Industry Outlook
Aerospace and Defense
FEBRUARY 2016
FEATURE REPORT
2015: Year-End Review
2015 established a new record year for aerospace and
defense (“A&D”) merger and acquisition (“M&A”)
activity (based on total deal value). Several notable
transactions, including Berkshire Hathaway’s purchase
of Precision Castparts for $37.2 billion, and Lockheed
Martin’s $9.0 billion acquisition of Sikorsky Helicopter
from United Technologies, helped drive M&A totals in
the aerospace and defense sector to new heights.
CHART 1 | 2015 Deliveries
These healthy levels of M&A activity in 2015, as well as
strong underlying industry fundamentals, set the stage
for a favorable M&A outlook for the A&D sector in
2016. In this report, Mesirow Financial will highlight the
notable trends within the commercial aviation, business
aviation and defense sectors, as well as the key drivers of
M&A deal activity.
Source: Aviation Week & Space Technology.
Commercial Aerospace
By any measure, the commercial aerospace industry
is fundamentally strong and poised to continue its
already successful run. Boeing and Airbus (collectively
the “OEMs”) are experiencing steady order patterns
and record backlogs, driven by a range of positive
factors including carriers flush with cash due to record
profitability, surging passenger demand and readily
available financing.
Boeing delivered 762 commercial aircraft in 2015
versus 723 in 2014. Comparatively, Airbus delivered a
company-record of 635, up from a 2014 total of 629.
In addition to strong delivery numbers, backlogs at
Boeing and Airbus remain impressive. Boeing reported
a backlog of $489 billion during the company’s fourth
quarter earnings call. Despite economic concerns from
Single-Aisle
Widebody
Very Large Aircraft
A350
14
4%
A320
491
50%
787
135
A320
103
737
495
37%
28%
50%
40%
777
98
767
16
747-8
18
A380
27
60%
27%
4%
CHART 2 | 2015 Net Orders
Single-Aisle
Widebody
Very Large Aircraft
A350
3
1%
737
588
40%
777
58
A320
897
60%
18%
A330
140
787
71
44%
767
49
22%
A380
2
50%
747-4
and
747-8
2
50%
15%
Source: Aviation Week & Space Technology.
China, Russia and Brazil, political unrest in multiple
geographies and historically cheap oil, these large OEMs
continue to plan for increased production and deliveries
[see Charts 1 and 2].
Given strong order patterns and existing backlogs, the
pace of commercial aircraft manufacturing volume
is expected to continue to increase in 2016. In fact,
Boeing recently confirmed its planned production rate
increases over the next several years, an action that will
place significant pressure on the supplier base. Perhaps
the largest increase will come from the ramp-up of new
IN THIS ISSUE
Transaction Spotlight......................................................................... 2
Feature Report.................................................................................... 1
Public Company Trading Analysis...................................................... 6
TRANSACTION SPOTLIGHT
Berkshire Hathaway’s Purchase of Precision
Castparts Corp.*
Deal Value $36.9 Billion
Enterprise Value / Revenue 3.72x
Enterprise Value / EBITDA 13.9x
In August 2015, Berkshire Hathaway announced
the purchase of Precision Castparts, a Portland,
OR-based manufacturer of investment castings,
forged components and airfoil castings for
use in the aerospace, industrial gas turbine
and defense industries. The deal represents
Berkshire Hathaway’s largest takeover ever and,
on the face, seems to be a departure from CEO
Warren Buffet’s reputation as a value investor.
The transaction, however, demonstrates
Buffet’s view that there are long-term value
opportunities within the aerospace sector, as
approximately 75% of Precision Castparts’ sales
are aerospace-related.
* Mesirow Financial did not represent any of the acquirers or targets in
connection with the transactions noted on this page, and is not currently
representing any of the listed acquirers or targets.
CHART 3 | Airline Net Post-Tax Profit by Region (2010 – 2016)
Africa
$40
North America
Middle East
Europe
Asia-Pacific
Latin America
$35
($ in billions of USD)
$30
$25
$20
$15
$10
$5
$0
($5)
2010
2011
2012
2013
2014
Source: IATA.
