A e r o s p a c e, D e f e n s e, G o v e r n m e n t M & A A n n u a l R e v i e w. Aerospace Defense Government Services M&A

Transcription

1 A e r o s p a c e, D e f e n s e, G o v e r n m e n t M & A A n n u a l R e v i e w Aerospace Defense Government Services M&A

2 Executive Summary The global macroeconomic uncertainties that highlighted the end of 2012 continued to permeate into 2013 beginning with the implementation of sequestration and culminating in a 16 day government shutdown in October. Since reopening however, Congress passed a two year budget plan and signs of an economic recovery continue. Despite all of these disruptions to the federal government and broader economy, the S&P 500 closed the year up 29.6% and was significantly outperformed by all of our custom Aerospace, Defense and Government Services indices. Amidst this climate of budget uncertainty, defense and government services transaction volume fell sharply. In 2013, The McLean Group tracked 129 announced defense and government services transactions compared to 219 in The drop in acquisitions was most notable among large government services primes. Acquisition activity in 2013 by constituents of The McLean Group s defense prime index was down 63% compared to the trailing three year average volume. Instead of pursuing acquisitions, many companies divested non-core business units to reshape and reposition in response to shrinking government spending. However, this reduced activity by large strategic buyers created an attractive environment for private equity to pursue opportunities in the sector and enabled mid-tier service providers to gain scale through inorganic growth. Aerospace transactions, meanwhile, remained stable in The McLean Group tracked 123 announced transactions compared to 129 in Major Original Equipment Manufacturer (OEM) suppliers were especially active, helping to drive deal volume and value. Furthermore, both strategic and financial buyers continued to be motivated by strong global air traffic growth forecasts. Notable 2013 M&A Activity Textron acquired Beechcraft CACI acquired Six3 Systems Rockwell Collins acquired ARINC Michael Baker Corporation was acquired by Integrated Mission Solutions, an affiliate of DC Capital Partners TransDigm acquired Arkwin Industries Engility acquired Dynamics Research Corporation Capital Markets % Change First Half 2013 Second Half 2013 CY2013 Defense Prime Index 24.1% 33.3% 65.5% Defense Systems Index 13.3% 28.5% 45.6% Diversified Government Services Index 20.7% 15.2% 39.1% Middle Market Government Services Index 23.4% 15.1% 42.0% Large Cap Aerospace Index 20.7% 25.7% 51.7% Mid Cap Aerospace Index 21.0% 34.6% 62.9% Small Cap Aerospace Index 32.6% 20.8% 60.2% International Aerospace Index 26.4% 29.5% 63.6% S&P % 15.1% 29.6% Source: Public Filings; Capital IQ as of 12/31/13 1

3 2013 ADG M&A Overview TMG tracked 38 announced defense and government services sector transactions and 35 announced aerospace sector transactions during Q4. Total 2013 transaction activity in the defense and government services sector was down considerably from prior years. Most notable was the lack of buy-side activity from large primes. The five companies in The McLean Group s large prime index completed only five transactions during 2013, down more than 60% from the last three years annual average. Additionally, transactions were smaller in size and targeted specific growth areas. There were just two reported government services deals by strategics in excess of $100 million announced in 2013: CACI s $820 million acquisition of Six3 Systems and Engility s acquisition of Dynamics Research Corporation for $120 million. Meanwhile, activity from financial buyers remained strong. Examples include DC Capital s take private of Michael Baker Corporation for $397 million and Aurora Capital Group s $270 million take private of National Technical Systems. Defense and Government Services Transaction Activity Q1 Q2 Q3 Q4 In contrast, acquisition activity in the aerospace sector was much more robust. Many strategic aerospace buyers remained active and helped to drive average EV/EBITDA and EV/Revenue multiples of 10.3x and 1.6x, respectively. Also, 19 transactions had reported deal values in excess of $100 million, four of which were in excess of $1 billion. Strategic buyers moved to strengthen their market positions due to growing commercial aircraft sales and a 151% forecasted increase in global revenue passenger kilometers (RPK) over the next 20 years. Large OEM suppliers were particularly active, seeking to capitalize on estimates that the global commercial aircraft fleet will more than double by 2032 to meet rising demand. Precision Castparts, TransDigm and Curtiss-Wright made a total of 13 acquisitions valued at well over $1 billion. The robust industry outlook has attracted the attention of many private equity groups which accounted for more than 25% of the 123 transactions in Q Quarterly Aerospace Transaction Activity 32 Q Q Q Q Q Q Q Source: InfoBase; Capital IQ as of 12/31/13 2

4 2013 Defense and Government Services M&A Trends Shifting Buyer Composition and Consolidation Among Mid-Tiers One of the most impactful trends on defense and government services M&A is the shifting buyer composition. Since 2010, activity among public buyers has declined while private equity and privately held strategics have become more active accounting now for over 70% of total deal activity in the sector, more than twice the level of just three years ago. This trend suggests that, for the most part, private and financial buyers remained active while large public companies were on the sidelines. The lack of active strategic buyers, who are typically known for driving transaction multiples with the ability to factor in synergies, created an attractive environment for private equity. Furthermore, a number of mid-tier companies pursued acquisition plans to gain scale, such as Vistronix, which completed three acquisitions in 2013 and Eagle Ray, which made its first acquisition by acquiring Kore Federal. Public companies are not expected to be out of the market for long. As the cash on their balance sheets swell and federal budgets become more clear, M&A activity should pick up rather quickly. Strategic Divestitures and Splits In lieu of buy-side M&A, several large public companies decided to shed noncore businesses to reshape and reposition in response to shrinking government spending. Most notable was SAIC s split into two publicly traded companies. The split allows both entities to avoid government Organizational Conflicts of Interest (OCI) caused by Leidos products or development business and SAIC s SETA business. Also notable was Exelis decision to spin off its military and government services business into an independent public company this summer. These moves create potential buyers looking to pursue targeted acquisitions that are free of OCI concerns and presents a clear strategic focus to the market. Source: InfoBase; Capital IQ as of 12/31/13 Defense and Gov. Services Buyer Composition 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Public Private Financial Divestitures and Splits Announced Split Mission Systems Completed Split Completed Divestiture Applied Technologies 3

