Aerospace &Defense 2016 YEAR IN REVIEW January 2017 Happy New Year! We hope you enjoy our 2016 M&A Yearbook. Inside you will find: ¡ Our thoughts on the Aerospace & Defense industry in 2017 ¡ Some preliminary thoughts on what the new administration will mean for our industry ¡ Public company statistics ¡ A comprehensive list of M&A transactions that took place in the industry last year I hope the enclosed information is useful to you as you reflect on the last year and think about what lies ahead in this new one. Stout Risius Ross Advisors (Stout) is a full service investment bank, advising middle market companies on strategy, capital structure, and mergers and acquisitions. We’re no strangers to the Aerospace & Defense industry. In fact, more than 400 Aerospace and Defense companies have sought financial advice from Stout. Clients value our deep knowledge of the industry and how closely we monitor it. Simply put, we know what makes A&D companies valuable. People know us for selling companies – but even if you don’t anticipate a liquidity event any time soon, please consider starting a dialogue with us. We love to talk about this dynamic industry and often can share insights on what you can do to maximize the value of your company. Regards, Eric David Reuther Stout Risius Ross Advisors, LLC +1.312.765.7253 [email protected] 2 M&A in 2017: After the Fog... Comes More Fog This time last year we wrote, “We’ll be to the new administration. It seems likely watching the presidential election, to be that on a macro basis, defense spending will sure.” Watch it we did, and what a show it increase, and we will also see the end of the was. It certainly kept us…. Entertained? Budget Control act (sequestration). Large- Horrified? Mesmerized? Certainly fascinated. scale programs like the F-35 and new bomber And the outcome will have implications for will almost certainly face scrutiny and may our industry. We’re just not sure what they ultimately see margins squeezed. That could will be. Still, we’ve been checking twitter trickle down the supply chain and ultimately daily for clues and talking with many industry affect values of component suppliers. But it’s colleagues about it all. Below, we set forth our tough to predict exactly which programs and thoughts on trends that will drive Aerospace & suppliers will face that pressure (like I said, I Defense mergers and acquisitions in 2017. check twitter every morning). There will be winners too. We’re still facing Defense threats around the world. ISIS and Russia Over the last year, many clients spoke with have been making headlines, but the Asia- us about life after sequestration. What made Pacific theater of war will also present sequestration difficult for M&A wasn’t just challenges (and opportunities) as we gear up. the magnitude of the cuts mandated, but Foreign governments, particularly in Europe, it was the lack of clarity around where the may be pressured to spend more on defense. cuts would come from. As we gained clarity Export programs may benefit, though we’re around where the cuts were going to happen, carefully watching programs like India’s “build- it became easier to invest in defense. Prices it-here” fighter program as the new president began to rise. And as we began to see the is no friend to off-shoring and technology light at the end of the tunnel – an end to transfer. We write more about the defense the cuts coming – asset prices rose further. world on page 11. We spent a lot of time this past year talking about investing in defense. Everyone wanted Commercial to buy. And as prices rose, sellers became We talked and wrote ad nauseam about the more receptive to selling. commercial order book. We watch it carefully. Then the election happened. Uncertainty In previous cycles we’ve noted that values has returned. Clients are telling us that they anticipate orders – which means values are taking a bit of a wait-and-see approach spike right before orders emerge and fall 3 For more information (Continued from previous page) on Stout’s Aerospace & Defense industry precipitously when orders dry up. Well, practice, contact us: The Best of the Rest orders are drying up. And yet values aren’t Business aviation has been bumping along falling. When we talk to clients about this, the bottom for years. Unfortunately, clients Eric D. Reuther they point to the backlog. Fair point. Previous we talk to seem convinced that 2017 will +1.312.765.7253 cycles have never approached this level of be much of the same. Some point to 2018 [email protected] backlog. And so even if there’s softness in as a potentially better year for the industry the backlog (or double counting) – and there as several new models come online, yet almost certainly is – it’s still so profoundly Gregory P. Range others seem skeptical