2017 Aerospace Industry Mid-Year M&A Review

Transcription

1 Aerospace Industry Mid-Year M&A Review INDUSTRY EXPERTISE GLOBAL PERSPECTIVE Investment Bank for the Manufacturing Sector SM

2 Aerospace Merger & Acquisition Activity Quarterly Transaction Data While still high relative to historical levels, aerospace merger and acquisition activity declined in the first half of, largely due to Q2, which generated the fewest number of transactions of the last 14 quarters Number of Aerospace Transactions Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Source: S&P Capital IQ Q1 activity was in line with the prior two quarters, but declined 8.6% on a yearover-year basis Q2 declined 34.2% from the same period in, with the largest drop off coming from the Support Services & Equipment segment of the industry For the first half of the year, total transactions declined 15.8% relative to the prior six months and 21.7% relative to the same period last year Cross border transaction activity was volatile in the first half of ; there was a high degree of activity in Q1 accounting for 41% of total transactions, the greatest proportion of any quarter in the last 14 and relatively light activity in Q2 comprising only 25% of total transactions, the smallest percentage in the last 14 quarters 2 August

3 Key Transaction Data Number of Cross Border Transactions Acquirer Type Strategic = 80% Public Investment Firm, 1% Private Investment Firm, 16% Undisclosed, 3% Financial = 17% Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Public Company, 32% Private Company, 49% US Targets US Acquirers Transactions in the first half of Transactions by Category H2 H Aircraft & Structural Cabin & Interior Electronics, Communications & Avionics Propulsion, Landing & Other Mechanical Satellites & Space Vehicles Support Services & Equipment Other Source: InterOcean analysis of public information and transactions reported by Capital IQ 3 August

4 Segment Spotlight: Precision Component M&A Trends Competitive Dynamics Drive Consolidation The precision component segment of the industry is ripe for significant consolidation Smaller players in the aerospace precision component supply chain face some distinct challenges in the foreseeable future. As OEMs implement plans to enhance margins which often materially trail those of their supply chain partners and gain greater control of aftermarket revenue streams, sub-oem companies are increasingly being asked to improve efficiency, increase production volumes and, ultimately, reduce prices. This dynamic places Tier 2 and Tier 3 suppliers in a challenging position, facing: increasing capital requirements for investment in new technologies for both manufacturing and automation; greater competition for programs as OEMs and Tier 1 suppliers seek to rationalize the supply base; and enhanced cost pressures from customers. For many such companies, the answer is to focus on growth, both to achieve economies of scale and to accrue greater negotiating leverage within the supply chain. These factors are very evident in the precision component segment of the industry, which appears ripe for significant consolidation. This segment remains highly fragmented, with a great number of relatively small participants that do not appear wellpositioned to achieve the necessary growth and efficiencies, whether due to lack of size/resources, reliance on a limited number of major customers and/or programs, or unwillingness to invest in significant capital programs particularly for owners approaching retirement age. For these and other reasons, InterOcean Advisors expects a significant increase in M&A activity in this segment in the near term. And based on investor activity, we are not the only ones. In recent years multiple private equity groups have either made new platform investments or created investment vehicles often in partnership with an industry executive with the express purpose of aggressively pursuing acquisition targets in the precision component segment of the industry. 4 August