5 2013 Aerospace M&A Trends Supplier Consolidation Large OEM suppliers pursued aggressive consolidation efforts in The most active buyer was Precision Castparts with five acquisitions targeting lower tier suppliers, including a $600 million acquisition of Permaswage SA. TransDigm Group continued to acquire dynamic system and component suppliers, spending a total of $725 million on four acquisitions. Curtiss-Wright also had four acquisitions in 2013, spending more than $230 million on companies in a range of strategic subsectors. The largest consolidation transaction was SKF USA s $1.2 billion acquisition of Kaydon Corporation in a move to simultaneously expand the Swedish industrial giant s US presence and enhance its engineering capabilities. Additionally, Triumph Group, RBC Bearings and Astronics all made three acquisitions during the course of the year. Expanding Private Equity Presence Private Equity played an active role in 2013 aerospace M&A, accounting for 27% of acquirers and 20% of sellers. High commercial aircraft sales combined with positive forecasts for global air traffic motivated buyers to build or grow positions in the space despite an average EV/EBITDA multiple of 10.3x. During the year, Arlington Capital established an engineering solutions platform through its Q1 acquisition of MB Aerospace and subsequent Q2 purchase of Delta Industries. Resilience Capital Partners also had two acquisitions in a platform build out, acquiring portfolio company Aerospace Products International in Q1 and Avionics International Supply in Q4. Greenbriar Equity took EDAC Technologies private in Q2 and which subsequently acquired Parkway s Aerospace and Defense Division in Q3. A majority of the 33 private equity targets were either precision products suppliers or MRO service providers. Source: InfoBase; Capital IQ as of 12/31/13 Notable Supplier Consolidation Activity Buyer Target EV Protective Coatings, Inc. NA SKF - metal rods $52.0M Permaswage SA $600.0M Exacta Aerospace NA Alloy Processing, Inc. NA Aerosonic Corporation $39.0M Arkwin Industries $286.0M Whippany Actuation Systems $150.0M Airborne Systems $250.0M FW Gartner-Thermal Spraying NA Exlar Corporation $85.0M Phönix Group $106.0M Parvus Corporation $38.0M Kaydon Corporation $1,245.7M Private Equity Acquisitions by Subsector 18% 37% 9% 18% 12% 6% Component Supplier Tooling Precision Machining MRO Services Distributer Other 4

6 Federal Budget Uncertainty Federal budget uncertainty once again shaped most of the year s discussions and industry strategies. The year began with legislation that averted widespread tax increases and deep spending cuts, which quickly came to be known as the Fiscal Cliff. Federal agencies, contractors, and employees endured unparalleled budget uncertainty throughout the year, which caused widespread delays and cutbacks. Sequestration cuts took effect on March 1 and shortly after, on March 21, Congress agreed to a Continuing Resolution (CR) to fund federal agencies through September 30, The CR maintained sequestration but avoided an April government shutdown, provided improved visibility, and accelerated contracting activity. However, this 6 month stopgap measure also set the stage for a 16 day government shutdown in October. On October 1, the federal government implemented its first shutdown in 17 years due to Congress inability to agree on a CR. Approximately 850,000 federal civilian employees were placed on unpaid leave (although federal employees were eventually provided back pay). The primary source of dispute within Congress was the 2010 Affordable Care Act, also referred to as Obamacare. House Republicans insisted on including language to defund or weaken the Affordable Care Act only to have the measure rejected by the Democratic-led Senate. Ultimately, Republicans backed down on their demands and agreed on a bill to reopen federal agencies and suspend the debt ceiling. The year ended on a high note when bipartisan budget negotiators announced a deal to set spending levels for the federal government for two years. Budgetary uncertainty and contracting delays undoubtedly affected corporate strategies and M&A volume and valuations. A clearer picture of long-term US federal spending will emerge in , which should draw buyers and sellers from the sidelines. However, deal volume and growth in the broader economy could be restrained by debt ceiling confrontations and uncertainty surrounding health care costs. Overall, 2014 is poised to be a stronger year for M&A, but significant potential headwinds remain. Federal Budget Timeline CR passed to fund Government from 10/1/13 3/27/13 Fiscal cliff averted Debt ceiling suspended until 5/18/13 Sequestration takes effect Bill passed to fund Government through 9/30/13 Shutdown begins, congress battles over CR and Obamacare Shutdown ends, funding in place to 1/15/14 Two year budget deal passed 16 Days I Sept 2012 I Dec 2012 I Mar 2013 I June 2013 I Sept 2013 I Dec 2013 Source: Public Filings 5

