The Aerospace & Defense Forum Arizona Chapter August 11, 2015 THERE’S NO SUBSTITUTE FOR EXPERIENCE. A EROSPACE / D EFENSE AND G OVERNMENT S ERVICES M ARKET O VERVIEW 8000 Towers Crescent Drive Suite 1200 Tysons Corner, VA 22182 A UGUST 11, 2015 703.442.1400 www.kippsdesanto.com K IPPS D E S ANTO & C O . O VERVIEW T HERE ’ S NO S UBSTITUTE FOR E XPERIENCE . C ONFIDENTIAL 1
The Aerospace & Defense Forum Arizona Chapter August 11, 2015 KippsDeSanto Introduction • KippsDeSanto is a premier investment bank focused on middle-market transactions solely in the aerospace / defense and government technology solutions industries • We are predominantly a sell-side M&A advisory firm, with approximately 90% of our revenue generated from sell-side engagements S ERVICES O FFERED K EY D ISCRIMINATORS Deep Industry Expertise • Sell-Side Buy-Side Private M&A M&A Financing / – 61 closed transactions in the past 6 years Advisory Advisory Capital – Most active firm in our industry in the U.S. (~90%) (~5%) (~5%) In-Depth Market Intel • Strategic Consulting Underpinning – Knowledge of market drivers, key deal points, and the industry’s “moving pieces” F OCUS A REAS – Extensive market presence and relationships – Senior level relationships with all major industry players Independent Advisor • Aerospace Defense – No potential conflicts of interest from outside ownership or influencers Consultative Methodology Govt. • Technology – Customized strategies / nothing off-the-shelf Solutions – Exceptional transaction execution – Optimal results T HERE ’ S NO S UBSTITUTE FOR E XPERIENCE . C ONFIDENTIAL | 3 Recent Completed Transactions Advanced Systems Line of Business of a subsidiary of has been acquired by has been acquired by has been acquired by has been acquired by has been acquired by has been acquired by was acquired by an has been acquired by has been acquired by has been acquired by entity controlled by a portfolio company of Innovative Capital Holdings Clear Lake Operations has been acquired by has been acquired by has acquired has been acquired by the management of has been acquired by BAI, Inc. a United Technologies and Corp. business T HERE ’ S NO S UBSTITUTE FOR E XPERIENCE . C ONFIDENTIAL | 4 2
The Aerospace & Defense Forum Arizona Chapter August 11, 2015 Market Snapshot • Commercial aerospace – strong backlogs and production rates, driven by increased airline profitability and passenger traffic I NDUSTRY • Defense and government services – more stable, sense that market T RENDS has bottomed and may now resume modest growth, but general feeling of unpredictability remains due to overall challenged procurement environment • Commercial aerospace public valuations are at cyclical highs, but share price increases have moderated given sentiment that we’re at top of cycle C APITAL • Defense and government services valuations have rebounded from M ARKETS cyclical lows given solid execution and expectation that worst is over • Ample and cheap private and public financing underpins deal activity • Healthy M&A environment across sectors • Commercial aerospace especially has been active – most robust volume M&A T RENDS and valuations for these companies across the supply chain AND A CTIVITY • Defense and government services activity has rebounded and more focused on high priority sectors (C4ISR, health, unmanned, etc.) and platforms / customers T HERE ’ S NO S UBSTITUTE FOR E XPERIENCE . C ONFIDENTIAL | 5 Operating Environment • Defense budget pressures started during 2008 (Great Recession combined with beginning of drawdowns in Iraq and Afghanistan) $800 $700 $600 $163 $159 $146 $115 $187 D EFENSE $85 $82 $64 $500 $689 $686 $667 $659 $645 B UDGET $400 $577 $581 $560 $300 ($ IN BILLIONS ) $526 $527 $530 $513 $480 $495 $496 $496 $200 $100 $0 2008 2009 2010 2011 2012 2013 2014 2015 Base OCO • Commercial aircraft build rates have grown consistently since 2008 low point; OEMs sitting on 7+ years of production backlog (but how solid?) 1,600 1,400 1,200 1,000 A IRCRAFT 800 1,444 D ELIVERIES 1,393 1,336 1,274 600 1,103 1,061 1,047 950 400 200 0 2008 2009 2010 2011 2012 2013 2014 2015 T HERE ’ S NO S UBSTITUTE FOR E XPERIENCE . C ONFIDENTIAL | 6 3