5 Select Middle Market Precision Component Financial Investors Financial Sponsor Investment Strategy / Focus Notable Investments (Boca Raton, FL) Highly technical manufacturers of aircraft engine components, including OEM and replacement parts Moeller Aerospace Technology, Inc. () AC&A, LLC () (Chicago, IL) (Southlake, TX) Companies that specialize in complex, multi-contoured parts and multi-axis machined components for both interior and exterior applications Precision contract machining, fabrication, assembly, and 3D metal printing services Gamma Aerospace LLC () McSwain Manufacturing Corporation (2015) CalRAM Inc. (2014) Midstate Berkshire (2014) Precision Holding, LLC (2014) (New York, NY) (Providence, RI) Apply management and investment expertise plus deep operating and industry experience of operating advisors to help build better businesses Manufacturers of precision machined components for commercial aircraft and aircraft engines ZTM, Inc. () J&M Machine () LaCroix Industries (2015) McCann Aerospace Machining (2014) Precise Machining & Manufacturing (2013) D.L. Horton Enterprises, Inc., d/b/a Warmelin Precision Products () Aerostar Aerospace Manufacturing, Inc. (2015) (Chicago, IL) Formed Tribus Aerospace LLC in to invest in precision manufacturers of critical engine, motion control and flow control parts and assemblies Advanced Machining & Tooling, LLC () (Birmingham, MI) Companies that specialize in the manufacturing of precision machined components and precision cutting tools and instruments Universal Aerospace Co., Inc. () Rid-Lom Precision Mfg. Corp. () Advanced Precision Inc. () Smith's Machine LLC (2015) ARCH Global Precision LLC (2011) Source: S&P Capital IQ, private equity sponsors 5 August

6 Select Precision Component Transactions, July e Close Date Acquirer Target Target Description Sonaca SA LMI Aerospace, Inc. Provides machined and formed close-tolerance aluminum, specialty alloy and composite components and assemblies, and design engineering services to the aerospace and defense markets in the United States. Chengdu Aerospace Superalloy Technology Co., Ltd. Gardner Group Limited Machines, fabricates, and treats small to large detailed parts in soft, hard, and exotic metals; and provides kits, sub-assemblies, and major assemblies. P4G Capital Management, LLC Aero Components LLC Aerospace and defense manufacturing specializing in sheet metal fabrication and NADCAP accredited chemical processing, metal bonding, and composites. P4G Capital Management, LLC Fore Machine Company, Inc. Aerospace and defense manufacturing specializing in CNC machining, coatings and customer-proprietary processes for complex geometries and advanced materials. Elite Aerospace Group, Inc. Halo Industries, Inc. Engages in manufacturing of precision machined components for the aerospace industry. May Harlow Aerostructures LLC Aerospace Holdings, Inc. Doing business as GroupAero, engages in the design, engineering, fabrication, and machining of complex, high-precision, and close-tolerance parts, assemblies, and tooling for aerospace, defense, high-tech research, and commercial sectors. May Charlesbank Capital Partners, LLC Tecomet, Inc. Provides net shape forging, photochemical etching, precision machining, and metal joining of components and assemblies for the aerospace and defense, medical implant, and specialty commercial and industrial markets. Apr Aernnova Aerospace S.A. Brek Manufacturing Company Manufactures machined parts and sub-assemblies for the aerospace industry. The company offers complex structural aircraft parts and complex contoured surface parts to the mold line of aircraft. Apr Greenbriar Equity Group LLC Whitcraft LLC Manufactures formed, machined, and fabricated sheet metal aerospace components and assemblies for multiple applications, including exhaust and combustion structures. Jan Initiative & Finance; Elige Capital Elastotech SA Manufactures and supplies precision O-rings and rotary shaft seals, technical moldings, fluid sealing products, pneumatics, sanitary seals, and hydraulic seals for aerospace, propulsion technology and other markets. Jan Admiralty Partners, Inc. Integral Aerospace, LLC Manufacturer of complex, hard to machine flight-critical systems, components and structures involving a broad range of materials, including carbon fiber, high-strength steel, aluminum, titanium, Inconel and other specialty alloys. Source: S&P Capital IQ 6 August