7 Snowden, Intel Budget, and Changing Capital Structures Booz Allen Hamilton technician Edward Snowden s leak of top-secret NSA documents to The Guardian newspaper was likely the most publicized event of 2013 s first half. Snowden's disclosures have accelerated Intelligence Community (IC) security reforms and provided unprecedented insight into IC budgets. The CIA has begun consolidating databases and has eliminated 90% of its system administrators. These changes relocate data from separate repositories into large data centers and reduce the number of individuals with access to secret information. As a result of Snowden, further insights into IC budgets and strategic positioning are also available (2013 breakdown displayed in the chart to the right). Despite Snowden s transgressions, the IC remains among the most coveted of customers for contractors. Acquisitions of IC contractors are expected to remain strong with well positioned companies that will continue to command premium valuations. $4.4 $4.9 $ Intel Budgets $2.8 $1.7 CIA $10.3 $52.6 Billion Total $14.7 $10.8 NSA NRO NGA DIA DOJ Other ODNI Another interesting industry trend during 2013 was the increase in company debt levels. From , industry debt to LTM EBITDA leverage multiples remained consistently low (about 1.3x industry average). Based 3.0x on analysis of historical averages, it can be argued that the industry as a whole was under-levered and thus not operating at an optimal capital 2.5x structure. However, during 2013 the average industry multiple increased 2.0x substantially for the first time in over a decade. The availability of cheap 1.5x debt is undoubtedly a driving factor of this trend; however, as budgetary clarity increases, one would expect the industry to continue reverting back 1.0x to higher levels of leverage. The most common way under-levered 0.5x companies add debt is through an acquisition, thus rightsizing the capital structure of the combined entity. As a result, debt financed industry consolidation (e.g. Engility s acquisition of Dynamics Research and CACI s acquisition of Six3) could continue to increase in 2014 as companies shift further towards optimal capital structures. Total Industry 1 Debt and Median Leverage Multiples $ x $ x $ x $29.8 Average Debt/ LTM EBITDA $ x 1.4x 1.3x $41.4 $ x Total Industry Debt (In billions) 1 BA, GD, LMT, NOC, RTN, LLL, CUB, FLR, HRS, TDY, CACI, LDOS, MANT $5 $4 $3 $2 $1 $0 Source: Public Filings; Capital IQ as of 12/31/13 6

8 Strong Commercial Aerospace Sales Commercial Aircraft sales continued their steady climb in 2013 with Airbus and Boeing s combined backlog growing more than 17% from 9,055 to 10,639. Boeing retained its status as world s top planemaker, delivering 648 aircraft. However, Airbus captured more new sales, booking 1,619 gross orders. Order growth was driven by two key factors: 1) growing middle classes, especially in Asia-Pacific and 2) new fuel-efficient aircraft options accelerating carrier replacement schedules Commercial Aircraft Sales Summary Company Deliveries Gross New Orders Net New Orders Backlog 588 1,619 1,503 5, ,531 1,355 5,080 Narrow body aircraft orders were driven by big sales in Europe and the Asia-Pacific where economy airlines are scaling up to capitalize on large forecasted increases in passenger traffic. Airbus booked significant orders for its A320neo at the Paris Airshow and the China Air Expo and secured a $22 billion order for 220 A320s from International Airlines Group. Boeing also booked large orders for its 737 MAX at these events in addition to a Q1 $18 billion order from Ryanair for s. Indonesia s Lion Air grabbed headlines twice when it ordered s in Q1 and 234 A320/A321s in Q2, a combined order value of nearly $50 billion. Widebody aircraft sales were propelled by huge orders at the Dubai Airshow for new fuel efficient designs. Middle Eastern airlines placed orders at the Airshow valued at nearly $150 billion including Xs, s, 50 A350s, and 50 A380s. Boeing s 787 orders remained stable despite several safety issues. However, Boeing s 787 troubles may have materialized in Japan with Japan Airlines landmark $9.5 billion order for 31 Airbus A350s, which threatens Boeing s near exclusivity in that market. Boeing s 747 sales remained stagnate but the market is expected to return in 2014 with the introduction of the stretched, next-generation Quarterly Backlog by Operational Design Family Short / Medium-Range, Narrow-Body Long-Range Wide-Body Twin-Engine Double-Deck, Wide-Body, Four-Engine 3,889 4,014 4,176 4, ,256 1,259 1,269 1, ,445 3,467 3, , , Q1 Close Q2 Close Q3 Close Q4 Close Airbus A320 Boeing 737 Q1 Close Q2 Close Q3 Close Q4 Close Airbus A330 / A340 / A350 Boeing 767 / 777 / 787 Source: Open Sources, Boeing and Airbus Public Filings Q1 Close Q2 Close Q3 Close Q4 Close Airbus A380 Boeing 747 7

