MILITARY READINESS AGAINST NEAR-PEERS DRIVES HEIGHTENED DEMAND FOR C4ISR INDUSTRY C4ISR INDUSTRY UPDATE | NOVEMBER 2020
CONTACTS KEY HIGHLIGHTS
Tess Oxenstierna • Resilient industry during COVID-19, as C4ISR serves Managing Director as primary “enabling technologies” across military Aerospace l Defense l Govt l Security air/land/sea/space platforms and the joint networks that allow for interoperability
Hilary Morrison • The National Defense Strategy is fueling Vice President modernization requirements to keep pace with Aerospace l Defense l Govt l Security warfighting missions against near-peers
• Merger and acquisition activity totals 60 deals through October, keeping pace with 2019 Military Readiness Against Near-Peers Drives Heightened Demand for C4ISR Industry
INDUSTRY OUTLOOK
TABLE OF CONTENTS C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance) continues to serve as primary “enabling technologies” across Industry Outlook military air/land/sea/space platforms and the joint networks that allow for Key Trends & Drivers interoperability across these mission critical systems. Many C4ISR companies were deemed essential at the onset of the COVID-19 pandemic and The Defense Defense Budget Request Overview Production Act, invoked in March 2020, further buoyed the sector by authorizing Highlight: U.S. Space Force federal government loans and prioritizing government orders to ensure continuity M&A Activity of supply. These immediate buffers helped mitigate business loses across the Defense industry. Select Transactions Buyer Universe While Capstone’s C4ISR index has yet to fully recover from universal COVID-19 C4ISR Five-Year Index impacts including delays in the supply chain, several public players have reported resilient Q3 year-over-year (YOY) revenue gains including CACI International Public Company Data (NYSE:CACI), up 7%,1 Lockheed Martin (NYSE:LMT), up 9%,2 and Northrop Key Takeaways Grumman, up 6%.3 Coming off the heels of Leidos (NYSE:LDOS) $1.65 billion Report Contributors acquisition of Dynetics in January, the company reported a 14.4% YOY Q3 revenue increase, including 22.4% growth in its Defense Solutions segment.4 The ability to Firm Track Record grow despite the unprecedented market continues to further demonstrate the industry’s strength.
Deal volume has also been resilient, keeping pace with 2019 despite a slowdown in Q2 and Q3 activity. October has been the most active month since the CONTACTS pandemic, with eight deals announced or closed including Parsons Corporation’s (NYSE:PSN) acquisition of Braxton Science & Technology Group ($300 million) and ANSYS’ (Nasdaq:ANSS) acquisition of Analytical Graphics ($700 million). Tess Oxenstierna Managing Director 203-524-0888 Capstone’s C4ISR Index vs. Market Indices: Last Twelve Months [email protected] S&P 500 Index C4ISR Index 110% Hilary Morrison Vice President 90% 917-763-0121 [email protected] 70% 50%
30%
Percentage Change 10%
-10% 10/30/15 10/30/16 10/30/17 10/30/18 10/30/19 10/30/20
Index includes: ACM, BAH, CACI, DXC, ESLT, GD, HXL, ICFI, J, LDOS, LHX, LMT, MANT, NOC, RTX, SAIC, SPR, TDG, VEC, VSAT, VSEC Source: Capital IQ and Capstone Research 2 C4ISR | November 2020
KEY TRENDS & DRIVERS
Defense Priorities Shift from Counterterrorism to without GPS or without (radio frequency), because if you Near-Peer Competitors China and Russia can take in velocity or barometer or an (inertial navigation unit), those are not jammable or spoofable.”6 C4ISR industry activity has been heavily driven by shifting readiness and modernization needs of the Department of Small Unmanned Aircraft systems (sUAS) are also Defense (DOD) as it implements its 2018 National expected to play a crucial role in addressing the near-peer Defense Strategy—the first to be released in a decade.5 threats, particularly against China. To reduce the national Protecting America’s economic, diplomatic, and security concerns of using Chinese-sourced drones, the technological competitive advantage over geopolitical DOD launched the Blue sUAS project in 2019 to approve rivals China and Russia has generated heightened U.S.-commercially manufactured sUAS to deploy in the demand for military tools, vehicles, and technology, military, federal agencies, and government operations. including multiuse technology and that which can be Privately-held companies participating in the project have utilized in contested environments. As the military included Altavian, Parrot, Skydio, Teal, and Vantage implements its strategy, technology investment will be Robotics. As the DOD continues to focus on commercial necessary in areas including Artificial Intelligence (AI), 5G, options to accelerate technology in this area, quantum communication, Autonomous Unmanned Aerial opportunities for private sector growth is rich. Vehicles (AUVS), offensive cyber operations, and Internet of Things (IoT). The following paragraphs outline a few of This year, several mergers and acquisitions of UAS the recent initiatives that are fueling the C4ISR industry. companies have been announced or completed. Notably, on October 15th, Honeywell (NYSE:HON) acquired In October, the U.S. Army awarded Raytheon intellectual property, inventory, and equipment from Technologies’ (NYSE:RTX) Collins Aerospace busines a Ballard Unmanned Systems (terms not disclosed). The contract for Phase III of the Army’s second generation deal follows the June launch of Honeywell’s new Mounted Assured Position Navigation and Timing System Unmanned Aerial Systems and Urban Air Mobility (MAPS). The value of the contract was undisclosed. business unit. MAPS Gen I was first installed in 2019 on Stryker vehicles in the 2nd Cavalry Regiment in Europe. The GPS- “Adding Ballard Unmanned Systems to the Honeywell alternative utilizes anti-jamming antennas, inertial family is another example of our commitment to invest in measurement units, sensor fusion, and Military-Code (M- the growing UAS segment," Mike Madsen, President & Code) to ensure that soldiers have access to accurate CEO, of Honeywell Aerospace said in a press release.7 "We Positioning, Navigation, and Timing (PNT) data when can now begin producing top-quality, scalable power a satellite is compromised. Lt. Col. Alexander Rasmussen, systems for our UAS customers and eventually adapt Product Manager for Mounted PNT, explained to the these systems for other future aerospace, defense and media: “Sensor fusion also lays the foundation to operate adjacent segment applications."