7 Select Precision Component Transactions, July e Close Date Acquirer Target Target Description Dec Strength Capital Universal Aerospace Co., Inc. Manufactures fabricated and machined aluminum alloy and stainless steel parts and precision assemblies for various aerospace applications, such as aircraft structures, cabin interiors and jet aircraft engines. Dec United Flexible, Inc. Lakes Region Tubular Products, Inc. Manufactures and distributes tube assembly components for aircraft and aerospace industries. It offers engines, airframes, hydraulics, missiles, satellites, and military aircraft parts. Nov Hübner Schlösser & Cie Advanced Structural Technologies, Inc. Manufactures and markets rotary forged and flow formed products for automotive, defense, aerospace, and alternative energy markets. It offers monoblocks and centers; military wheels and wheel components; nozzles, chambers, cylinders and tubes, and fuel storage and transfer systems; and aluminum liners. Nov ESCO Technologies Inc. Mayday Manufacturing Collectively, produces precision machined components for commercial Co.; Hi-Tech Metals Inc. aerospace and military aircraft applications and provides plating and metal finishing services for the aerospace industry. Nov EDAC Technologies Corporation (GB Aero Engine Holding Company) Flanagan Industries Limited Partnership Manufactures and supplies aerospace and land-based gas turbine components to customers in the aerospace market in the United States and internationally. It specializes in the manufacture of complex cases, machined components, and assemblies, as well as turned products. Nov The Heico Companies, LLC Costello/April Design, Inc. Manufactures heat exchangers and avionics enclosures for aerospace customers. It offers tube design, fuel cooled chassis, cold plates, screwed and bonded assemblies, CNC machined components, heat sinks, and oil coolers, as well as cross flow, plate, and fin heat exchangers. Oct Porter's Group, LLC Karlee Company Inc. Contract manufacturer of precision sheet metal and machined components for communications, defense, aerospace, commercial goods, and medical equipment industries. It offers enclosures, racks, chassis, ordnance guidance systems, small defense systems, night vision scopes, communication bays, and interior components. Oct Precision Castparts Corp. Atlantic Precision Inc. Offers direct metal laser sintering services, including sheet metal fabrication; plasma, fusion, resistance, and stud welding; EDM; CNC machining services; 3D printing metals and prototyping services; grinding; FPI inspection; CMM and metallurgical/ calibration; laboratory tool design/manufacturing and inspection services. Jul United Flexible, Inc. Kreisler Manufacturing Corp. Manufactures and sells precision metal components and assemblies primarily for use in military and commercial aircraft engines, and industrial gas turbines. Key products include tube assemblies, fuel manifolds, cooling baffles, de-icing lines, fuel tank and transfer lines, air ducting products, hydraulic actuation systems, environmental control lines, and APU service lines. Source: S&P Capital IQ 7 August

8 Impact of Additive Manufacturing An additional complicating factor and likely disruptive force in the already challenging competitive landscape for precision component suppliers is the advancement of 3D printing, or additive manufacturing, capabilities. Not only will this technology enable the design and production of more complex components in direct competition with more traditional manufacturing processes, but the supply chain itself will almost assuredly experience some level of upset. OEMs and large Tier 1s have already begun to bring select manufacturing functions including many additive manufacturing operations back in-house in an effort to enhance margins and retain control of critical components and technologies. As more advanced materials are developed, it is likely these highly technical and sophisticated processes will be retained inhouse. GE Aviation has already determined that additive manufacturing will play a critical role in its strategic plans. Some 3D-printed components are used on the LEAP engine (developed by CFM International, a joint venture between GE and Safran Aircraft Engines), but a much greater number is being planned for the GE9X jet engine being developing for Boeing s next-generation wide-body passenger jet scheduled to enter service around To meet production needs for the GE9X, and other future products, GE is investing heavily in additive manufacturing. In addition to creating centers for additive manufacturing such as its flagship Center for Additive Technology Advancement located near Pittsburgh, PA GE has pursued a number of acquisitions of companies with desirable additive manufacturing technologies. GE expects the new additive manufacturing business to generate $1 billion in sales by 2020 and cost reductions of $3-5 billion across the company over the next 10 years. GE s view on the potential for additive manufacturing is summed up by Chairman and CEO Jeff Immelt: Additive manufacturing will drive new levels of productivity for GE, our customers, including a wide array of additive manufacturing customers, and for the industrial world. GE Aviation Additive Manufacturing Acquisitions Close Date Target Target Description Size ($mil) Employees Dec Concept Laser Manufactures complex 3D-printed parts from titanium, nickel alloys, precious metal alloys, steels, aluminum and cobalt-chromium. $ Nov Arcam AB Provides additive manufacturing solutions for the production of metal components, including turbine blades and structural airframe components, and processes materials that require elevated process temperatures, such as titanium aluminide and inconel. $ Nov 2012 Morris Technologies, Inc. and Rapid Quality Manufacturing, Inc. Manufactures and markets precision metal components specializing in additive manufacturing techniques and provides product design, development, machining and testing services. n/a 130 Sources: S&P Capital IQ, press releases 8 August