9 Balancing Technology and Cost Defense Aerospace companies produced a steady stream of next-generation developments in The gradual, macro shift from conventional to asymmetric engagements continues to drive militaries towards greater spending on state-of-the-art equipment. Advanced technology investments in UAV surveillance systems, unmanned warplanes, and fighter jets are fast becoming critical components of high-priority security strategy. However, high cost is also driving industry investments in mission specific, low-cost alternatives. Despite a $400 billion price tag, Lockheed Martin s next generation F-35 program survived the shrinking defense budget unscathed, securing two orders from the Pentagon for 71 aircraft valued at $7 billion. F-35 testing is scheduled to be completed in 2017 at which point the Pentagon will begin mass orders for a total fleet size of 2,443 aircraft. Northrop Grumman s Triton completed its first nine test flights and its X-47B became the first large UAV aircraft to take off and land on a carrier at sea. In December, sources revealed that Northrop s highly classified RQ-180 was flying and projected to be operational by The large UAV s advances in stealth and aerodynamic efficiency are critical to the Air Force s ISR asset shift away from permissive environments and toward contested or denied airspace. In combination with the shift towards contested/denied airspace, the US forward operating presence is shrinking and regional partners can be unpredictable. The combination of these factors provide budgetary protection for future Air Force platforms that offer reach and survivability, such as the new long-range bomber. Boeing and Lockheed have announced that they will team on this multibillion-dollar program. Lockheed also revealed long-running, followon plans for the SR-71 Blackbird. Dubbed the SR-72, the program is a twin-engine, unmanned hypersonic ISR / strike platform designed for Mach 6 cruise. Both the long-range bomber and SR-72 programs could enter development in demonstration phases as early as Proposed F-35 Procurement Schedule RQ-180 SR-72 Scorpion On the opposite end of the tech spectrum, Textron-AirLand unveiled its self-funded Scorpion Light Attack, Recce Jet. The two-seat, twinengine Scorpion completed its first test flight in December and is designed to handle low-end Air Force missions such as US-based interdiction, quick-reaction natural disaster support, and air sovereignty patrols. The Scorpion s design is focused on keeping operating costs below $3,000 per flying hour, significantly less than the $25,000 per flying hour for F-16s currently flying these missions. If delivered, the fuel savings alone would exceed $1 billion annually. While the Air Force has not declared a need for such an aircraft, developers maintain that pressure to curb military spending has already created demand. Options like the Scorpion could provide savings needed to maintain future funding for high-tech programs and create a new procurement opportunity for low-end missions. Source: Open Sources, Public Filings 8

10 Capital Markets: Overview (Defense and Gov. Services) 70.0% 60.0% Last 52 Weeks Custom Index Performance 65.0% 50.0% 40.0% 30.0% 20.0% 42.6% 42.0% 39.1% 29.6% 10.0% 0.0% -10.0% Dec 2012 Jan 2013 Feb 2013 Mar 2013 Apr 2013 May 2013 Jun 2013 Jul 2013 Aug 2013 Sep 2013 Oct 2013 Nov 2013 Dec 2013 Defense Prime Index Defense Systems Index Diversified Government Services Index Middle Market Index S&P 500 Index Index Constituents and Stock Price as a % of 52 Week High Defense Prime Index 96% 100% 99% 99% 99% Defense Systems Index 99% 93% 98% 89% 99% 98% 98% Diversified Government Services Index 86% 99% 95% 95% 98% 83% Middle Market Index 100% 96% 82% 84% 96% 91% Source: Public Filings; Capital IQ as of 12/31/13 9

11 Capital Markets: Overview (Aerospace) 70.0% 60.0% 50.0% 40.0% Last 52 Weeks Custom Index Performance 63.6% 62.9% 60.2% 51.7% 30.0% 29.6% 20.0% 10.0% 0.0% -10.0% Dec 2012 Jan 2013 Mar 2013 Apr 2013 May 2013 Jun 2013 Jul 2013 Aug 2013 Sep 2013 Oct 2013 Nov 2013 Dec 2013 Large Cap Aerospace Index Mid Cap Aerospace Index Small Cap Aerospace Index International Aerospace Index S&P 500 Index Index Constituents and Stock Price as a % of 52 Week High Large Cap Aerospace Index 85% 98% 96% 99% 98% 98% 98% 100% Mid Cap Aerospace Index 99% 97% 100% 93% 99% 97% 99% 89% Small Cap Aerospace Index 89% 93% 94% 97% 75% 64% 96% 98% International Aerospace Index 98% 85% 82% 92% 92% 100% 100% 100% Source: Public Filings; Capital IQ as of 12/31/13 10

12 Public Market Valuations: EV/2014E EBITDA Multiples Defense and Government Services Average: 8.3x Median: 8.0x Defense Prime Index Defense Systems Index Diversified Government Services Middle Market Index Average: 8.5x Average: 8.7x Average: 7.4x Average: 8.4x 10.0x 8.5x 8.7x 7.8x 7.6x 10.9x 10.6x 9.2x 9.0x 8.2x 6.8x 6.3x 9.6x 7.6x 7.6x 6.8x 6.5x 6.4x 13.4x 8.7x 8.6x 7.8x 6.2x 5.4x BA RTN LMT GD NOC FLIR TDY CUB LLL HRS ATK XLS LDOS SAIC BAH MANT CACI EGL KEYW KTOS DRCO ICFI VSEC NCIT Aerospace Average: 10.4x Median: 10.1x Large Cap Aerospace Index Mid Cap Aerospace Index Small Cap Aerospace Index Average: 11.3x Average: 10.0x Average: 10.0x 14.0x 13.2x 12.8x 12.3x 10.1x 10.0x 9.1x 9.0x 13.8x 12.5x 11.9x 10.1x 9.1x 8.7x 6.9x 6.9x 19.7x 12.2x 11.4x 8.2x 8.1x 7.0x 6.7x 6.5x AME TDG PCP BEAV UTX BA COL TXT HEI DGI HXL ESL CW MOG.A SPR TGI AVAV ATRO WAIR ORB LMIA GILT AIR GY Source: Public Filings; Capital IQ as of 12/31/13 11