2015
2016E
narrowbody production, with the Airbus A320neo,
while the Boeing 737 MAX enters testing. The sharp
increase in planned production has forced suppliers to
make significant decisions with respect to commitments
and timing. Some larger suppliers (General Electric and
Safran) have publicly stated the need to confirm a steep
rise in output before committing to even higher targets.
Meanwhile, the OEMs continue to introduce second
source suppliers wherever possible in order to reduce
the risk of disruption given the anticipated production
volumes.
However, not all aircraft OEMs are enjoying the same
positive momentum demonstrated by Boeing and
Airbus. Bombardier continues to struggle with the
development of its C-Series commercial jet, which
is two years past its original schedule and over $2
billion above budget. In an attempt to increase profits
through direct sales, Bombardier recently announced
that the company is terminating third party distributor
agreements. This announcement led to the restructuring
of customer agreements and multiple order cancellations,
as well as a $278 million financial charge in 2015. In
addition to its own financial woes and a sinking share
price, Bombardier’s recent struggles have continued
to negatively impact its supply base. As an example,
Triumph Group announced a $229 million non-cash
impairment charge in Q4 2015 due to the impact of
declining revenues from production rate cuts, the slower
than projected ramp on the Bombardier Global 7000
program and the timing of associated earnings.
As anticipated, the airline industry set a record for
collective profit in 2015, and the industry appears
primed to increase profits further in 2016. According to
the International Air Transport Association (“IATA”),
collective net profits reached $33 billion supported by
sustained low oil prices, 6.5% passenger growth and load
factors in excess of 80% [see Chart 3]. North American
carriers account for a significant portion of the rise in
net profits, while Latin American and African carriers
struggled in 2015.
The industry’s return on capital is expected to exceed the
cost of capital, a significant milestone. However, despite
the continued momentum, operating margins within the
airline industry are not exceptional as compared to other
large segments of the broader economy, with net margins
of approximately 4.6% in 2015. Further, multiple signs
point to the potential for airline profitability growth
to slow beyond 2016. Rising interest rates and full
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AEROSPACE & DEFENSE | FEBRUARY 2016
MESIROW FINANCIAL INVESTMENT BANKING
realization of the maximum positive impact of low fuel
costs, as well as the cyclical nature of the global airline
industry, are among the most notable.
CHART 4 | Business Aviation Delivery Forecast
Very High Speed – Ultra Long Range
Ultra Long Range
Long Range
Large
Medium-Large
Medium
Light-Medium
Light
Very Light
1,200
1,000
Aircraft Units
The most attractive M&A targets will continue to
be the companies providing proprietary products or
services to customers through exclusive or sole source
relationships. In particular, Mesirow Financial has
identified the in-flight entertainment (IFE) and in-flight
connectivity (IFC) segments as highly attractive due to
a range of factors. Both segments are growing quickly
as airlines continue to differentiate themselves through
enhancements to the passenger experience. Further,
both segments require innovation and technology,
allowing suppliers to differentiate themselves on multiple
dimensions. Other technology-focused segments, such as
tracking and surveillance, are also highly attractive given
the upcoming mandates surrounding aircraft tracking
and crash site identification.
800
600
400
200
0
2000
Opposite North America, emerging markets such as
Brazil, Russia, China and South Africa have seen a
slowdown in business aviation purchases given economic
uncertainty [see Chart 6].
Recent guidance from Gulfstream underscores these key
trends. In General Dynamics’ fourth quarter earnings
release, the company detailed a modest revenue increase
of 2.3% for Gulfstream in 2015, with strong operating
margins and order intake. During 2015, Gulfstream
received more orders for in-production aircraft than
2014 and reported that “order activity going into the
first quarter of this year is quite good.” Gulfstream did
note some changes to production planning, including
an increase in rates for the G650 and G650ER to reflect
the current demand and sizable backlog and a slight
downward change for the G450 / 550.
