aerospace & defense m&a trends: spring 2020 · jun-19 acra aerospace novaria group,...

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1

Aerospace & Defense | SPRING 2020Market Update


2Meridian Capital’s Aerospace & Defense Practice

AARON FRANZHEIM

SENIOR ASSOCIATE

BRIAN MURPHY

PRESIDENT & MANAGING DIRECTOR

L e a d i n g t h e N o r t h w e s t i n M & A

Areas of Expertise

2019 By the Numbers:

3 Closed Transactions

2 Engagements under LOI

6 Active Engagements Committed to tracking current industry valuation trends, M&A rationale, and

investor criteria

• Actively tracking 150+ aerospace and defense focused PE firms

• Ongoing correspondence with acquisitive strategic investors Conference, Panel, and Interview Participation

Ground Support Equipment

Interior Components

Tooling and Automation

Precision Machining and Assembly Aerospace Components

Defense

A&D Leadership Team


3Capital Markets Update – Impacts of COVID-19

• 50 – 75% of in-market transactions have been put on hold

• Select late stage deals with committed financing were completed – particularly those with limited commercial aerospace exposure

• Defense, security solutions, and UAV sectors showing resiliency

• Opportunities remaining in market likely to have extended timeline and diligence processes

Deal Activity

• Strategics are primarily focused on internal operations, expense reduction, and liquidity

o Mantra of most companies is now ‘cash is king’

• Active stress testing of near and mid-term demand scenarios

• Proactive management teams with strong balance sheets looking likely to evaluate consolidation and M&A opportunities

Strategic Buyers

In process transactions and the M&A deal pipeline have been adversely impacted by uncertainty caused by COVID-19 challenges

Lenders

• Non-bank cash flow lenders have halted lending and narrowed the credit window for new opportunitieso Focused on existing clientso Lending standards to tighten and cost of debt likely to increaseo Underwriting of more conservative cash flow scenarios, stringent covenants, etc.

• Alternative lenders have indicated that appetite for new credit opportunities may reemerge in May / June

Private Equity

• Combination of earnings declines, financing challenges, and mid-term demand uncertainty create challenging environment

• Private equity firms pulling out of active processes, causing sellers to reevaluate transaction strategies

• Experienced A&D investors are seeking minority investment opportunities to back platforms to pursue consolidation strategies


4Impact by Subsegment

Commercial Aerostructures

Declining Air Traffic Trends

Reduced OEM Build Rates

Risk of New Entrants / Low Cost

Competitors

Very High Very High Very High

MRO Medium

Commercial Subsystems

High Very High

Defense Low Low Medium

Market Trend (negative impact if present)

Declining Commercial

Order Volume

Low

Very High

Low

High

Margin Compression

Low

Medium

Medium

High

Low

MediumVery High


5Significant Challenges From Current Environment…

Supply Chain Risks• Unknown financial viability of smaller suppliers especially for any sole-source exposure• Furloughs and temporary shutdowns at suppliers extending lead times• Potential increased use of prepayment or shorter A/P terms

OEM Uncertainty• Reduction in build rates• Temporary manufacturing facility closures impacting shipment and order schedules• Ongoing 737 MAX certification challenges and uncertainty

Workforce Management• Implementation of remote employment, staggered shifts, and social distancing processes • Labor uncertainty given employee health concerns• Pairing key talent retention with potential workforce reductions

Near Term Cash Flow and Strategic Planning• Revenue reduction and A/R collection delays leading to cash flow challenges• Need to balance near-term liquidity issues with forecasted build rate increases in 2021+• Management required to analyze post COVID-19 market positioning and growth opportunities

Customer Order Volumes and Payments• Inconsistent demand as customers respond to market conditions• Extended A/R as customers manage their cash flow

A&D suppliers, particularly those with meaningful exposure to the commercial market, are facing multiple hurdles


6…Requiring Shareholders to Consider Mitigation and Response Strategies

zh

Cash Flow and Expense Management

• Draw on revolver, if possible, and focus on improving working capital by accelerating receivables and offering incentives for cash up front payment