Tess Oxenstierna, Managing Director This fall, the Department of Defense (DOD) released its first enterprise data strategy, with its top priority focused on how to harness multi-sensor data for joint all-domain operations. The Pentagon’s strategy outlines the principles, capabilities and goals needed for DOD to become a “data-centric organization. ” Underpinning this strategy is a robust C4ISR network.
According to the Pentagon’s Chief Information Officer, “Data is the ammunition in the Digital Modernization Strategy and is increasingly central to warfighter advantage on and off the battlefield. This strategy is the DOD’s first step to making that ammo persistently available… regardless of echelon or geographic location.”
The release of the Pentagon’s data strategy comes after the U.S. Army and Air Force tested their ability to connect sensors and shooters across domains, a concept known as Joint All-Domain Command and Control (JADC2), a major initiative across the military services. 3 C4ISR | November 2020
DEFENSE BUDGET REQUEST OVERVIEW
DOD Funding from FY10 - FY21: Discretionary Budget Authority
Base Budget Emergency OCO OCO for Base $1,000 $900 $800 $700 71 16 65 69 8 53 $600 163 159 6 3 115 82 82 85 59 $500 63 $400
$300 600 616 633 636 U.S. Dollars in BillionsU.S. Dollars in 528 528 530 495 496 497 521 523 $200 $100 $0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Source: Department of Defense FY 2021 budget Proposal
FY21 Investment Total: $234.4 Billion Key defense spending accounts: Missile Defeat and Defense Mission-support activities: $66.8 billion C4I Systems, Programs, $11.6 $11.9 Aircraft and related systems: $56.9 billion Ground Systems, $13.0 Shipbuilding and maritime systems: $32.2 billion
Mission Support Missiles and munitions: $21.3 billion Space-based Activities, $66.8 Systems, $15.5 Space-based systems: $15.5 billion
Ground systems: $13 billion
C4I systems: $11.9 billion Missiles and Munitions, $21.3 Missile defeat and defense programs: $11.6 billion Aircraft and Related Systems, $56.9 Shipbuilding and Maritime Systems, $32.2
4 C4ISR | November 2020
DEFENSE BUDGET REQUEST OVERVIEW (CONTINUED)
1) Strengthen military readiness and invest in readiness. The FY 2021 budget request continues building a more lethal force by maximizing force readiness, modernizing capabilities in all warfighting domains, and innovating to expand the U.S. competitive advantage. The budget funds readiness across each of the Services at $125.1 billion, with Air Force receiving Air $56.9 billion, Maritime $32.3 billion, Land $13 billion, Missile Defeat and Defense $20.3 billion, Nuclear Enterprise $17.7 billion, Special Operations Forces $3.0 billion.8
2) Strengthen alliances, deepen interoperability. The North Atlantic Treaty Organization (NATO) announced that 2019 defense spending across European Allies and Canada increased in real terms by 4.6%, the fifth consecutive year of growth. By the end of 2020, these Allies will have increased investment in FY 2020 by $130 billion cumulatively from FY 2016, and this accumulated increase in defense spending is projected by the NATO Secretary General to rise to $400 billion by 2024.
3) Reform the DOD greater performance and accountability. The Secretary of Defense and the Deputy Secretary of Defense led 21 review sessions examining $99 billion of appropriated resources across roughly 50 Defense-Wide (DW) organizations and activities. The DWR identified aggressive reform opportunities resulting in over $5.9 billion in FY 2021 savings for reinvestment in lethality and readiness, and an additional $2.1 billion in activities and functions to realign to the Military Departments.