that this will cure an large that it supports values. For now. +1.310.775.2510 industry suffering from oversupply of both [email protected] Buyers of commercial assets are getting new and used aircraft. more cautious. They’re concerned that Rotorcraft is a tale of two cities. The we’re at the top of the cycle, and perhaps commercial rotorcraft world continues Jeffrey S. Shippy even past it. They don’t want to over pay. to suffer from weak oil industry sales. +1.310.846.8893 We expect to see asset values start to The defense side of the business, on [email protected] drop, though probably not too fast and the other hand, seems poised to benefit probably not too much. That backlog will from the new administration as well as provide visibility for a lot of companies Aziz El-Tahch foreign demand. Operators talk about and will let buyers get comfortable paying +1.646.807.4224 strong commercial niches – infrastructure, higher multiples. [email protected] firefighting, etc. – and potential opportunity We’re watching for chinks in the backlog in outsourced defense work. armor. Oil remains relatively low-priced. That Other areas our clients are talking about: the Paul R. Mallarkey allows older planes to fly longer and still MRO market is strong with opportunities on +1.703.848.4954 remain profitable. Will that induce some the horizon for composite MRO and further [email protected] carriers to push off taking delivery of new demand as operators fly older aircraft longer. aircraft? Airline profitability is another factor. Unmanned vehicles will see incredibly strong 2016 was a record year, particularly for demand across the board – defense and Gregory A. O’Hara U.S. airlines. 2017 will likely be profitable commercial – but finding opportunities to +1.216.373.2992 as well, but not as strong as 2016. Middle invest in frustrates buyers. Cybersecurity [email protected] Eastern airlines, in particular, seem to be presents a host of opportunities but also under pressure. That could spell more significant challenges – picking winners and trouble for the already depressed twin-aisle William D. Adams losers is difficult. market. Will the single-aisle backlog come +1.312.763.6240 under pressure? [email protected] Zachary S. Wiersma +1.312.763.6641 [email protected] About the author – Eric D.Reuther Eric Reuther is a senior corporate finance and mergers & acquisitions professional within Stout’s Investment Banking Group, where he focuses on the Aerospace and Defense Industry. Mr. Reuther started his investment banking career in 1998 and has experience leading transactions across various sectors of the Aerospace and Defense industry, including mergers, acquisitions, leveraged buyouts, capital raising and strategic advisory. Phone: +1.312.765.7253 Email: [email protected] 4 Q2 AEROSPACE & DEFENSE M&A TRANSACTIONS TABLE OF CONTENTS SECTION PAGE I. 2016 M&A Year in Review 6 II. 2016 Scorecard 7 III. Notable 2016 M&A Transactions 8 IV. Orders, Deliveries & Backlogs 10 V. Defense Industry: Post-Election Perspectives 11 VI. Publicly Traded Companies 12 VII. Stout’s Aerospace & Defense Practice 15 VIII. Appendix: 2016 M&A Transactions 19 5 2016 M&A YEAR IN REVIEW M&A VOLUME AND VALUATIONS Source: Capital IQ 350 25.0x 291 Volume and Valuation Trends 300 277 20.0x 237 ¡ M&A transaction volume increased 5% to 250 201 181 281 186 12.6x 15.0x 291 transactions, and median valuation 200 11.9x 10.7x 134 8.9x multiples decreased 15%, to 10.7x EBITDA 150 8.7x 8.6x 10.0x in 2016. 7.6x 100 6.4x 5.0x 50 Sector Trends 0 0.0x 2009 2010 2011 2012 2013 2014 2015 2016 ¡ The strongest sectors of A&D M&A growth last year occurred within the machined parts # of Deals EV / LTM EBITDA (Median) & components sector. M&A VOLUME BY SECTOR ¡ Consolidation within military and defense continued as players continued to adjust Source: Capital IQ and consolidate as a result of the changing 2% 4% Electronics, IT & Communication Systems 3% 18% defense climate (shifting away from ground 4% Ops., Support & MRO Products/Services deployment to air and sea defense). Structures & Materials Traditional Military & Defense 13% ¡ Stable demand continues to exist for 6% Machined Parts & Components operations, support, & MRO products/ Propulsion, Braking & Landing Systems services, interiors, cabins, & control Interiors, Cabins & Control Systems 6% 11% systems, UAVs & space, and traditional UAVs & Space military & defense. 4% Aircraft Manufacturing Aircraft Leasing Cyber Technological Defense Buyer/Seller Trends 29% ¡ Both strategic and financial buyers were active in A&D transactions in 2016. There M&A GROWTH BY SECTOR was a noticeable increase in transactions Source: Capital IQ coming from strategic buyers, particularly 150.0% 116.7% those completing acquisitions as add-ons to 100.0% existing A&D platforms.