• Evaluate variable costs to identify opportunities for cost reduction measures

• Reevaluate capital expenditures timing and need

Strategy Commentary

Traditional Lenders, Stimulus Debt, and

Government Programs

• Discuss payment and amortizations schedule options with existing lenders

• Take advantage of government and stimulus programs offered under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act including the Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loans

• SBA Program Details

Temporary Workforce Reductions

• Consider workforce furloughs to retain skilled labor and be able to scale operations quickly to capitalize on recovery

• Explore government programs including Washington State’s Workshare program to pursue flexible labor levels and keep workforce intact

Minority Investment and Alternative Debt

Options

• Proactive companies and management teams will look to capitalize on dislocation in market

• Capital opportunities available for companies looking for support beyond operating cash flow and loans under the CARES Act

• Opportunity for companies to partner with capital providers to pursue organic and inorganic investments to gain market share

Key:Immediate and

DefensiveNear-term and

Offensive

https://smallbusiness.house.gov/uploadedfiles/cares_flow_chart_edit.pdf


7Notable Recent Transactions – Aerospace

* Represents transaction announced / in-progress

Represents transaction advised by Meridian

Date Target Buyer Segment EV ($M)EV /

RevenueEV /

EBITDAApr-20 Raytheon (Airborne Tactical Radios) BAE Systems Avionics and Controls $275.0 -

Apr-20 Ellison Surface Technologies Bodycote MRO $199.5 3.3x

Mar-20 Impcross Gardner Group Components and Subsystems - - -

Mar-20 Prime Turbines PTB Group MRO $21.0 - -

Feb-20 ZIM Flugsitz Aurelius Equity Opportunities Aircraft Interiors - - -

Feb-20 FreeFlight Systems ACR Electronics Avionics and Controls - - -

Feb-20 Bombarier (C Series Jets) Airbus Aircraft Manufacturer - - -

Feb-20 *L3Harris (Airport Security and Automation Business) Leidos Avionics and Controls $1,000.0 - -

Jan-20 *Consolidated Aerospace Manufacturing Stanley Black & Decker Components and Subsystems $1,500.0 4.0x

Jan-20 Excelitas Technologies (A&D Power Business) TT Electronics Components and Subsystems $17.7 1.9x 10.4x

Jan-20 Aero Parts Mart Jet Parts Engineering (Vance Street Capital) Machined Parts - - -

Dec-19 MTM Robotics Airbus Automation / Tooling - - -

Nov-19 Ontic Engineering & Manufacturing CVC Capital Partners Components and Subsystems $1,365.0 - -

Nov-19 SureFly Moog Avionics and Controls $4.0 - -

Sep-19 Exotic Metals Forming Company Parker Hannifin Machined Parts $1,706.0 3.8x

Sep-19 Pacific Design Technologies AMETEK Avionics and Controls $125.0 - -

Aug-19 Esterline Interface Technologies Division KPS Capital Avionics and Controls $190.0 - -

Jul-19 Ontic Engineering & Manufacturing CVC Partners MRO - - -

Jul-19 Matrix Composites (United States) ITT Components and Subsystems $29.0 - -

Jul-19 Valence Surface Technologies ATL Partners, British Columbia Investment Mgmt. Metal Processing - - -

Jun-19 ACRA Aerospace Novaria Group, Rosewood Private Investments Machined Parts - - -

Jun-19 AIM Aerospace Sekisui Chemical Components and Subsystems $510.0 2.9x -

Jun-19 EnCore Group (Seat and Galley Manufacturer) Boeing Components and Subsystems - - -

Jun-19 EDAC Technologies Hanwha Aerospace Components and Subsystems $297.0 2.0x -


8Notable Recent Transactions – Aerospace

TRANSACTION MULTIPLE BY SEGMENT* TRANSACTION VOLUME BY EV

Source: PitchBook Data*Transactions completed since 2010 with an EV/EBITDA multiple reported


RevenueEV /

EBITDAJun-19 Advanced Polymer Technologies (Stockton) Mitsubishi Chemical Advanced Materials Machined Parts - - -

May-19 Zircon Precision Products CLM Equity Partners Machined Parts - - -

Mar-19 Esterline Technologies TransDigm Group Avionics and Controls $3,608.8 1.8x 11.6x