4) Support service members and their families. The Pentagon proposed over $8 billion in key investments in compensation, quality-of-life and family support initiatives and commitments to improve the service members and their families’ safety. The proposed budget supports a 3% military pay raise.
FY 2021 BUDGET Strengthen Strengthens PRIORITIES military alliances, readiness and deepens invest in interoperability readiness
Reforms DOD Supports for greater service performance members and and their families accountability
5 C4ISR | November 2020
HIGHLIGHT: U.S. SPACE FORCE
TheUnitedStatesestablishedtheU.S.SpaceForce(USSF)in2019,makingit the sixth branch of the Armed Forces and the first branch to be created since 1947. The C4ISR industry will play an important role in providing new China and Russia have space technology and highly skilled services for the branch’s development. “ weaponized space and turned The Pentagon requested an $18 billion Space Domain budget for FY 2021, it into a warfighting domain. according to the DOD. This included the USSF’s first budget as a separate They present the greatest military service, $249 million for U.S. Space Command, and $337 million for strategic threat due to their a Space Development Agency. development, testing, and deployment of counterspace In August, The Space Development Agency awarded its first major contracts capabilities and their to create a low-Earth orbit constellation of satellites that will be used to associated military doctrine support the military’s command, control, and communications systems. Lockheed Martin (NYSE:LMT) received a $187.5 million contract and York for employment in conflict Space Systems a $94 million contract to build the first 20 satellites, extending to space. according to Space News.9 Thefocusonspaceinnovationwillprovidenew opportunities for organizations to deploy new growth strategies including ” M&A in order to secure government contracts and provide needed services. - DOD Defense Space Strategy Fact Sheet, June 202010
AE Industrial Partners Launches Space Technology Platform
In June 2020, private equity firm AE Industrial Partners (AEI) formed a new space technology platform known as Redwire. The new platform will serve the growing demand for next generation space systems and components in both the U.S. Government and Commercial markets. AEI invests in middle market companies in the Aerospace, Defense & Governments Services, Power Generation, and Specialty Industrial markets with annual revenues of up to $1 billion.
AEI Acquires Adcole Maryland Aerospace (Undisclosed) – Founded in 1957, Adcole Maryland Aerospace (AMA) has been in the vanguard of space exploration and has supplied components for voyages to Mercury,
March Venus, Mars, Jupiter, Saturn, and Pluto. AMA specializes designing and manufacturing components and small satellites for low earth orbit, geosynchronous, and interplanetary spacecraft.
AEI Acquires Deep Space Systems (Undisclosed) – Founded in 2001, Deep Space Systems (DSS) develops engineering solutions across the Aerospace industry and offers products including fully qualified payloads, spacecraft elements, ground support equipment, and embedded software.
AEI Combines Acquisitions to Form Redwire – Deep Space Systems and Adcole Maryland Aerospace are combined to become a new space technology platform known as Redwire. “The combination of our June businesses will enable us to offer our customers a one-stop shop for complex space exploration products and services.“ DSS President Steve Bailey, said in a press release.11
Redwire Acquires Made In Space (Undisclosed) – AEI’s new platform Redwire completed its first add-on in June with the acquisition of Made In Space (MIS), including its sister company Made in Space Europe. Founded in 2010, MIS creates space manufacturing technologies including on-orbit manufacturing. NASA awarded MIS a Phase I SBIR grant in 2012 and has continued to work closely with the organization.
Redwire Acquires Roccor (Undisclosed) – Redwire added to its portfolio in October, with the acquisition of Colorado-based satellite technology products and solutions provider Roccor. Founded in 2012, Roccor designs Oct. and develops solar arrays, antennas, stand-alone booms, hinges, deorbit devices, and thermal products. The company has contracts with NASA, the U.S. military, and commercial space companies globally. DEFENSE OUTLOOK | 6 6 C4ISR | November 2020
M&A OVERVIEW
Merger and acquisition activity through October has been Monthly Transactions strong with 60 transactions and has marginally outpaced 2019 2020 the year-to-date (YTD) volume for 2017, 2018, and 2019, 20 respectively. The YOY increase was due to a robust Q1 2020, with watershed deals including the close of United 15 Technologies and Raytheon merger for $93 billion; the 12 close of Leidos Holdings’ (NYSE:LDOS) acquisition of 10 10 9 9 9 Dynetics for $1.65 billion; and BAE System’s (LSE:BA.) 8 announced acquisitions of Collins Aerospace’s Military 7 6 6 6 Global Positioning System Business for $1.9 billion and 5 5 5 4 4 4 4 4 Raytheon’s tactical airborne radios for $275 million.
Number of Transactions Number of 2 2 Following a slowdown in M&A activity in Q2 and Q3, 1 transaction volume has demonstrated a recovery entering 0 Q4 with October deal count outpacing YOY levels. The sector’s defensible nature due to insulated government funding, and its entrenchment in disruptive, high-demand technology have been fundamental to its buoyancy and have driven increased investor interest.