13 Capital Markets: Stock Performance (Defense and Gov. Services) Fourth Quarter 2013 CY2013 Dynamics Research Alliant Techsystems Exelis Northrop Grumman Harris Raytheon NCI Lockheed Martin Boeing L-3 S&P 500 General Dynamics Teledyne CACI Engility ManTech VSE KEYW Booz Cubic ICF Flir Kratos (0.1%) (0.9%) (1.9%) (2.0%) (4.1%) (7.2%) 24.7% 21.3% 20.3% 17.7% 17.7% 17.6% 16.6% 16.2% 13.1% 9.9% 9.2% 8.2% 5.9% 5.3% 4.1% 2.3% 51.1% Alliant Techsystems Dynamics Research VSE Boeing Engility Northrop Grumman Exelis Lockheed Martin Raytheon Kratos ICF Harris Teledyne NCI L-3 General Dynamics Booz Flir CACI S&P 500 ManTech Cubic KEYW 9.8% 5.9% 15.4% 81.1% 73.4% 69.6% 69.1% 61.1% 57.6% 52.7% 48.1% 42.6% 41.2% 41.2% 39.5% 37.9% 37.6% 34.9% 33.1% 29.6% 96.4% 96.2% 95.9% (20%) 0% 20% 40% 60% 0% 25% 50% 75% 100% Defense Prime Index Defense Systems Index Diversified Government Services Index Middle Market Government Services Index S&P 500 Index Source: Public Filings; Capital IQ as of 12/31/13 12

14 Capital Markets: Stock Performance (Aerospace) Spirit AeroSystems Textron Curtiss-Wright DigitalGlobe Esterline AeroVironment Finmeccanica Precision Castparts Airbus Group B/E Aerospace Boeing TransDigm Moog Hexcel Thales Rolls-Royce Ametek GenCorp Safran LMI Aerospace Orbital Sciences S&P 500 Rockwell Collins Triumph HEICO UTC Wesco Aircraft Holdings Astronics AAR Embraer Bombardier Meggitt Gilat Fourth Quarter 2013 (0.9%) (3.8%) (3.9%) (4.8%) 40.6% 33.1% 32.5% 30.1% 27.6% 26.1% 24.5% 18.5% 18.5% 17.9% 16.2% 16.1% 15.8% 15.2% 15.2% 14.7% 14.5% 12.4% 10.9% 10.3% 10.0% 9.9% 8.9% 8.3% 6.9% 5.5% 4.7% 2.6% 2.5% (20%) (10%) 0% 10% 20% 30% 40% 50% Astronics Spirit AeroSystems GenCorp Curtiss-Wright Airbus Group Boeing Thales B/E Aerospace Orbital Sciences DigitalGlobe Wesco Aircraft Holdings Hexcel Moog HEICO Esterline Safran AAR Textron Rolls-Royce Precision Castparts Ametek UTC Meggitt AeroVironment S&P 500 Rockwell Collins Finmeccanica Bombardier TransDigm Triumph Embraer Gilat (12.0%) LMI Aerospace (23.8%) CY % 100.8% 96.9% 89.6% 89.2% 81.1% 78.3% 76.2% 69.2% 68.4% 65.9% 65.8% 65.6% 61.8% 60.3% 55.0% 49.9% 48.3% 46.0% 42.2% 40.2% 38.8% 38.0% 34.0% 29.6% 27.1% 26.5% 22.6% 18.1% 16.5% 12.9% (50%)(25%) 0% 25% 50% 75% 100% 125% 150% Large Cap Aerospace Mid Cap Aerospace Small Cap Aerospace International Aerospace S&P 500 Source: Public Filings; Capital IQ as of 12/31/13 13

15 Short Interest (Aerospace, Defense and Gov. Services) 4.0% Last 52 Week Median Short Interest 3.5% 3.0% 2.5% 2.0% 2.0% 2.0% 1.5% 1.0% Dec 2012 Jan 2013 Feb 2013 Mar 2013 Apr 2013 May 2013 Jun 2013 Jul 2013 Aug 2013 Sep 2013 Oct 2013 Nov 2013 Dec 2013 Defense and Government Services Aerospace Short Interest as of December 31, 2013 Defense and Government Services 0.9% 1.0% 1.4% 2.0% 1.9% 1.6% 21.4% 5.1% 8.5% 8.4% 5.6% 0.2% 1.9% 17.0% 6.5% 0.1% 0.6% 3.3% 2.1% 0.8% 2.0% 2.4% 4.3% 0.7% Aerospace 0.7% 3.4% 0.9% 0.9% 4.9% 2.9% 3.1% 0.8% 2.5% 8.8% 1.4% 2.6% 0.5% 1.2% 0.8% 1.8% 6.3% 4.9% 1.0% 0.1% 31.1% 11.3% 2.3% 1.1% Source: Public Filings; Capital IQ as of 12/31/13 14

16 Dry Powder Calculations (Defense and Gov. Services) ($ millions) Defense Prime Index 3x LTM EBITDA $24,516.0 $12,723.0 $16,485.0 $10,854.0 $10,142.0 Less LT Debt 9, , , , ,734.0 Plus Cash 9, , , , ,296.0 Dry Powder $23,969.0 $14,116.0 $12,950.0 $10,076.0 $8,704.0 Middle Market Defense & Government Services Index 3x LTM EBITDA $1,958.6 $358.1 $2,007.0 $1,100.0 $3,255.0 $4,416.0 $989.3 Less LT Debt 2, , , Plus Cash Dry Powder $44.0 $459.0 $1,667.0 $1,200.0 $1,913.9 $1,286.0 $502.8 Middle Market Defense & Government Services Index 3x LTM EBITDA $1,687.2 $954.9 $485.9 $2,265.0 $527.0 $813.0 Less LT Debt 1, , , Plus Cash Dry Powder $ $397.5 $280.2 $1,598.0 $585.7 $465.0 Middle Market Defense & Government Services Index 3x LTM EBITDA $82.7 $264.6 $71.7 $252.3 $59.3 $193.2 Less LT Debt Plus Cash Dry Powder $0.5 $206.5 ($6.4) ($342.5) $57.9 $61.7 Source: Public Filings; Capital IQ as of 02/03/14 15