Jan-19 GECO Avionics Mercury Systems Avionics and Controls $36.5 - -

Jan-19 Carmel Forge Bet Shemesh Engines Components and Subsystems $58.5 - -

Jan-19 Momeni Engineering Essex Industries Machined Parts - - -

Nov-18 Magellan Distribution (A&D Division) Electronic Connector Company MRO - - -

Nov-18 Voyager Jet Center Lynx FBO Network MRO - - -

Oct-18 Aries Alliance Astorg Partners Machined Parts - - -

Oct-18 Aspect Aircraft Maintenance Textron Aviation MRO - - -

Oct-18 PenAir Ravn Alaska Airline $12.3 - -

Oct-18 PDQ Airspares Aircraft Fasteners International MRO - - -

Oct-18 KLX Aerospace Solutions Boeing Components and Subsystems $3,922.3 2.0x 12.6x

265

94

<$200M >$200M

13.3x 13.6x12.2x 11.8x 11.0x 10.3x

8.5x6.9x

Aircraft Interiors Components andSubsystems

ElectronicsManufacturing

Aerostructures Machined Parts MRO Controls Engines


9Notable Recent Transactions – Defense


RevenueEV /

EBITDAApr-20 Raytheon United Technologies Defense Contractor $52,783.0 - -

Mar-20 *L3 Communications EOTech American Holoptics Military Devices and Products - - -

Mar-20 Mast Technology Ultra Defense Military Devices and Products - - -

Mar-20 *Sinclair Interplanetary Rocket Lab Defense Technology - - -

Feb-20 Galactic Sky Lockheed Martin Defense Technology $4.3 - -

Feb-20 Black Diamond Advanced Technology Sagamore Capital Defense Technology - - -

Jan-20 Cobham Advent International Defense Technology $5,230.0 - -

Jan-20 3M (Ballistic Protection Business) Avon Rubber Tactical Equipment $116.0 - -

Jan-20 Critical Solutions International AirBoss of America Military Devices and Products $132.7 - -

Nov-19 Nutronics nLIGHT Defense Technology $33.3 - -

Oct-19 Manufacturing Techniques QinetiQ Defense Technology $125.0 0.8x 11.0x

Oct-19 Revision Military (Eyewear Business) Merit Capital Partners, ASGARD Partners Tactical Equipment - - -

Sep-19 Berg Companies HDT Global (Charlesbank Capital Partners) Shelters - - -

Sep-19 McNally Industries Susquehanna Private Capital Military Devices and Products - - -

Aug-19 H2M Group ManTech International Defense Technology $38.8 - -

Aug-19 Alion Science & Technology (Naval Systems Business) Serco Engineering Services $225.0 - -

Aug-19 Columbia Helicopters AE Industrial Partners Aerial Vehicles - - -

Jul-19 Integrated Polymer Solutions Arcline Investment Management Elastomeric Components - - -

Jul-19 Black Sage Technologies Acorn Growth Companies Defense Technology - - -

Jul-19 Globe Composite Solutions ESCO Technologies Materials - - -

Jul-19 L3 Technologies Harris Defense Technology $35,892.0 3.4x 26.9x

Jun-19 Riptide Autonomous Solutions BAE Systems Aerial Vehicles - - -

Mar-19 Endeavor Robotics FLIR Systems Vehicles $385.0 - -

Mar-19 LGS Innovations CACI International Cybersecurity $759.5 1.6x 9.3x

Feb-19 Florida Turbine Technologies Kratos Defense & Security Solutions Defense Systems $74.9 - -

Feb-19 Aeronautics Rafael Advanced Defense Systems Aerial Vehicles $235.0 - -

Jan-19 DHA Group ASGN Consulting $48.5 1.0x 11.4x

* Represents announced transaction

Represents transaction advised by Meridian


10Select Public Companies

As of 04/15/20

$ in M

Market LTM EV/LTM LTM Margin 52-Week

Company Name Cap EV Rev EBITDA Rev EBITDA EBITDA Change

Aerospace

Airbus SE (ENXTPA:AIR) 51,253 48,598 78,896 4,592 0.6x 10.6x 5.8% (52.8%)