Private equity (PE) firms have become more acquisitive in Year-To-Date Buyer Breakdown the space as they seek a safer return on investment in the volatile market. To date this year, PE buyers have accounted for 37% of deals, compared to 24% in 2019 and 26% in 2018. Notably, this included AEI’s buy-and-build STRATEGIC 21.7% strategy with newly formed Redwire platform (see Public 35.0% previous page) and the May acquisition of AMERGINT Private Technologies by The Blackstone Group (NYSE:BX) and FINANCIAL 15.0% Boundary Group. Prior to its acquisition, AMERGINT Platform acquired space satellite solutions provider Tethers Add-on Unlimited (May) and Raytheon Technologies’ Space-Based 28.3% Precision Optics Business (April).
Looking ahead, Capstone expects Q4 M&A activity to continue to rebound from its COVID-19 dip and for the Note: Year-to-date (YTD) ended October 31 industry to enter 2021 with strength. Source: Capital IQ, PitchBook, FactSet, and Capstone Research
Tess Oxenstierna, Managing Director M&A activity in the C4ISR subsector continues to be robust, as defense primes merged at the top of the value chain, evidenced by the Raytheon and UTC merger, and the subsequent spinning off non-core assets to BAE Systems. We also saw transactions in the rapidly growing hypersonic missile market, with Leidos acquiring Huntsville-based Dynetics for $1.65 billion.
Private equity continues its active interest in ISR and space systems with the formation of Red Wire by AE Industrial Partners, a well-regarded player in Aerospace & Defense sector. We also note Madison Dearborn Partners and CoVant’s acquisition of AEVEX Aerospace, a provider of full-spectrum airborne ISR to DOD and Intelligence Community customers.
With the heightened focus on space as a warfighting domain, and the formation of the Space Force, we expect strong M&A demand in this area where emerging technologies and new commercial players can compete with long-standing aerospace and defense primes. 7 C4ISR | November 2020
SELECT TRANSACTIONS
Enterprise EV / LTM Date Target Acquirer Target Business Description Value (mm) Revenue EBITDA
ANSYS Develops modeling and analysis software for space, 10/26/20 Analytical Graphics $700.00 - - (Nasdaq:ANSS) cyberspace, aircraft, missile defense, and C4ISR systems.
Assets of Ballard Honeywell Comprises business operations that design fuel cell 10/15/20 --- Unmanned Systems (NYSE:HON) systems that power unmanned aerial systems (UAS).
Designs high-precision positioning, navigation, and 10/05/20 Geodetics AEVEX Aerospace --- sensor fusion technology products and solutions.
Aethon Aerial Manufactures sensors for unmanned aerial vehicles and 09/30/20 Flight Evolved --- Solutions helicopter-borne sensor systems.
Digital Force Provides reconnaissance, surveillance, and 09/24/20 DC Capital Partners --- Technologies communications solutions.
Pacific Star Curtiss-Wright Designs and produces communications systems for 09/24/20 $400.0 3.3x - Communications (NYSE:CW) military, government, and commercial needs.
Alliance Designs and manufactures composite structures for 09/02/20 AC&A --- Spacesystems spacecraft and other high-tech applications.
Provides high-end engineering and development for 08/19/20 Centauri KBRwyle critical, well-funded, national security missions, $827.0 - -
Lepton Global Provides satellite-based communication solutions and 08/18/20 Kymeta Corporation --- Solutions services with expertise in government sectors.
Ascent Vision CACI International Manufactures and distributes gimbal and gyro- 08/12/20 $350.0 - - Technologies (NYSE:CACI) stabilized imaging systems.
Provides customized broadband products and 07/28/20 Oceus Networks Battle Investment --- solutions to government and enterprise customers.
Westelcom Develops communication equipment for commercial, 07/15/20 Teo Technologies --- Networks Government, Defense, and Intelligence markets.
ASC Signal Kratos Defense Manufactures satellite communication, high frequency 06/30/20 $35.0 -- Corporation (NasdaqGS:KTOS) antenna, radar antenna, and other products.
Designs space exploration, national security, and 06/23/20 Made In Space Redwire --- sustainable space settlement equipment.
Assets of IJK General Atomics Comprises advanced sensors and payloads 06/04/20 --- Controls Aeronautical development business.
Deep Space AE Industrial Supports the development, testing, and operations of 06/01/20 --- Systems Partners science, technology, and exploration of spacecraft.
Manufactures sensors, filters, radio frequency 05/18/20 ED2 Corp. FreeFall Aerospace --- electronics, and wireless solutions.
AMERGINT Blackstone Group Develops software-defined signal and protocol 05/18/20 --- Technologies (NYSE:BX); Boundary processing applications.
The Jordan Manufactures catalog and custom magnetic 05/12/20 PulseR --- Company components.