17 Dry Powder Calculations (Aerospace) ($ millions) Large Cap Aerospace Index 3x LTM EBITDA $2,793.0 $2,156.7 $24,516.0 $8,615.7 $3,117.0 $3,504.0 $2,664.3 $33,090.0 Less LT Debt 1, , , , , , , ,241.0 Plus Cash , , ,619.0 Dry Powder $1,673.1 $586.6 $23,969.0 $5,058.7 $981.0 $2,736.0 ($3,081.4) $17,468.0 Mid Cap Aerospace Index 3x LTM EBITDA $1,024.7 $723.3 $1,053.7 $661.1 $990.6 $1,109.4 $741.6 $1,707.4 Less LT Debt , , ,621.5 Plus Cash Dry Powder $236.3 ($164.6) $543.8 $299.1 $761.1 $589.9 $5.7 $111.3 Small Cap Aerospace Index 3x LTM EBITDA $ $2.1 $149.5 $232.8 $62.4 $144.3 $470.4 $576.5 Less LT Debt Plus Cash Dry Powder ($17.1) $64.1 $18.9 ($290.4) $76.9 ($150.4) $566.6 $84.7 Source: Public Filings; Capital IQ as of 02/03/14 16

18 Notable Transaction Activity has acquired has acquired has acquired Closed Closed Closed January 31, 2014 January 2, 2014 December 31, 2013 Notes Notes Notes Engility Holdings, Inc. acquired Dynamics Research Corporation (DRC). Founded in 1955, DRC is a US government services, information technology and management consulting firm. Its capabilities include healthcare, homeland security, R&D, Defense Readiness, Logistics and C4ISR. DRC has more than 1,100 employees and annual revenue of more than $270 million. Engility acquired DRC s shares at a price of $11.50 per share. Motorola Solutions acquired Twisted Pair Solutions (TPS), a leader in push-to-talk over broadband applications for secure, real-time communication anywhere, on any device. TPS WAVE software transforms smartphones, tablets and PCs into powerful, secure communication solutions that provide integrated voice, text messaging, location and presence in one application that serves global public and private sector customers. The McLean Group served as M&A advisor to TPS. DAI acquired HTSPE. Based in Hemel Hempstead in the United Kingdom, HTSPE is currently implementing 200 projects around the world for clients such as the UK Department for International Development, EuropeAid, and the World Bank, in technical areas including climate change, land tenure, governance, education, and monitoring & evaluation. The McLean Group advised DAI on the transaction. Source: Capital IQ and InfoBase as of 12/31/13 17

19 Notable Transaction Activity will acquire has acquired has acquired Announced Closed Closed December 26, 2013 December 23, 2013 December 19, 2013 Notes Notes Notes Textron announced it will acquire Beech Holdings for $1.4 billion in cash. Beechcraft manufactures business, special mission, light attack and trainer aircraft. Since emerging from Chapter 11 protection in February 2013, Beechcraft s aircraft booking rates are higher than any time in the past three years and the Company expects to generate $1.8 billion in 2013 revenue. Rockwell Collins acquired ARINC from The Carlyle Group for $1.4 billion. ARINC provides communications and information processing solutions for the commercial aviation industry with expected 2013 revenues in excess of $600 million. When completed, the acquisition will shift Rockwell Collins business to approximately 54% commercial and 46% government. L-3 Communications acquired Mustang Technology Group. Based in Texas, Mustang develops and manufactures radar-based sensors and systems used in precisionguided weapons, electronic warfare, unmanned systems and other military applications. It s products are on the leading edge of the current and next generation of weapon systems. Mustang employs approximately 115 people and is expected to generate $36 million in sales in Source: Capital IQ and InfoBase as of 12/31/13 18

20 Notable Transaction Activity has acquired has acquired has acquired Closed Closed Closed December 19, 2013 December 13, 2013 November 22, 2013 Notes Notes Notes TransDigm Group acquired Airborne Systems Inc from MetalMark Capital for $250 million cash. Airborne Systems designs and manufactures personnel parachutes, cargo aerial delivery systems, emergency escape systems, naval decoys. The highly proprietary products have significant sole source positions with the US, UK and 50 other national governments. Revenue for the fiscal year ended June 30, 2013 was $160 million. Google acquired Boston Dynamics, a company known for developing superfast, animal-like robots for DARPA and other DoD organizations. The Company s development teams take projects from initial concept to proofof-principle prototyping to build-testbuild engineering, to field testing and low-rate production. The purchase is part of Google's broader push into the field of robotics. Aurora Capital Group acquired National Technical Systems (NTS) for approximately $270 million. Based in California, NTS provides testing and engineering services primarily to aerospace, defense, telecommunications, and high technology markets. The acquisition represents Aurora s first investment in the aerospace, defense, and government services industry. Source: Capital IQ and InfoBase as of 12/31/13 19