Ducommun Incorporated (NYSE:DCO) 276 565 721 84 0.8x 6.7x 11.7% (39.3%)

HEICO Corporation (NYSE:HEI) 9,812 10,544 2,096 558 5.0x 18.9x 26.6% (21.3%)

Hexcel Corporation (NYSE:HXL) 2,583 3,579 2,356 567 1.5x 6.3x 24.1% (54.6%)

Kaman Corporation (NYSE:KAMN) 1,105 837 762 84 1.1x 10.0x 11.0% (34.3%)

MTU Aero Engines AG (XTRA:MTX) 7,206 7,939 5,317 933 1.5x 8.5x 17.5% (43.4%)

Safran SA (ENXTPA:SAF) 36,413 41,886 28,096 5,763 1.5x 7.3x 20.5% (39.2%)

Senior plc (LSE:SNR) 341 642 1,417 138 0.5x 4.7x 9.7% (73.8%)

Spirit AeroSystems Holdings, Inc. (NYSE:SPR) 2,095 2,828 7,863 990 0.4x 2.9x 12.6% (76.7%)

Textron Inc. (NYSE:TXT) 6,249 8,702 13,630 1,529 0.6x 5.7x 11.2% (49.4%)

The Boeing Company (NYSE:BA) 79,556 97,145 76,559 734 1.3x 132.3x 1.0% (62.7%)

TransDigm Group Incorporated (NYSE:TDG) 17,081 31,273 3,538 2,302 5.5x 13.6x 65.1% (30.3%)

Triumph Group, Inc. (NYSE:TGI) 348 1,703 3,076 (273) 0.6x - (8.9%) (71.4%)

Median 6,249 7,939 3,538 734 1.1x 7.9x 11.7% (49.4%)

Mean 16,486 19,711 17,256 1,385 1.6x 19.0x 16.0% (49.9%)

Defense

BAE Systems plc (LSE:BA.) 21,250 24,224 23,354 3,264 1.0x 7.4x 14.0% (4.6%)

Elbit Systems Ltd. (TASE:ESLT) 5,317 6,347 4,508 410 1.4x 15.5x 9.1% (15.8%)

General Dynamics (NYSE:GD) 40,194 52,725 39,350 5,491 1.3x 9.6x 14.0% (20.6%)

Kratos Defense & Security Solutions, Inc. (NasdaqGS:KTOS) 1,549 1,734 718 72 2.4x 23.9x 10.1% (1.5%)

L3 Harris Technologies (NYSE:LHX) 42,729 45,721 6,801 2,268 6.7x 29.7x 33.3% 18.6%

Lockheed Martin Corporation (NYSE:LMT) 107,118 118,302 59,812 9,083 2.0x 13.0x 15.2% 22.4%

Northrop Grumman Corporation (NYSE:NOC) 58,350 70,183 33,841 4,094 2.1x 17.1x 12.1% 25.1%

Raytheon Technologies (NYSE:RTN) 98,664 140,174 77,046 13,637 1.8x 10.3x 17.7% (52.1%)

Thales S.A. (ENXTPA:HO) 16,837 20,843 20,599 2,914 1.0x 7.2x 14.1% (36.0%)

Median 40,194 45,721 23,354 3,264 1.8x 13.0x 14.0% (4.6%)

Mean 43,556 53,361 29,559 4,581 2.2x 14.9x 15.5% (7.2%)


11Meridian’s Aerospace and Defense Team

AARON FRANZHEIM

Senior Analyst

TY KJELLESVIK

Senior Associate

• 5 years – Investment

Banking


Banking

• Washington (BBA) • Washington (BBA)

GABRIEL CABALLERO

Analyst

• 1 year – Investment

Banking

• Portland State (BS)

• Tullius Partners

KRISTIN BRANDTNERBRIAN MURPHY

Senior Vice PresidentManaging Director & President

YEARS EXPERIENCE

BACKGROUND

PRIOR EXPERIENCE

• 14 years – M&A and

corporate finance


Banking and Corporate

Banking

• Redlands (BS, BS) • Notre Dame (BBA)