9 Sep Dec Mar Sep Dec Mar Sep Dec Mar Public Company Data Public Company Valuations & Performance Enterprise value multiples (TEV/EBITDA) for public companies in the aerospace industry have enjoyed material appreciation over the course of the last 12 months, during which the industry-wide median multiple increased by 17.4%. By sector: Total enterprise value multiples have appreciated materially over the last 12 months Aircraft & Structural: The median multiple improved significantly (29%) in the last half of, but remained relatively flat over the first six months of. Diversified Systems & Components: On the strength of an almost two-year run, the median multiple ended e just shy of its three-year peak following an increase of 24% over the last twelve months. Engines & Engine Systems: The median multiple declined in Q4, reaching a low of 7.2x, but recovered to reach 11.3x towards the end of Q1, based largely on dramatic improvement in the multiple for Rolls Royce. Machined & Cast Parts: The median multiple ended the first six months of at 11.5x, near the top of its three-year range. This segment s multiple largely moved in concert with the median multiple for Engines & Engine Systems, largely due to the amount of content sold into those applications. Median Public Company Valuation Multiples by Segment 15.0x 14.0x 14.0x 13.0x 12.0x 11.0x 10.0x 11.5x 11.3x 10.7x 9.0x 8.0x 7.0x 6.0x Aircraft & Structural Engines & Engine Systems Machined & Cast Parts Diversified Systems & Components Source: S&P Capital IQ Note: Constituent companies detailed on the following pages 9 August

10 IAI Constituent Company Financial Performance Data ($ in millions) Market Company Name Cap Revenues $ % $ % TEV EBITDA Aircraft & Structural Gross Profit EBITDA Airbus $ 63,601 $ 75,910 $ 5, % $ 1, % $ 61, x Boeing 119,358 90,899 15, % 10, % 121, x Bombardier 3,994 15,784 1, % % 12, x CPI Aerostructures % % x Embraer 3,364 6,206 1, % % 4, x FACC % % x GKN 7,271 12,291 7, % 1, % 8, x Hexcel 4,797 1, % % 5, x Kaman 1,356 1, % % 1, x Leonardo 9,535 13,594 5, % 1, % 13, x Magellan % % 1, x Spirit AeroSystems 6,989 6, % % 7, x Textron 12,608 13,680 2, % 1, % 15, x MEDIAN $ 4,797 $ 6,802 $ 1, % $ % $ 7, x TEV/ Engines & Engine Systems General Electric $ 234,554 $ 118,846 $ 26, % $ 17, % $ 360, x MTU Aero Engines 7,236 5, % % 6, x Rolls-Royce 21,278 20,856 4, % 1, % 22, x Safran 38,058 19,053 9, % 4, % 40, x UTC 97,838 58,108 16, % 10, % 117, x MEDIAN $ 38,058 $ 20,856 $ 9, % $ 4, % $ 40, x Machined & Cast Parts Arconic $ 9,985 $ 12,558 $ 2, % $ 1, % $ 15, x ATI 1,851 3, % % 3, x Barnes 3,144 1, % % 3, x Lisi 2,518 1,898 1, % % 2, x NN % % 1, x Standex 1, % % 1, x Senior 1,273 1, % % 1, x SIFCO % 4 3.3% x MEDIAN $ 1,562 $ 1,305 $ % $ % $ 2, x Source: S&P Capital IQ as of 6/30/ 10 August