21 Notable Transaction Activity has acquired has acquired will acquire Closed Closed Announced November 15, 2013 November 12, 2013 November 4, 2013 Notes Notes Notes CACI acquired Six3 Systems for $820 million from Private Equity firm GTCR. Based in McLean, Virginia, Six3 provides specialized support services to the national security community in cyber and signals intelligence; intelligence, surveillance, and reconnaissance; and intelligence operations. The acquisition is the largest in CACI s history and financed by $800 million in debt. Acentia acquired InSysCo, an information technology (IT) services provider to Federal Government financial-related customers. The company has a unique employee base comprised of exceptional technical and industry experts who have extensive experience in large IT systems modernization, software development, and operations and maintenance. Veritas Capital will acquire Anaren, Inc. for $381 million. The purchase price reflected a premium of approximately 12.4% over a closing stock price of $24.91 the last day of trading prior to the deal announcement. Anaren designs, develops, manufactures and sells highly integrated microwave components, assemblies and subsystems for the wireless communications, satellite communications and defense electronics markets. Source: Capital IQ and InfoBase as of 12/31/13 20

22 Notable Transaction Activity has acquired has acquired will acquire Closed Closed Announced November 1, 2013 October 31, 2013 October 23, 2013 Notes Notes Notes Alliant Techsystems (ATK) acquired Bushnell Group Holdings for $985 million cash. Bushnell is a leading global designer, marketer and distributor of branded sports optics, outdoor accessories and performance eyewear. The Bushnell acquisition will expand ATK's product offerings into key growth areas and comprehensive product offerings in commercial and security ammunition, sporting arms and accessories. Precision Castparts (PCC) acquired Permaswage SA for $600 million. Based in France, Permaswage designs and manufactures aerospace fluid fittings. Permaswage specializes in permanent fittings used in airframe fluid conveyance systems and related installation tooling. The transaction will extend PCC s permanent fittings business while building on the separable fittings market foothold it established with its 2008 acquisition of Airdrome. Hong Kong Aircraft Engineering Company Limited (HAECO) entered into a definitive agreement to acquire TIMCO Aviation Services for approximately $388.8 million. TIMCO is a global provider of aviation maintenance, repair and overhaul (MRO) services. The acquisition will create one of the world s largest airframe MRO service providers based on revenue, number of customers, and scope of services and products offered. Source: Capital IQ and InfoBase as of 12/31/13 21

23 Notable Transaction Activity has acquired has acquired has acquired Closed Closed Closed October 16, 2013 October 11, 2013 September 23, 2013 Notes Notes Notes SKF acquired Kaydon Corporation in an all-cash transaction valued at $1.2 billion. Kaydon is a diversified industrial manufacturer with three distinct business areas: friction control products (bearings), velocity control products and specialty products, including environmental services. Kaydon has a global customer base, annual sales of $475 million, and more than 2,100 employees. The acquisition expands SKF s US footprint and enhances its engineering capability. Integrated Mission Solutions (IMS), a portfolio company of DC Capital Partners, acquired Michael Baker for $40.50 per share. Baker, which provides engineering, design, planning, and construction services to the defense industry, will expand IMS s offering of mission critical services. The per share offer price represents a 55% premium to Baker s 90-day average share price. Source: Capital IQ and InfoBase as of 12/31/13 Tallasi Technology acquired GAP Solutions, Inc (GAPSI). Established in 1999, GAPSI provides professional and technical services in a full spectrum of mission support services serving emergency management, security and information management, managerial support, and logistics support. Tallasi Technology is led by former Stanley Associates executives Eric Wolking and Pat Flannery. The McLean Group acted as the exclusive M&A advisor to GAPSI. 22

24 Notable Transaction Activity has acquired has acquired has acquired Applied Technology Division Closed Closed Closed July 19, 2013 June 27, 2013 June 5, 2013 Notes Notes Notes PAE acquired Computer Sciences Corporation s (CSC) Applied Technology Division. The Applied Technology Division has about 5,400 employees who provide aviation maintenance, base operations and maintenance, and space range support for the US government. This acquisition will add military and space testing and training services to PAE s portfolio. Raytheon acquired Visual Analytics Incorporated, a firm that specializes in data analytics, data visualization and information sharing. The transaction will add advanced analytic products and knowledge management solutions with intuitive user interfaces to Raytheon's offerings and will further broaden the Company's customer base in federal, state and local law enforcement. TransDigm Group acquired Arkwin Industries for $286 million in cash or 3.0x Arkwin s 2012 revenue. Located on Long Island, New York, Arkwin manufactures proprietary, highly-engineered aerospace hydraulic and fuel system components for commercial and military aircraft, helicopters and other specialty applications. Arkwin also has product positions on various ground-based aero derivative turbine engines. Source: Capital IQ and InfoBase as of 12/31/13 23

25 Notable Transaction Activity has acquired has acquired has acquired Closed Closed Closed May 7, 2013 May 2, 2013 April 17, 2013 Notes Notes Notes Greenbriar Equity Group announced its definitive agreement to acquire EDAC Technologies for $104.1 million in cash. EDAC designs and manufactures jet engine parts as well as equipment gauges and special tooling for engine assembly, manufacturing and inspection. Greenbriar is paying $17.75 per share, a 30% premium over EDAC's average closing price during the 90 trading days ending March 15. Erickson Air-Crane acquired Evergreen Helicopters, Inc. (EHI) from Evergreen International Aviation in a transaction valued at up to $276 million. EHI provides cargo- and personnel-related air transport services to government and commercial customers. Erickson will pay $185 million in cash and the balance in promissory notes, preferred stock and earn outs. Bohemia Interactive Simulations, a Riverside Company portfolio firm, acquired TerraSim which provides commercial products enabling the rapid production of correlated terrain for visual, constructive and serious game simulation systems. This is Riverside s first bolt-on acquisition since acquiring Bohemia in December The McLean Group acted as the exclusive M&A advisor to TerraSim. Source: Capital IQ and InfoBase as of 12/31/13 24

