Israel Mezzanine Investors, has acquired Aitech Rugged Group, Inc., a provider of embedded computing subsystems and modules for defense, aerospace, and space electronics markets. KippsDeSanto & Co. was the sell-side advisor on the deal. Terms of the deal were not disclosed.
Mercury Systems, Inc. has acquired Germane Systems LC, a provider of rugged servers, computers and storage systems for command, control and information applications. KippsDeSanto & Co. was the sell-side advisor on the deal. The deal is worth an estimate $45 million.
GenNX360 Capital Partners has acquired Precision Aviation Group, a provider of maintenance, repair and overhaul (MRO) and supply chain solutions for fixed and rotary-wing aircrafts serving diverse end markets. KippsDeSanto & Co. was the buy-side advisor on the deal. Terms of the deal were not disclosed.
Vance Street Capital Partners has acquired Jet Parts Engineering, Inc., a provider of proprietary aftermarket replacement components and complementary proprietary component repair services for commercial airline and MRO customers. Terms of the deal were not disclosed.