Certain Assets of Perspecta 05/01/20 Comprises electronic warfare technologies. $53.0 - - DHPC Technologies (NYSE:PRSP)
The AEgis Manufactures, integrates, and tests multiple fixed and 04/15/20 EMRC Heli --- Technologies rotary wing small Unmanned Aerial (UAS) Platforms.
Source: Capital IQ, PitchBook, FactSet, and Capstone Research 8 C4ISR | November 2020
SELECT TRANSACTIONS (CONTINUED)
Enterprise EV / LTM Date Target Acquirer Target Business Description Value (mm) Revenue EBITDA
Arlington Capital; Provides unmanned aerial systems to government and 04/15/20 e-Mergent RC Heli --- Technologies Group commercial customers.
Fluidmesh Cisco Systems Designs and manufactures wireless systems for security, 04/06/20 --- Networks (NasdaqGS:CSCO) industrial, and mission-critical applications.
L-3 03/24/20 American Holoptics Manufactures weapon accessories. $42.0 0.7x - Communications
Provides professional services for implementing, highly 03/16/20 AASKI Technology MAG Aerospace --- complex, mission-critical networks and systems.
Madison Dearborn; Provides airborne intelligence solutions to the U.S. 03/09/20 AEVEX Aerospace $450.0 - - CoVant special operations community and DOD.
Engages in the provision of defense and 03/03/20 Kwesst Foremost Ventures $17.0 - - security services.
Adcole Maryland AE Industrial Designs, manufactures, integrates, and tests 03/02/20 --- Aerospace Partners components and small satellites for spacecraft.
Virtual Network ComSovereign Manufactures fixed and mobile broadband 02/27/20 $20.8 - - Communications (OTCPK:COMS) communications equipment.
Science Applications Provides infrastructure modernization, cloud migration, 02/06/20 Unisys Federal (NYSE:SAIC) managed, and enterprise IT-as-a-service solutions. $1,200.0 1.7x 13.0x
AMETEK Develops, manufactures, and sells uninterruptible 02/05/20 Intellipower $116.5 2.9x - (NYSE:AME) power systems (UPS).
IntelliWare Trowbridge & Provides operation support services, such as 02/04/20 --- Systems Trowbridge, LLC intelligence, counterintelligence, and counterterrorism.
Huntington Ingalls Manufacturer and supplier of Autonomous Underwater 02/04/20 Hydroid $350.0 3.8x 24.4x (NYSE:HII) Vehicles (AUV) for military and commercial markets.
Custom MMIC Qorvo Designs fabless radio frequency (RF) and monolithic 01/29/20 $100.0 - - Design Services (NasdaqGS:QRVO) microwave integrated circuit products.
Audacy EOS Defense 01/28/20 Provides space communication services. $6.1 - - Corporation Systems USA
Zentech; BlackBern Specializes in high-end aerospace, military, ruggedized, 01/21/20 Trilogy Circuits --- Partners and industrial applications.
Business of BAE Systems Comprises airborne tactical radio business that designs 01/20/20 $275.0 - - Raytheon Company (LSE:BA.) a range of mission-critical communication systems.
Business of Collins BAE Systems 01/20/20 Comprises military global position system business. 1,925.0 - - Aerospace (LSE:BA.)
Designs intelligence (SIGINT), electronic warfare (EW), 01/16/20 Spectranetix Pacific Defense --- direction finding (DF), and cyber security systems.
Star Lab Develops embedded cybersecurity solutions for 01/14/20 Wind River Systems --- Corporation aerospace and defense systems.
01/13/20 Timbercon Radiall America Designs fiber optic cables. - - -
Owl Cyber Defense Provides cyber defense technology and 01/06/20 Tresys Technology --- Solutions engineering services.
Source: Capital IQ, PitchBook, FactSet, and Capstone Research 9 C4ISR | November 2020
BUYER UNIVERSE: AEROSPACE, DEFENSE, GOVERNMENT & SECURITY
Capstone has built relationships with and tracked buyers that have been highly acquisitive in the Aerospace, Defense, Government, & Security industry as well as those that have completed notable C4ISR transactions. Capstone’s industry expertise and network provides us with unique insights into this buyer universe such as the companies’ industry and growth perspectives.
Leading Strategic Buyers
Leading Financial Buyers
Source: Capstone Research 10 C4ISR | November 2020
PUBLIC COMPANY TRADING & OPERATING DATA
The average valuation for Capstone’s C4ISR Index leading C4ISR companies as EV/EBITDA EV/Revenue multiples of both trailing 20x cash flow and revenues have 18x climbed out of their March 16x trough yet remain below the 14x five-year highs of 17.25x 12x EV/EBITDA and 2.16x 10x EV/Revenue. As of the end 8x of October, companies in our 6x C4ISR index have traded at Multiple Average 4x an average of 13.76x trailing 2x twelve-month EV/EBITDA of 0x and 1.78x EV/Revenue. 10/30/15 10/30/16 10/30/17 10/30/18 10/30/19 10/30/20
Index includes public companies listed below Source: Capital IQ and Capstone Research
Publicly-traded C4ISR companies traded between 3.6x – 19.8x trailing twelve-month EV/EBITDA and 0.5x – 3.2x trailing EV/Revenue as of October 30. Collectivity, these stocks are trading at 62.9% of their 52-week highs and with median gross margins of 22%, median EBITDA margins around 13.5%, and with the best performers eclipsing a 44% EBITDA margin.