11 IAI Constituent Company Financial Performance Data (continued) ($ in millions) Market Company Name Cap Revenues $ % $ % TEV EBITDA Diversified Systems and Components Gross Profit EBITDA AMETEK $ 13,938 $ 3,990 $ 1, % $ 1, % $ 15, x CIRCOR % % 1, x Curtiss-Wright 4,061 2, % % 4, x Ducommun % % x Esterline 2,823 2, % % 3, x HEICO 5,562 1, % % 6, x Héroux-Devtek % % x Honeywell 101,612 39,359 12, % 7, % 108, x Meggitt 4,796 2,698 1, % % 6, x Moog 2,574 2, % % 3, x Parker-Hannifin 21,285 12,029 2, % 1, % 26, x Rockwell Collins 17,063 6,074 1, % 1, % 18, x Teledyne 4,504 2, % % 5, x Thales 22,756 17,434 4, % 1, % 20, x TransDigm 13,988 3,360 1, % 1, % 24, x Triumph 1,568 3, % % 2, x Woodward 4,141 2, % % 4, x Zodiac Aerospace 7,565 5,484 2, % % 9, x MEDIAN $ 4,650 $ 2,576 $ % $ % $ 5, x TEV/ Source: S&P Capital IQ as of 6/30/ 11 August

12 About InterOcean Advisors LLC Middle Market Investment Bank InterOcean Advisors LLC is one of North America s leading specialty investment banks focused on serving middle market companies in the manufacturing sector. Through this singular focus, InterOcean has developed deep industry expertise that time and again proves invaluable to our clients. With extensive transaction experience in the manufacturing sector, coupled with the practical advice of dedicated senior advisors with relevant operating expertise, the InterOcean team can provide seasoned advice targeted to the Aerospace & Defense industry and our clients specific circumstances. Mergers & Acquisitions Private Capital Sourcing Financial Advisory Selected as a finalist for the M&A Advisor s 2015 M&A Deal of the Year in the category of Industrial Goods & Basic Resources Named to the Axial 100 list for the most referred middle market M&A advisory firms InterOcean advises private business owners, corporations, private equity groups, family offices and management teams, offering the following services: Global Coverage InterOcean is the sole U.S. member of the Terra Corporate Finance Alliance, a growing international alliance of well-established investment banks with operations in North America, South America, Europe, the Middle East, Africa and Asia. Through this network, InterOcean has a platform for offering enhanced identification of, and access to, potential transaction parties around the globe. Founded in 2002 Consists of leading middle market M&A and corporate finance advisory firms 30+ offices across five continents An extremely effective network with a high degree of cooperation and a strong record of transaction success Associated firms have advised on more than 200 M&A transactions with a total value in excess of $10B 12 August

13 Aerospace & Defense Focus InterOcean works with companies in the Aerospace & Defense industry that manufacture structural parts, interior parts, ground support equipment, and components for engines, auxiliary power units, environmental control systems, and other systems. Prior clients have possessed a wide range of production capabilities, as well as special processes such as welding, brazing, conventional machining, non-conventional (laser) machining, heat treating, hydroforming, and non-destructive testing. Aerospace & Defense Team Leaders Nick Newlin Managing Director Aerospace & Defense Team Leader nnewlin@ioadvisors.com Bob LaBelle Senior Aerospace & Defense Advisor rlabelle@ioadvisors.com Certain members of InterOcean are Registered Representatives of and securities are offered through StillPoint Capital, LLC, Member FINRA/SIPC. InterOcean Advisors LLC is not affiliated with StillPoint Capital, LLC. This is not an offer to sell securities or the solicitation of an offer to purchase securities. Any offer of securities may only be made pursuant to a written offering memorandum. Recipients of this document must conduct their own appraisal and due diligence procedures and should not act or refrain from acting solely in reliance on this document. 13 August