26 Notable Transaction Activity has acquired has acquired has acquired Pump & Engine Control Systems Closed Closed Closed April 3, 2013 March 18, 2013 March 18, 2013 Notes Notes Notes ORBCOMM Inc. acquired substantially all of the assets of System Planning Corporation s (SPC) GlobalTrak division. GlobalTrak uses satellite and cellular networks, sensors and proprietary software platforms to provide realtime situational awareness and intelligence to improve global logistics, security processes and operations. The McLean Group acted as the exclusive M&A advisor to SPC. Arlington Capital Partners acquired MB Aerospace Holdings Ltd from UK private equity group LDC Ltd. MB Aerospace provides supply chain integration services and manufactures and repairs aero engine components. This was Arlington Capital s first overseas acquisition and plans use MB as a platform for future aerospace acquisitions. Triumph Group acquired Goodrich Pump & Engine Control Systems (GPECS) from United Technologies Corp (UTC). GPECS supplies aerospace fuel systems for commercial, military, helicopter and business jet markets. The sale of GPECS was one of the divestitures required as a condition of UTC s acquisition of Goodrich. Triumph was the second attempted buyer; the Department of Justice blocked a proposed acquisition by TransDigm Group. Source: Capital IQ and InfoBase as of 12/31/13 25

27 Notable Transaction Activity has acquired has acquired has acquired Closed Closed Closed March 1, 2013 January 28, 2013 January 9, 2013 Notes Notes Notes Teledyne Technologies acquired RESON A/S, a provider of highresolution marine acoustic imaging and measurement solutions. RESON s multibeam sonar systems range from portable high-resolution shallow water systems used on autonomous underwater vehicles (AUVs) to full ocean depth vessel mounted oceanographic systems. DC Capital Partners acquired Computer Security Solutions, Inc. (CompSec). CompSec is an IT solutions provider based in McLean, Virginia supporting the Intelligence Community (IC) and Washington DC based agencies. The deal is expected to rapidly expand CompSec s customer base through relationships with existing companies in DC Capital's portfolio. The McLean Group acted as the exclusive M&A advisor to CompSec. ManTech acquired ALTA Systems, Inc., an IT and professional services company with applications in healthcare systems and capital planning. ALTA provides a broad range of IT and professional services to government and private industry in three major practice areas: capital planning and investment control; system design, development and operation; and fraud detection and statistical analysis. Source: Capital IQ and InfoBase as of 12/31/13 26

28 The McLean Group Overview The McLean Group is an independent, industry-focused investment bank with deep expertise in mergers and acquisitions, corporate finance, capital raises, and business valuations Founded in 1997 Headquartered in McLean, Virginia with 20 offices nationwide Over 65 dedicated professionals Through our dedicated industry groups, we bring extensive domain and transactional expertise to every client engagement Largest valuation practice in the mid-atlantic area, outside the Big 4 accounting firms Deep Industry Expertise Aerospace, Defense & Government (ADG) Diversified Industrials Technology & Telecommunications Agriculture & Food Processing Energy & Clean Technologies Transportation & Logistics Business Services Healthcare Services Travel & Hospitality Core Capabilities Investment Banking Mergers & Acquisition (Private Company Sale, Public M&A Advisory, Buy-side Advisory, etc.) Corporate Divestitures Private Equity Investments Strategic Alternatives Analysis Business Valuation Services Financial Reporting (Purchase price allocation, goodwill impairment, stock option expense) Equity Incentive Plans and Tax Litigation Support Transaction Advisory (Fairness Opinion, Due Diligence) 27

29 The McLean Group s ADG Practice The McLean Group s Aerospace, Defense & Government (ADG) industry group is one of the largest, most experienced, and most capable investment banking teams focused exclusively on the defense and government services industry Deep Government Market Expertise Aerospace Hardware & Services C4ISR Cyber Security Products & Services Defense Electronics Healthcare IT Intelligence Community IT, Software & Consulting Services Logistics & Training Technical & Professional Services Discriminators One of the largest ADG teams in the country 15 bankers that cover the sector Leadership team averages over 10 years of exclusive focus on the sector Longstanding relationships with virtually every strategic and financial buyer in the sector 40 closed transactions in the government sector since 2010 As an independent investment bank, we avoid potential conflicts of interest and are able to provide honest advice to best support our clients Recent Representative Buyers / Clients 28

30 Recent McLean Group ADG Advisory Experience 29

31 Contact Information The McLean Group 7900 Westpark Drive, Suite A320 McLean, VA Main: Fax: Aerospace, Defense and Government Services Team Joe Golden Principal Cameron Hamilton Principal Mitch Martin Principal Greg Woodford Senior Managing Director Greg Boucher Managing Director Kathleen Crow Managing Director Gregory Nossaman Managing Director John Stack Managing Director Harry Ward Director Brent Lorenz Vice President Disclaimer: The McLean Group does not provide accounting, tax or legal advice. The contents of this document are believed to be reliable, however The McLean Group, LLC makes no representation as to the accuracy or completeness of this information. 30