Price % 52 Wk Market Enterprise LTM EV / LTM Company 10/30/20 High Cap Value Revenue EBITDA Margin Revenue EBITDA AECOM $44.84 85.6% $7,191.8 $8,978.7 $19,715.4 $1,301.6 6.6% 0.5x 6.9x
Booz Allen Hamilton Holding Corp. $78.50 87.8% $10,817.5 $12,308.7 $7,794.7 $886.4 11.4% 1.6x 13.9x
CACI International Inc $208.53 72.3% $5,258.9 $7,218.8 $5,816.2 $710.1 12.2% 1.2x 10.2x DXC Technology Company $18.42 48.0% $4,682.3 $13,234.3 $19,189.0 $3,650.0 19.0% 0.7x 3.6x Elbit Systems Ltd. $0.00 0.0% $5,009.2 $5,924.2 $4,573.4 $569.5 12.5% 1.3x 10.4x General Dynamics Corporation $131.33 69.1% $37,601.7 $50,923.7 $38,217.0 $5,565.0 14.6% 1.3x 9.2x Hexcel Corporation $33.48 41.6% $2,796.8 $3,728.0 $1,770.9 $317.2 17.9% 2.1x 11.8x Jacobs Engineering Group Inc. $95.00 91.4% $12,369.8 $14,183.8 $13,440.1 $1,312.8 9.8% 1.1x 10.8x Leidos Holdings, Inc. $83.00 66.0% $11,802.1 $16,876.1 $11,999.0 $1,306.3 10.9% 1.4x 12.9x L3Harris Technologies, Inc. $161.11 69.7% $34,831.2 $41,156.2 $24,036.0 $4,503.0 18.7% 1.7x 9.1x Lockheed Martin Corporation $350.13 79.1% $97,960.7 $107,083.7 $64,244.0 $9,765.0 15.2% 1.7x 11.0x ManTech International Corporation $64.88 69.0% $2,616.8 $2,725.3 $2,427.0 $265.4 10.9% 1.1x 10.3x Northrop Grumman Corporation $289.82 75.3% $48,317.6 $60,317.6 $35,308.0 $4,781.0 13.5% 1.7x 12.6x Raytheon Technologies Corp. $54.32 34.3% $81,934.6 $108,096.6 $83,559.0 $13,084.0 15.7% 1.3x 8.3x Science Applications International $76.37 78.9% $4,442.0 $7,391.0 $6,691.0 $678.0 10.1% 1.1x 10.9x Spirit AeroSystems Holdings, Inc. $18.19 19.6% $1,921.3 $3,437.8 $4,487.5 NM NA 0.8x NM TransDigm Group Incorporated $477.41 70.9% $25,878.6 $41,875.6 $5,471.2 $2,415.4 44.1% NM 17.3x Vectura Group plc $1.33 85.1% $791.4 $696.4 $218.3 $43.5 19.9% 3.2x 16.0x Viasat, Inc. $33.90 43.6% $2,288.3 $4,253.1 $2,302.7 $417.5 18.1% 1.8x 10.2x VSE Corporation $28.96 70.4% $320.0 $595.9 $706.9 $88.3 12.5% 0.8x 6.7x
EV = enterprise value; LTM = last twelve months Mean 15.5% 1.4x 10.6x $ in millions, except per share data Median 13.5% 1.3x 10.4x NM = Not Meaningful NA = Not Available Harmonic Mean 13.3% 1.2x 9.5
11 C4ISR | November 2020
PUBLIC COMPANY TRADING & OPERATING DATA (CONTINUED)
Aerospace & Defense Enterprise Value Index by Sector Public Company Enterprise A&D Components Defense Electronics Values Continue to Climb Defense Technology* MRO/Component Repair** Prime Defense S&P 500 Capstone Headwaters’ Aerospace & Defense Enterprise Value Index 20x rose to a median 13.1x in October, showing a strong resurgence from 18x its March low of 11.1x. 16x Prime Defense companies are trading at a premium of 18.6x 14x EV/EBITDA, representing a 20% YOY increase and a 45.6% rebound from their March trough. 12x
10x
Average EV/EBITDA Multiple Average EV/EBITDA 8x
6x 10/01/15 10/01/16 10/01/17 10/01/18 10/01/19 10/01/20
Aerospace & Defense Index by Sector Strong Growth for Defense Electronic Companies A&D Components Defense Electronics The Defense Electronics Index, has Defense Technology* MRO/Component Repair** seen the strongest long-term Prime Defense S&P 500 growth, with a 68% increase in 120% value from October 2015. 100% The Defense Technology Index, which includes C4ISR companies, 80% has seen the fastest recovery since March, marginally outpacing 60% the S&P with a 27% increase. 40% 20% Index Value 0% -20% -40% 10/01/15 10/01/16 10/01/17 10/01/18 10/01/19 10/01/20
*Includes C4ISR **MRO valuation skewed by weighting to Asia/Pacific market Source: Capital IQ and Capstone Research 12 C4ISR | November 2020
KEY TAKEAWAYS
Tess Oxenstierna, Managing Director
C4ISR continues to serve as primary “enabling technologies” across military air / land / sea / space platforms and the joint networks that allows for interoperability across these mission critical systems.
