LCD ISSUER REPORT Hawker Beechcraft Fourth-Quarter Earnings Review
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February 22, 2010 LCD ISSUER REPORT Hawker Beechcraft Fourth-quarter earnings review Aircraft manufacturer Hawker Beechcraft recently company also provides parts, maintenance and fl ight- announced that 2009 adjusted EBITDA would be support services through a network of service centers in $127 million, versus a previous estimate for $95-110 27 countries to an estimated installed fl eet of more than million. The company has been severely impacted 37,000 aircraft. by the recession and the cancellation of orders over the past year, so any positive news at this point is Strengths encouraging. However, one relatively solid quarter • Solid market share in the segments in which it does not necessarily mean that the company has moved competes. beyond its recent struggles. Therefore, the following report will discuss the company’s adjusted EBITDA and • Strong liquidity. its strengths and weaknesses going forward, and will present an enterprise value/recovery analysis given the • Backlog does not have material concentrations after turmoil in the business and the general aviation markets. the U.S. government (approximately one third). Note that this analysis is not affi liated in any way with • Aircraft for military training purposes is a stable S&P’s ratings group and does not include any non-public source revenue. information, as LCD is not privy to that information. • Installed base of aircraft ensures relatively predictable Key financial data revenue from parts and maintenance, which represents $ thousand 12/31/2009 12/31/2008 Change approximately 14% of total revenue. Sales: 4Q 1,086,900 1,158,000 -6.1% LCD EBITDA: 4Q 57,200 101,800 -43.8% • Signifi cant barriers to entry in terms of capital, EBITDA margin 5.3% 8.8% technology, distribution, parts/service and brand LCD LTM EBITDA 102,900 308,000 -66.6% names limit new competitors. Company adjusted LTM EBITDA 127,300 338,600 -62.4% Senior debt 1,581,000 1,403,800 Weaknesses Total debt 2,364,200 2,490,800 • Disappointing operating performance: Even though EBITDA for the fourth quarter of 2009 was better Senior debt/co. adj. LTM EBITDA 12.4 4.1 than expected, it was still down more than 40% versus Total debt/co. adj. LTM EBITDA 18.6 7.4 2008. S&P/Moody’s ratings CCC+/Caa2 Note: EBITDA noted above does not include the adjustment for loss-making aircraft. • Cyclical/weak economy and corporate spending: Also, leverage statistics are not calculated according to credit-agreement definitions. Business jets are generally considered a luxury, and corporations may limit these expenditures in a poor Company overview economy. Available alternatives to buying new aircraft Hawker Beechcraft designs and manufactures business include buying used aircraft, buying fractional shares, jet, turboprop and piston aircraft for corporations, or fl ying commercial. fractional and charter operators, governments and individuals throughout the world. The company’s • Negative industry trends: According to a recent aircraft are generally in the light to midsize categories industry report by Honeywell, in the fi rst half of 2009, and range from small piston aircraft to sophisticated jet unit sales were down 25% industry-wide. Business jet aircraft, such as the recently launched Hawker 4000. deliveries are projected to continue to decline through The company delivered 418 aircraft in 2009, down 13% 2010, with improvement starting in 2011. However, from 2008. The company’s key competitors include deliveries are not expected to reach the peak 2007- Cessna, Bombardier, Gulfstream and Dassault. The 2008 levels until 2016. © 2010 by Standard & Poor’s Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc. LCD Issuer Report: Hawker Beechcraft • High leverage/limited cash fl ow/substantial capex: See • Military training aircraft: The company has had success with below for more information. its military training aircraft and has announced contracts with Israel, Morrocco and Iraq, in addition to current orders • NetJets cancellation signifi cantly reduced the backlog. with the U.S. Air Force and Navy. Other factors to consider: • Business and general-aviation deliveries: For 2009, the company delivered 309 business and general-aviation • Adjusted EBITDA: The company announced that adjusted aircraft, versus 441 in 2008. The 30% decline is consistent EBITDA was $127 million, including a $137 million with the overall industry decline in units. Total deliveries, charge for “loss-making aircraft” and “vendor settlements.” as noted above, were only down 13%, but that is due to The charge for loss-making aircraft represents a reserve to a substantial increase in military trainers, which were up account for aircraft that will be sold for less than the costs more than 200% from 2008. to manufacture. These losses will be realized in future