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AEROSPACE & DEFENSE | FEBRUARY 2016
2010
2015
2020
2025
CHART 5 | North American Fleet Growth Forecast (2013 – 2033P)
(units in actuals)
Light
Medium
Large
4,885
15,225
Business Aviation
The business aviation market continued its revival in
2015 with another strong year of deliveries. Growth is
expected to continue in 2016 and beyond with North
America serving as the primary driver of demand [see
Charts 4 and 5]. According to Honeywell International,
over 9,000 new business jets worth $270 billion will be
delivered worldwide in the next decade. New programs
make-up a critical component of projected business
aviation growth as OEMs continue to leverage new
technologies to differentiate their aircraft and attract new
buyers to the market.
2005
Source: Honeywell.
3,875
12,430
(1,225)
9,780
Fleet 2013
(2,090)
Deliveries
Retirements Fleet 2023
Deliveries
Retirements Fleet 2033
Source: Bombardier Business Aircraft Report, 2013 – 2033.
CHART 6 | Fleet Growth Forecast by Region (2013 – 2033P)
(units in actuals)
2013
2033
15,225
9,780
5,785
4,685
3,305
1,440
North
America
Europe
2,252
1,790
330
Latin
America
China
375
925
Africa
1,485
ROW
Source: Bombardier Business Aircraft Report, 2013 – 2033.
MESIROW FINANCIAL INVESTMENT BANKING
In addressing the large cabin business jet market,
Gulfstream stated that demand has remained “reasonable”
and that there is no evidence of a cyclical decline. Further
to the above, Gulfstream confirmed that order activity in
North America is particularly good, accounting for more
than 50% of placed orders. Despite reports of weakness
abroad, Gulfstream noted that orders from Asia-Pacific
improved by more than 60% over 2014.
Conversely, Dassault Aviation took only 45 orders for
Falcon business jets in 2015, approximately half of the
prior year. Shipments fell short of Dassault’s goal as well,
driven by a large NetJets order cancellation and softening
economic conditions in emerging markets. Such varying
performance underscores the presence of some isolated
choppiness within the business aviation market.
Defense
The recent two-year budget deal between Congress and
the White House provides clarity around anticipated
U.S. defense spending, which is expected to reach $581
billion, or an estimated 3.3% of GDP in 2016. These
budgetary dollars will need to be allocated strategically
given the multiple conflicts and threats facing the U.S.
today. Moving to 2017, the defense budget is expected
to grow modestly to $584 billion. This figure is slightly
lower than what the Pentagon had requested, which may
impact some anticipated modernization programs.
Defense spending in Europe, including the United
Kingdom, France and Germany, is expected to increase
in 2016 as a result of the Paris attacks, the refugee crisis
and assertiveness by Russia. Such planned increases,
while notable, are more of a reflection of a regional
downward defense spending trend over the past six
years. Elsewhere, Brazil is expected to cut defense
spending sharply given economic and political instability.
Meanwhile, Russia continues to spend heavily on
defense, although such aggressive spending will likely
need to be curtailed going forward in order to allow
other areas of the economy to develop.
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AEROSPACE & DEFENSE | FEBRUARY 2016
As always, the wildcard for the defense industry is the
geopolitical environment and the potential for conflict.
Any sustained volatility could materially impact defense
spending, both in the U.S. and abroad.
With respect to M&A, the defense market has seen an
uptick in activity over the past 18 months and remains
poised for a continued increase in transactions in 2016.
Strategic acquirers, including the prime contractors,
appear focused on smaller deals that address technology,
product or customer gaps, rather than blockbuster
transactions. In particular, emerging niche market
segments, such as cybersecurity, surveillance and UAVs,
are expected to continue to attract M&A attention.
Large prime contractors have increasingly been sellers,
as opposed to actively pursuing consolidation strategies,
due in part to signals from the Pentagon. Further, larger
industry participants are focused on their most profitable
product segments and are willing to divest lower margin
or non-core assets. As an example, Lockheed Martin
(NYSE: LMT) has entered into a definitive agreement to
separate and combine its realigned Information Systems
& Global Solutions (IS&GS) business segment with
Leidos Holdings, Inc. (NYSE: LDOS). In addition to
generating significant tax benefits and $1.8 billion in
proceeds to Lockheed Martin, the transaction is highly
complementary to the strategic objectives of both
corporations with substantial synergies and potential to
enhance value for both sets of stockholders.