With the focus on space as a warfighting domain, and the formation of the Space Force, we expect strong M&A demand in this area where emerging technologies and new commercial players can compete with long-standing aerospace and defense primes.
Aerospace and defense players continue to position themselves for growth areas within ISR, to include classified space and intelligence programs and key technologies, such as hypersonic missile systems.
Private equity continues to play an active role in creating new middle market C4ISR players, often exiting to tier II players who are pivoting toward high margin contracts with significant barriers to entry.
13 C4ISR | November 2020
C4ISR REPORT CONTRIBUTORS Tess Oxenstierna Managing Director [email protected] | 203-524-0888
Tesshas25+yearsofexperienceintheAerospace&Defense industry, government policy arena and financial services sector. She holds deep domain knowledge and transaction advisory skills, especially in the high growth markets of Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR), Defense Electronics / Sensors, Unmanned Systems / Robotics, Cybersecurity, and Air/Land/Sea/Space Systems.
Prior to joining Capstone Headwaters, Tess founded the Aerospace & Defense practice at a middle market boutique investment bank, focusing on private and public corporate clients with diverse products such as command and control software for aerial drones, satellite-based force tracking systems and electronic warfare devices used in Afghanistan and Iraq. She was Global Head of Equities Strategy at Lehman Brothers, responsible for strategy development leveraging competitive intelligence, market analysis, and acquisitions across Americas, Europe, and Asia. Transactions included investments in stock exchanges, a NYSE specialist market-maker, and international broker dealers. Tess was also Director of Corporate Development and Strategy at Raytheon, with deal team transactions valued at over $3.4 billion in sensor automation/information synthesis, geospatial mission support, network forensics, interoperable communications for homeland security, and commercial aviation/life cycle support. She also holds the rank of Commander, US Navy Reserve.
Prior to these transactional roles, Tess worked in the Reagan White House, U.S. Departments of State and Energy, and NATO Headquarters, complementing her combat operational experience as a Commander in the U.S. Navy Reserve. A recognized industry expert, she speaks at leading industry conferences and has been interviewed on ABC’s Government Matters, Defense News, Homeland Security Wire, and Private Equity Hub. Tess holds a PhD in War Studies from Kings College London, an MA in Law and Diplomacy from Harvard’s Kennedy School of Government, and a BA in International Relations from UCLA. She is a Series 7, 63 Registered Securities Representative, Series 23 Registered Securities Principal, and 79 Registered Investment Banking Representative.
Hilary Morrison Vice President [email protected] | 917-763-0121
Hilary is a Vice President in the Aerospace & Defense group, bringing 10+ years of experience spanning Investment Banking and Equity Research. Prior to Capstone Headwaters, Hilary worked as a Vice President on the #1 rated Broadline Retailer and Textile Manufacturing team at Lehman Brothers. She has significant public company expertise with a focus on Industrials and Manufacturing M&A and carve-outs. She has also worked on numerous strategic advisory and company valuation assignments. Hilary graduated in International Finance and French from Texas Christian University, M.J. Neeley School of Business. She is also a Series 79 Registered Investment Banking Representative.
Sarah Doherty Vice President of Research [email protected] | 617-619-3310
Sarah is Vice President of Capstone Headwaters’ corporate Research Team. She joined the firm in 2016 and brining more than eight years of research and writing experience. Sarah specializes in the Healthcare, Education & Training, and Aerospace, Defense, Government, & Security industries. Previously, she was the Data Graphics Specialist at a think tank in Washington, D.C., where she collaborated with economists and industry experts to analyze and present data for congressional testimonies and research publications. Sarah holds a BA in Journalism and Political Science from Biola University and is a certified Market Research Analyst through the International Institute of Market Research and Analytics. 14 C4ISR | November 2020
FIRM TRACK RECORD
Capstone Headwaters’ Aerospace, Defense, Government & Security Group has represented numerous companies that serve the needs of federal, state and local or foreign governments, as well as the needs of civilian and defense-related agencies. We understand the nuances associated with sole-sourced, multi-year or subcontracted awards, the value of partnerships, GWACs, IDIQs and GSA schedules. We have completed transactions requiring complex CFIUS filings, ITAR registrations and contract negotiations, and those involving classified information. Our advisory work has included multiple industries and involved companies of diverse specialties, many of which sell in both the public- and private-sector markets.