periods, but for accounting purposes the charge is taken • Seasonality: The third and fourth quarters are typically in 2009. Therefore, 2009 EBITDA could be considered to the strongest in terms of revenue, EBITDA and cash fl ow. be $264 million, but 2010 and 2011 will be lower as these However, this can change, as revenue does not necessarily losses are realized. For the purpose of the DCF analysis follow a predictable pattern every quarter or year. This is below, EBITDA will be presented assuming that the losses because revenue and cash are realized when aircraft are are incurred when realized, which leads to 2010 mid case delivered, and a delay of a week or two in fi nalizing a EBITDA of $130 million, for example. delivery can push signifi cant amounts of revenue to another quarter or fi scal year. The main reason that 2009 EBITDA • NetJets order cancellation: In December 2009, the company was higher than the range noted above was that deliveries announced that NetJets was cancelling a substantial portion closed earlier than anticipated. of its previously contracted orders. The cancellation represented $2.6 billion of the backlog in 2011-2020. • Liquidity: The company had over $568 million in cash at However, the company noted that a.) NetJets historically Dec. 31, 2009, but the company paid down its revolver in full represented less than 10% revenue, and b.) the cancellation subsequent to year-end, and as a result it should have roughly does not have a material impact on Hawker Beechcraft’s $333 million in cash and $235 million in revolver availability. profi tability going forward. The company stills plans to deliver approximately 20 Hawker 4000s and 900s to Market pricing and valuation NetJets. Market view: Hawker Beechcraft’s term loans are quoted in the mid-70s and low 90s, which implies a yield of roughly • Cash fl ow: At $185 million of mid case 2011 EBITDA, the 13%, versus an 11.5% yield on the average CCC credit. company would only generate approximately $15 million in cash fl ow ($185 million in EBITDA minus $110 in interest DCF valuation: The following presents a DCF valuation and expense minus $50 million in capex minus $10 million in the related recovery expectations for each tranche of debt under cash taxes). Clearly, $15 million in cash fl ow versus $1.3 bear/mid/bull scenarios. For each scenario we are assuming billion in senior debt is not suffi cient, so EBITDA needs that revenue and margins decline substantially (bear case) to to increase substantially. However, the company does have moderately (bull case) due to the negative industry trends, ample liquidity at this point. the weak economy and operating leverage through 2011. Thereafter, revenue and EBITDA improves minimally (bear • Capex: The company noted that 2010 capex will be similar case) to moderately (bull case) as the economy and demand for to 2009, which was approximately $51 million. The new/replacement aircraft increases. company also noted that a substantial portion of capex is tooling. For all of the cases noted above, projected information for this analysis was estimated using historical and projected data • Reasons for buying new aircraft: As noted in the Honeywell obtained from the General Aviation Manufacturers Association, report, the key reasons for replacing existing aircraft are Honeywell’s October 2009 Business Aviation outlook report, age, improved avionics and fuel effi ciency. This suggests and Aviation Week. This analysis does not contain any non- that a replacement cycle may be on the horizon as the age public information from the company, its advisors or lenders. of existing fl eets and fuel prices increase. Additional details are noted below. 2 February 22, 2010 LCD Issuer Report: Hawker Beechcraft Projected 2010 Highest EBITDA Highest assumed Cost of Enterprise value $ million EBITDA achieved capex capital EV $ million Projected EBITDA 2011 6.5 7.0 7.5 Recovery: 1st-lien debt Bear 110 314 75 12.5% 1,304 Mid 185 1,203 1,295 1,388 91% Mid 130 351 60 12.5% 1,617 Bull 140 366 50 12.5% 1,830 From the tables above, it appears that the term loans are basically covered by the enterprise value under all of the Recovery Amount Bear Mid Bull scenarios. However, the notes generally require the more Senior debt - $100M cash 1420 92% Par Par optimistic scenarios to realize substantial value. Senior fixed-rate notes 182 N/A Par Par Senior PIK 275 N/A 6% 83% Conclusion Senior subordinated notes 145 N/A N/A N/A Hawker Beechcraft clearly faces a number of challenges going forward and needs an uptick in the economy for EBITDA to Multiples valuation: The table below highlights a range of increase meaningfully. The company has a strong market valuations assuming a set of EBITDA multiples. The multiples share, contracts with U.S. government and solid liquidity, are derived from historical and estimated data as presented by which should help it weather the storm in the near term.