• Accenture • J.P. Morgan • Financial Technology

Partners


12International Aerospace and Defense Connections

USANorth American Sector

Team Lead

BRIAN MURPHY

FranceManaging Partner,

Aerospace & Defense

PHILIPPE DORE

United KingdomSenior / Operations Advisor

Chairman – ShimtechChairman – MAA

CLIVE SNOWDEN

Nordic RegionManaging Partner,

Aerospace

ULF HOYEN

GM&A PARTNERS AEROSPACE LEADERSHIP TEAM GLOBAL M&A

A&D COVERAGE TEAM HIGHLIGHTS

Meridian Capital is a founding member of Global M&APartners, a global partnership of independent, middle-market investment banking firms. Established in 1999,the partnership includes 34 investment banks with morethan 200 M&A professionals transacting in over 50countries. Combined the partnership has successfullycompleted over 1,500 transactions with combined valuein excess of $50 billion over the past five years. Meridianis a leading member of the partnership’s AerospaceCoverage Team.

• Significant aerospace operational and transaction experience

• Global coverage across key geographic markets (50+ countries)

• Unmatched strategic relationships and investor access across aerospace industry

• Leading research and thought leadership

FranceSector Team Lead

Former Chairman & CEO -Airbus

NOEL FORGEARD

GermanyDirector,

Aerospace & Defense

PHILIPP ELSEN


13Meridian Aerospace and Defense Transaction Experience

AVIC International

Manufacturer and installer of

production and assembly lines

- By-side Advisory Services -

Procesos Termicos

Mexico-based provider of machining

and special processing services

- Acquired by -

Mobile Tool Management

Manufacturer of robotics for the

aerospace industry

- Growth Capital Provided by -

Imaginetics, Inc.

Tier I manufacturer of precision

aerospace components

- Acquired by -

Blast Deflectors

Global leader in jet blast deflection

and engine noise mitigation

technology

- Acquired by -

HR Givon

Manufacturer precision machined

parts for the aerospace industry

- Acquired by -

VIOX Corporation

Manufacturer of glass/ceramic

compositions for electronic, industrial,

and healthcare markets

- Acquired by -

J&M Machine

Manufacturer of precision machined

aerospace parts

- Acquired by -

Loxin

Design and manufacture of large machine

tools for the aerospace and railway

sectors in Spain

- Acquired by -

Airline Services Holdings

Maintenance, repair and overhaul

services to airlines and aviation

businesses in the U.K.

- Management Buyout Backed by -

JL Manufacturing

Manufacturer of precision machined

components for the aerospace

industry

- Acquired by -

Dynamic Ceramic

Leading UK manufacturer of

advanced ceramics

- Acquired by -

Hutchinson SA

Manufacturer of thermal and acoustics

insulation materials

- By-side Advisory Services -

Procesos Termicos

Mold Rite

Injection moldings for aerospace,

medical, and consumer products

- Acquired by -

Sound Rite

Plastics, Ltd.

Pacific Aerospace & Electronics

Manufacturer of precision electronic

aerospace, medical, and industrial

products

- Financial and Buy-side Advisory Services -

Apollo Video Technology

Manufacturer of mobile video, fleet &

information management systems

- Acquired by -

Berg Companies

Manufacturer of remote camp

solutions for military and commercial

applications

- Acquired by -

MTM Robotics

Leading provider of high-quality,

automated portable tools, robotics,

and software systems

- Acquired by -

http://www.airline-services.com/index.php


14

The Meridian DifferenceE x c e p t i o n a l R e s u l t s D e l i v e r e d

Brian MurphyPresident & Managing DirectorDirect: (206) [email protected]

Kristin BrandtnerSenior Vice PresidentDirect: (206) [email protected]

Ty KjellesvikSenior AnalystDirect: (206) [email protected]

Aaron FranzheimSenior AssociateDirect: (206) [email protected]

Gabriel CaballeroAnalystDirect: (206) [email protected]

aerospace & defense m&a trends: spring 2020 · jun-19 acra aerospace novaria group,...

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