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15 C4ISR | November 2020
CITATIONS
1. CACI, “CACI Reports Results for Its Fiscal 2021 First Quarter,” https://investor.caci.com/investor-home/default.aspx, accessed November 2, 2020. 2. Lockheed Martin Corporation, “Lockheed Martin Corporation 3rd Quarter 2020,” https://investors.lockheedmartin.com/static-files/da807e02-ea25- 42b6-a56c-8de3fd42ff10, accessed November 2, 2020. 3. Northrop Grumman, “Northrop Grumman Reports Third Quarter 2020 Financial Results,” https://investor.northropgrumman.com/investor-overview, accessed November 2, 2020. 4. Leidos Holdings, “Leidos Holdings, Inc. Reports Third Quarter Fiscal Year 2020 Results,” https://investors.leidos.com/news-and-events/calendar-of- events/default.aspx,accessed November 2, 2020. 5. U.S. Department of Defense, “What is the National Defense Strategy?” https://www.defense.gov/Explore/Features/Story/Article/1656414/what-is-the- national-defense-strategy/, accessed November 1, 2020. 6. C4ISR Net, “Collins Aerospace to build GPS-jamming solution for the Army,” https://www.c4isrnet.com/battlefield-tech/2020/10/07/collins- aerospace-to-build-gps-jamming-solution-for-the-army/, accessed November 2, 2020. 7. Cision, “Honeywell Acquires Ballard Unmanned Systems,” https://www.prnewswire.com/news-releases/honeywell-acquires-ballard-unmanned- systems-301153075.html, accessed November 2, 2020. 8. U.S. Department of Defense, “DOD Releases Fiscal Year 2021 Budget Proposal,” https://www.defense.gov/Newsroom/Releases/Release Article/2079489/dod-releases-fiscal-year-2021-budget-proposal/, accessed November 3, 2020. 9. Space News, “Lockheed Martin, York Space to produce 20 satellites for Space Development Agency,” https://spacenews.com/lockheed-martin-york- space-win-contracts-to-produce-20-satellites-for-space-development-agency/, accessed November 2, 2020. 10. Department of Defense, “Defense Space Strategy, Fact Sheet,” https://media.defense.gov/2020/Jun/17/2002317392/-1/- 1/1/2020_DEFENSE_SPACE_STRATEGY_FACTSHEET.PDF, accessed October 29, 2020. 11. Cision, “AE Industrial Partners Acquires Adcole Maryland Aerospace, a Specialist in Spacecraft Components and Small Satellite Technology,” https://www.prnewswire.com/news-releases/ae-industrial-partners-acquires-adcole-maryland-aerospace-a-specialist-in-spacecraft-components- and-small-satellite-technology-301014667.html, accessed October 29, 2020.
Disclosure: This report is a periodic compilation of certain economic and corporate information, as well as completed and announced merger and acquisi- tion activity. Information contained in this report should not be construed as a recommendation to sell or buy any security. Any reference to or omission of any reference to any company in this report should not be construed as a recommendation to buy, sell or take any other action with respect to any security of any such company. We are not soliciting any action with respect to any security or company based on this report. The report is published solely for the general information of clients and friends of Capstone Headwaters. It does not take into account the particular investment objectives, financial situation or needs of individual recipients. Certain transactions, including those involving early-stage companies, give rise to substantial risk and are not suitable for all investors. This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Prediction of future events is inherently subject to both known and unknown risks and other factors that may cause actual results to vary materially. We are under no obligation to update the information contained in this report. Opinions expressed are our present opinions only and are subject to change without notice. Additional information is available upon request. The companies mentioned in this report may be clients of Capstone Headwaters. The decisions to include any company in this report is unrelated in all respects to any service that Capstone Headwaters may provide to such company. This report may not be copied or reproduced in any form, or redistributed without the prior written consent of Capstone Headwaters. The information contained herein should not be construed as legal advice.
16 BUILT FOR THE MIDDLE MARKET
Capstone Headwaters is one of the largest and most active independent investment banking firms in the United States. The firm has a rich 18+ year history of achieving extraordinary results for middle market entrepreneurs, business owners, investors, and creditors. The firm offers a fully integrated suite of corporate finance services, including merger & acquisition, debt & equity placement, ESOP advisory, corporate restructuring, valuation & fairness opinion, and financial advisory services.
Headquartered in Boston, Capstone Headwaters has over 170 professionals across 16 offices in the U.S. with 16 dedicated industry groups. Capstone has been recognized consistently as one of the top investment banks to work for and “U.S. Middle Market Firm of the Year.”
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