By Paul K. Richey, Regional Managing Director, West, and Brent Costello, Managing Director, FOCUS
In real estate, it’s “location, location, location.” If you are the owner of an aerospace supply chain company, it may well be “timing, timing, timing.” In fact, 2013 may be one of the best times ever to sell your aerospace supply chain company—for a number of solid reasons, including many factors beyond any business owner’s control.
First, the Good News: the Aerospace Market is Booming
The outlook for the commercial aerospace market is very positive. The sector is literally taking off with an expected record level of airplane production. By 2016, total commercial aircraft deliveries are expected to exceed $100 billion annually—an increase of 40 percent over the 2011 level.1
In general, commercial air traffic (passenger and cargo) has grown with consistency for the last forty years with only a few dips (notably 2009 when traffic declined 2.5 percent, followed by a 7 percent increase in 2010). The 2010 uptick generated a host of new aircraft orders for both Boeing and Airbus. As a result, both OEMs are working hard to speed up production times and advance delivery dates for popular aircraft.
According to Deloitte’s “2013 Global Aerospace and Defense Outlook,” the commercial aerospace industry is expected to have record revenues in 2013, and OEMs are positioned to benefit from the robust growth predicted in emerging markets: “Commercial aircraft manufacturers will achieve record revenue levels, driven by growth in passenger travel demand in Asia and the Middle East.” Boeing estimates that China’s airlines will need 2,612 new aircraft over the next 20 years, and India’s air travel market is growing at an annual rate of 25 percent.
Coming into 2013, both Boeing and Airbus are thriving. In 2012, Boeing delivered a total of 601 aircraft—the highest number since 1999—increasing deliveries by 26 percent, and booking 1,339 new orders. Boeing Commercial President and CEO Ray Conner said, “As we look ahead to 2013, we’re focused on meeting our customer commitments by increasing production rates and delivering high-quality, reliable products and services.”
European Aerospace, Defence & Space Co. (EADS) results for 2012 should meet or beat earnings and sales goals at its four main units, largely driven by activities at Airbus, the commercial airliner division. In 2012, Airbus orders for new jets were above expectations at 914. In 2013, Airbus plans to increase production again, aiming to deliver more than 600 aircraft while taking new orders for at least 700 jets.
With commercial aircraft deliveries experiencing record highs, a wealth of new business is flowing down the supply chain from OEMs.
Investors Are Hungry to Acquire Aerospace and Defense Companies
Both strategic and financial investors are displaying great appetite for acquisitions of aerospace and defense companies. Reflecting the positive outlook for aerospace, the 341 aerospace and defense deals and $43.7 billion of deal value announced during 2011 was a record high.2
Although indications are that 2012 aerospace and defense M&A transactions may lag behind 2011’s record, predictions are that 2013 aerospace and defense M&A will top 2011.
Average sale price multiples for aerospace and defense companies sold in 2012 were attractive:
- The average sale price/revenue multiple was 2.053
- The average sale price/EBITDA multiple was 9.244
FOCUS Bankers Bring First Hand Experience to Aerospace Supply Chain Deals
At FOCUS, we are witnessing this aerospace and defense M&A phenomenon first hand. In December 2012, FOCUS represented Embee, Inc. in connection with its sale to Triumph Group, Inc. Embee, a leading commercial metal finishing provider employing over 400 people, offers more than seventy metal finishing, inspecting, and testing processes primarily for the aerospace industry. The firm holds multiple AS 9100 and NADCAP certifications as well as OEM approvals from the industry’s prime commercial and military contractors.
Triumph Group designs, engineers, manufactures, repairs, and overhauls a broad portfolio of aero structures, aircraft components, accessories, sub-assemblies, and systems for a worldwide spectrum of the aviation industry.
Jeff Frisby, Triumph Group President and CEO, describes the rationale for the acquisition as follows: “We view the Embee acquisition as an excellent strategic fit within our Aerospace Systems Group that will position us well for future growth.”
With OEM backlogs at very high levels, aerospace M&A deal volume, if not deal value, could be set to break another new record in 2013. Therefore, 2013 may be the perfect time for aerospace supply chain company owners to put their companies on the market—especially given the challenges facing them going forward.
Now, the Bad News: Critical Challenges Face Aerospace and Defense Supply Chain Company Owners
A key challenge facing companies in the aerospace supply chain is environmental regulation and the numerous accompanying certifications and requirements. In today’s regulatory climate, the increasing levels of concern over long-term environmental impacts favor companies that are up-to-date and totally compliant with current regulations.
In addition, these companies must continue to make significant investments in training, certifications, equipment, ongoing facility upgrades, higher quality standards, and more—just to remain compliant.
Another challenge facing many aerospace supply chain companies is the need to devote significant amounts of capital and time to prevent or even remediate environmental problems associated with their manufacturing operations. We know of an aerospace supply chain company that has been working on a government agency mandated clean-up effort for 12 years, and the company’s outside environmental experts estimate that it will take another 13 years to complete the clean-up. Not surprisingly, the estimated clean-up costs for this situation have been revised upward every year.