The Aerospace & Defense Forum Arizona Chapter August 11, 2015 Public Company Share Price Performance • Aerospace stock prices have moderated after the markets have priced in the sector’s strong visibility and build rates • With greater budget / funding clarity, defense and government services shares have recently outperformed the broader market 140 D: 23.8% 120 S&P: 13.4% GS: 11.6% A: 3.9% 100 80 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 (1) (2) (3) Aerospace Defense Primes Government Services S&P 500 (1) Aerospace Index includes: AIR, BEAV, HEI, HXL, LMIA, PCP, SPR, TDG, TGI, and ZC (2) Defense Primes Index includes: BAE, GD, LLL, LMT, NOC, and RTN (3) Government Services index includes: BAH, CACI, EGL, ICFI, KEYW, LDOS, MANT, NCIT, SAIC, VEC, VSEC Source: Capital IQ and Company filings; indices are equal weighted T HERE ’ S NO S UBSTITUTE FOR E XPERIENCE . C ONFIDENTIAL | 7 Public Valuation Trends • Strong build rates have driven commercial aerospace multiples to cyclical highs, although valuations have topped out – sense that we’re at a cyclical peak with more downside than upside risk • Defense and government services valuations have steadily rebounded from multi-year lows; companies have re-aligned and delivered to expectations E NTERPRISE V ALUE / NTM EBITDA 14.0x A: 12.0x 11.6x GS: 10.0x D: 9.6x 10.0x D: 8.0x GS: 8.3x 9.1x A: 6.0x 6.4x 4.0x 2.0x 0.0x (4) Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 (1) (2) (3) Aerospace Defense Government Services (1) Aerospace Index includes: AIR, BEAV, HEI, HXL, LMIA, PCP, SPR, TDG, TGI, and ZC (2) Defense Primes Index includes: BAE, GD, LLL, LMT, NOC, and RTN (3) Government Services index includes: BAH, CACI, EGL, ICFI, KEYW, LDOS, MANT, NCIT, SAIC, VEC, VSEC (4) Pricing as of June 30, 2015 C ONFIDENTIAL | 8 Source: Capital IQ and Company filings 4
The Aerospace & Defense Forum Arizona Chapter August 11, 2015 M&A Environment • Overall activity on order of ~250 B UYER T YPE transactions per year • Middle-market dominated : ~85% of Other deals are <$100 million in size 4% PE / PEG- – Sizable M&A targets are scarce; “size Backed 23% premium” for big deals Public • Private equity is an active buyer group, 43% ~25% of transactions Private 30% M&A T RANSACTION V OLUME D EAL S IZE 350 Annualized > $500M 288 < $15M 284 ~260 300 257 254 10% 14% $100M - 230 Nearly 85% 250 79 $500M 107 99 90 of deals 200 65 6% 154 66 150 are <$100 77 62 39 73 90 100 million in 47 143 50 100 103 91 size 68 68 0 (1) 2010 2011 2012 2013 2014 YTD 2015 $15M - $100M 70% Aerospace Defense Government Services (1) As of July 3, 2015 Note: Figures represent announced deal activity T HERE ’ S NO S UBSTITUTE FOR E XPERIENCE . C ONFIDENTIAL | 9 Source: Company filings and press releases Strong Financial Sponsor Activity • Robust financing markets have fueled M&A activity by private equity firms – 350+ deals by private equity firms and/or their portfolio companies since 2010 – Activity spread across aerospace, defense, and government services – New platforms of $5 million+ of EBITDA with solid management teams S ELECT R ECENT P RIVATE E QUITY T RANSACTIONS A EROSPACE ( ) D EFENSE ( ) G OVERNMENT T HERE ’ S NO S UBSTITUTE FOR E XPERIENCE . C ONFIDENTIAL | 10 5
The Aerospace & Defense Forum Arizona Chapter August 11, 2015 What’s Driving Strategic Value in Today’s Aerospace / Defense / Government Services M&A Market R ECENT M ARQUEE D EALS C HARACTERISTICS OF C OMPANIES W / S TRATEGIC M ULTIPLES (1) BUYER TARGET DATE VALUE � Larger size / scale Apr $1.9B � Proprietary technology / products 25.3x 2015 � Priority end-market or platform position (Intel, C4ISR, new aircraft) Mar $500M 13.3x 2015 � Strong backlog with clear revenue visibility (long-term contracts / Mar $658M 10.6x agreements) 2015 � Above average profitability Mar $1.5B 13.1x � 2015 Entrenched customer position and relationships Feb $725M � Transformational, addressable 12.1x 2015 market opportunities � Quality management team and Feb $4.75B 9.3x 2015 skilled / technical employee base Source: Capital IQ and Wall Street research C ONFIDENTIAL | 11 (1) Represents Enterprise Value and EV / EBITDA A PPENDIX T HERE ’ S NO S UBSTITUTE FOR E XPERIENCE . C ONFIDENTIAL 6
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