MESIROW FINANCIAL INVESTMENT BANKING
2015 M&A Activity
2016 A&D OUTLOOK
CHART 7 | Number of A&D Transactions by Buyer Type
(% of Total Deal Count): 2015
The outlook for aerospace and defense M&A in
2016 remains positive.
Financial
13.1%
Commercial Aerospace Based on current
information and market insights, Mesirow
Financial believes that 2016 will be another
strong year for M&A in the commercial
aerospace segment. Deal activity will likely be
driven by significant liquidity and the presence
of several active consolidators. Additionally,
leaders with respect to technology and
innovation will continue to be most heavily
pursued as M&A targets. While M&A activity is
expected to remain strong beyond 2016, our
view is that valuations are likely to moderate
beginning next year.
Strategic
86.9%
Source: S&P Capital IQ.
CHART 8 | Number of A&D Deals by Transaction Range
(% of Total Deal Count): 2015
$500MM – $1B
3.1%
>$1B
3.1%
<$500MM
23.1%
Undisclosed
70.6%
Source: S&P Capital IQ.
CHART 9 | Aggregate A&D Deal Volume by Transaction Range (2010 – 2015)
>$1B
$500MM–$1B
<$500MM
No. of Deals
350
$70.0
$60.0
254
279
244
$64.9
$40.0
160
$35.0
$30.0
100
$16.6
$10.6
$10.0
50
$0.0
0
2010
2011
2012
2013
2014
Source: S&P Capital IQ.
1. Includes deals with disclosed deal value.
2. Includes deals that are announced.
5
|
200
150
$22.7
$16.0
300
250
215
$50.0
$20.0
240
AEROSPACE & DEFENSE | FEBRUARY 2016
20152
No. of Deals (1)
Enterprise Value ($ in billions)
$80.0
Business Aviation Similar to commercial
aviation, Mesirow Financial expects the
most attractive M&A targets in the business
aviation segment to be companies providing
proprietary products or services to customers
through exclusive or sole source relationships.
In particular, cabin interior products and
technologies driving improved or differentiated
passenger experiences, such as the in-flight
entertainment (IFE) and in-flight connectivity
(IFC) segments, are highly attractive due to a
range of factors.
Defense The defense M&A market continues to
show signs of life, a trend that Mesirow Financial
expects to continue through 2016 and beyond.
M&A remains a key avenue not only for strategic
acquirers to address technology, product or
customer gaps, but also to divest non-core or
lower margin businesses. Further, M&A serves
as an attractive alternative to stock buy-backs
or dividends amidst a market increasingly
focused on growth. For private equity buyers,
timing appears attractive as multiples continue
to climb from the trough levels experienced
over the last few years. Additionally, divestiture
opportunities from larger companies remain
a key part of the private equity strategy in the
defense market.
MESIROW FINANCIAL INVESTMENT BANKING
PUBLIC COMPANY TRADING ANALYSIS – SELECTED AEROSPACE SUPPLIERS
CHART 11 | Enterprise Value / LTM Revenue
CHART 10 | Enterprise Value / LTM EBITDA
3.12x
16.0x
Median 10.4x
11.8x
11.6x
10.8x
10.5x
2.45x
2.23x
10.2x
8.3x
8.1x
Median 1.42x
1.73x
1.52x
7.9x
6.1x
ZC
BEAV
AME
COL
ESL
LMIA
KAMN
DCO
B
TGI1
1.32x
1.06x
AME
COL
BEAV
B
ESL
ZC
Source: Bloomberg, S&P Capital IQ.
Source: Bloomberg, S&P Capital IQ.