Last, but not least, in the list of environmental challenges facing aerospace supply chain companies is litigation over environmental damages caused (or alleged to have been caused) by manufacturing operations on the premises of these companies. In many instances, regulatory authorities are utilizing aggressive litigation strategies in order to extract damages from aerospace supply chain companies for alleged environmental problems stemming from the companies’ operations.
Stiff Quality Control Requirements Driven by OEMs, Outsourced to Nadcap
Nadcap (National Aerospace and Defense Contractors Accreditation Program) certifications are a good example of the increasingly stringent quality control requirements placed on companies that serve the aerospace and defense industries.
One result of the heightened quality control standards is the attrition from the industry of companies that are not able to meet the stringent performance requirements and make the necessary investments in order to meet Nadcap and other quality control requirements.
FOCUS was recently informed by an aerospace and defense supply chain company that it has been forced to double the size of its quality control (QC) department in the past year in response to increasingly stiff quality control requirements—and that the higher QC requirements have had a significant negative impact on their margins.
In the near future, we understand it is likely that Nadcap will be given the mandate to begin auditing smaller A&D machine shops that will not be able to afford—or choose not to—meet the heightened quality control standards required by Nadcap. These firms may choose to sell to larger/better financed competitors.
Pricing Squeeze from OEMs
Aerospace supply chain companies are feeling pressure from OEMs to lower their prices even as they are being asked to improve quality and speed production rates. Ultimately, this continuing pricing squeeze may drive some aerospace supply chain owners to sell.
As a vice president from one aerospace company put it when describing the pricing squeeze common throughout the supply chain, “Our contracts with Boeing were very stressful. As Boeing ramps up production, your mouth has to water at the big numbers. Business is going to grow. At the same time, you’ve got to be very nervous about how you’ll do it.” 5
Analysts attending a recent Pacific Northwest Aerospace Alliance meeting were unanimous that the biggest challenge for Boeing’s ramp up plan is whether suppliers can keep pace. “Boeing is checking whether subcontractors two or three steps down the supply chain can make the required parts at the required rates, demanding to see performance data, and applying scrutiny far surpassing anything done in the past.” 6
At the same meeting, a consultant working for an A&D supply chain company said: “We can’t give any more…each time a contract was renegotiated, Boeing demanded higher quality, higher productivity and a three percent reduction in price…I fear the pricing squeeze will drive some smaller suppliers to sell out, destroying what was once a thriving local universe of small, innovative machine shops.” Similar sentiments come from Airbus suppliers.
Jet makers are getting a lot more aggressive in how they manage their global supply chains. At the 2012 Farnborough International Air Show, Kent Fisher, vice president and general manager of Boeing’s supply chain management noted: “We are in the middle of the most proactive effort we’ve ever had in managing the supply base.”
Apparently, Boeing has audited more than 1,000 suppliers in an effort to gauge how each is going to meet Boeing’s planned 40 percent boost in production by 2014 to more than 750 deliveries each year, putting additional pressure on suppliers to deliver parts on time at more and more aggressive prices.
“Some suppliers are struggling to fund investment in new tooling associated with the ramp-up in production. Financing is increasingly hard to find for some ‘mom and pop’ suppliers,” according to The Wall Street Journal.7
Globalization of supply chains is accompanied by competitive pressure on suppliers to consolidate. “OEMs and tier 1 integrators increasingly prefer to deal with a manageable number of proven suppliers—and to conduct the research necessary to develop new or updated systems or components, forcing them to shoulder new costs, accept more risk, and build design capacity not required in the past.” 7
Is 2013 the Right Time to Sell Your Aerospace Supply Chain Company?
Of course, only you can make a decision about the right time to sell. But, given the positive outlook for the aerospace market, the hearty appetite of strategic and financial buyers for aerospace companies and the current operational challenges facing aerospace companies, 2013 may be the right time to sell your company.
1 Robert Jones, “Private Equity in the Aircraft Market,” Mergers &Acquisitions: The Dealmaker’s Journal; Sept. 1, 2011. 2 PriceWaterhouseCoopers, “Mission Control: Fourth Quarter 2011 Global Aerospace and Defense Industry Mergers and Acquisitions Analysis.” 3 CapitalIQ—Industry Classifications: Aerospace and Defense (statistics as of January 17, 2013 for transactions closed in 2012). 4 CapitalIQ—Industry Classifications: Aerospace and Defense (statistics as of January 17, 2013 for transactions closed in 2012). 5 Seattle Times article, “Local Aerospace Suppliers Say They Feel Squeezed by Boeing” 6 The Wall Street Journal article, “Putting the Squeeze on Suppliers” 7 “Beyond the Horizon: Canada’s Interests and Future in Aerospace—November 2012.”