CHART 12 | Enterprise Value / NTM EBITDA
CHART 13 | Enterprise Value / NTM Revenue
11.4x
10.1x
0.71x
TGI1
KAMN
0.79x
0.71x
TGI1
KAMN
0.60x
DCO
3.12x
Median 8.5x
10.1x
LMIA
0.79x
9.8x
8.8x
8.2x
2.45x
7.6x
2.23x
7.3x
5.7x
Median 1.35x
1.73x
1.52x
5.0x
1.32x
1.06x
AME
ZC
BEAV
COL
ESL
LMIA
KAMN
Source: Bloomberg, S&P Capital IQ.
B
DCO
TGI1
AME
COL
BEAV
B
ESL
ZC
LMIA
0.60x
DCO
Source: Bloomberg, S&P Capital IQ.
AME: Ametek Inc., B: Barnes Group Inc., BEAV: B/E Aerospace Inc., DCO: Ducommun Inc., ESL: Esterline Technologies Corp., KAMN: Kaman Corporation, LMIA: LMI Aerospace Inc.,
COL: Rockwell Collins Inc., TGI: Triumph Group, Inc., ZC: Zodiac Aerospace
1. Adjusted pro forma for Triumph’s forward losses on 747-8 long term contract.
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AEROSPACE & DEFENSE | FEBRUARY 2016
MESIROW FINANCIAL INVESTMENT BANKING
PUBLIC COMPANY TRADING ANALYSIS – SELECTED DEFENSE AND PRIME CONTRACTORS
CHART 15 | Enterprise Value / LTM Revenue
CHART 14 | Enterprise Value / LTM EBITDA
Median 10.5x
11.8x
11.2x
10.8x
10.6x
10.4x
1.78x
1.60x
9.9x
Median 1.41x
1.49x
1.47x
9.1x
1.35x
1.22x
7.3x
1.01x
0.81x
RTN
LMT1
LLL2
NOC
BA.
OA3
GD
BA4
Source: Bloomberg, S&P Capital IQ.
RTN
NOC
LMT1
OA3
GD
LLL2
BA.
BA4
Source: Bloomberg, S&P Capital IQ.
CHART 17 | Enterprise Value / NTM Revenue
CHART 16 | Enterprise Value / NTM EBITDA
Median 10.4x
11.2x
11.0x
10.9x
1.70x
10.9x
1.58x
9.9x
9.0x
Median 1.40x
1.52x
1.47x
9.0x
1.34x
1.26x
7.5x
1.03x
0.83x
RTN
LMT1
LLL2
NOC
OA3
GD
Source: Bloomberg, S&P Capital IQ.
BA.
BA4
RTN
NOC
LMT1
OA3
GD
LLL2
BA.
BA4
Source: Bloomberg, S&P Capital IQ.
BA.: BAE Systems plc, BA: The Boeing Company, GD: General Dynamics Corp., LLL: L-3 Communications Holdings Inc., LMT: Lockheed Martin Corporation, NOC: Northrop Grumman
Corporation, OA: Orbital ATK, Inc., RTN: Raytheon Co.
1. Adjusted pro forma for the acquisition of Sikorsky Aircraft.
2. Adjusted pro forma for the spin-off of National Security Solutions, Inc.
3. Adjusted pro forma for Orbital Sciences merger.
4. Adjusted pro forma for KC-46 Tanker and 747 charges.
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AEROSPACE & DEFENSE | FEBRUARY 2016
MESIROW FINANCIAL INVESTMENT BANKING
Thought Leadership from Mesirow Financial Investment Banking
Dedicated M&A Advisor to the
Aerospace and Defense Sector
Mesirow Financial Investment Banking is consistently focused on elevating
the experience for our clients. With extensive sector-specific expertise and
deep long-standing relationships, our dedicated aerospace and defense team
has a proven track record of completing highly complex and successful
transactions. Our highest priority is helping individuals and organizations
achieve their financial and strategic goals.
CONTACT US
Jeffrey Golman
Vice Chairman
Direct–312.595.7880
jgolman@mesirowfinancial.com
Andrew Carolus
Managing Director
Direct–312.595.7802
acarolus@mesirowfinancial.com
Adam Oakley
Director
Direct–312.595.6692
aoakley@mesirowfinancial.com
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