AEROFLEX HOLDING CORP ARX
September 17, 2013 - 8:16pm EST by
coalone
2013 2014
Price: 7.24 EPS $0.68 $0.77
Shares Out. (in M): 85 P/E 10.6x 9.4x
Market Cap (in $M): 615 P/FCF 0.0x 0.0x
Net Debt (in $M): 548 EBIT 0 0
TEV ($): 1 TEV/EBIT 0.0x 0.0x

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  • Wireless Communications
  • Aerospace Parts
  • Sum Of The Parts (SOTP)
  • Potential Acquisition Target
  • Low CapEx
 

Description

Overview

 

ARX was founded in 1937 and has a long history of research and development focused on specialized technologies, often in collaboration with their customers. The proprietary technology was developed throughout the years from the “know-how” of their ~700 engineers and experienced management team.

 

After 46 years as a public company, ARX was acquired on August 15, 2007 in a going-private transaction and returned as a public company via IPO in November 2010 at $13.50 per share. As a result of the going-private transaction, Leonard Borow was promoted to CEO upon consummation of the transaction and instilled a results oriented culture where business managers are encouraged to make strategic decisions to drive growth and margin enhancement.

 

ARX is a leading provider of RF, microwave integrated circuits, components and systems used in the design, development and maintenance of technically demanding, high performance wireless communication systems. ARX’s solutions included highly specialized microelectronic components and test and measurement equipment used by companies in the (i) space, avionics and defense (ii) commercial wireless communications; and (iii) medical and other markets. These customers are targeted because ARX’s solutions address their technically demanding requirements.

ARX is worth more on a sum of the parts basis than it is as a combined entity.

 

ARX Segments

ARX operates in two segments: Aeroflex Microelectronic Solutions (AMS) 55.8% of FY13 sales & Aeroflex Test Solutions (ATS) which was 44.2% of sales. In Q413, ARX reclassified their frequency synthesizer business from ATS to AMS, which will leverage the synthesizer group’s engineering, sales and marketing functions with AMS’s RFMW group.  The synthesizer business is close to $20MM in sales a year.

 

Aeroflex Microelectronic Solutions(AMS): manufactures a range of RF, microwave and millimeter wave microelectronic components with a focus on HiRel and radiation hardened or RadHard, ICs and analog and mixed-signal devices. FY13 AMS generated $360.8MM in sales and $179.4MM in gross profit.

Products:

  • HiRel microelectronics/semiconductors: 46%
  • RF and microwave components: 35%
  • Mixed signal/digital ASICs: 10%
  • Motion control products: 9%

Competitive Advantages:

  • Leadership in microelectronic specialty products within ARX’s targeted end markets, with a long history and proven track record
  • High-performance, high reliability products optimized for ARX’s target markets
  • Proprietary technologies in RF, microwave and millimeter wave development
  • Established long-term blue chip customers
  • Class K, Class V and Defense Supply Center Columbus (DSCC) certified

AMS offers a broad range of microelectronics products and is a leading provider of high performance, high reliability specialty products for the space, defense, commercial wireless communications, medical and other markets.

  • ARX’s strength stems from their success in the design and development of HiRel and RadHard products. RadHard products are designed to tolerate high radiation level environments, which can degrade electronic components. The process by which harsh environment products are designed, developed and manufactured differs materially from basic semiconductor manufacturing practices. ARX is among a very limited number of qualified RadHard vendors who have the expertise, history and relationships in this target market.
  • ARX operates a fabless semiconductor manufacturing model, outsourcing all front-end semiconductor fabrication activities to commercial foundries; reduces capex and increases the ability to respond quickly, in scope and scale to changes in technology and customer needs.
  • AMS’s Plainview, New York and Colorado Springs, CO facilities are spaced certified and have been manufacturing Class K and Class V products for space, avionics and defense programs for 20 years.
    • Class K device manufacturing utilizes the highest quality and reliability for electronic parts through a number of specifications, standards and test methods

 

AMS offers a broad range of complementary products that provide connectivity and computing functionality for applications that are characterized by their high-performance, high reliability requirements.

 

AMS Products Offered

 

AMS: provides customers with high precision, high reliability, application specific standard products and ASICs including databuses, transceivers, microcontrollers, microprocessors and memory products. In addition AMS also sells sub-assemblies and multichip modules, or MCMs, as well as a diverse portfolio of commercial mixed signal ICs and RF, microwave and millimeter wave devices. “AMS’s broad product portfolio has a longstanding, field-tested, history of reliable performance often characterized by long product life cycles and mission-critical functionality.”

 

HiRel Microelectronics/Semiconductors: AMS provides HiRel standard and custom ICs and circuit card assembly for the aerospace, high reliability altitude avionics, medical, x-ray, GPS receivers, networking and telecommunication markets. AMS’ HiRel products include transceivers, analog multiplexers, clock management

 

 

Aeroflex Test Solutions (ATS): is a leading provider of a broad line of specialized test and measurement hardware and software products, primarily for the space, avionics, defense, commercial wireless and other markets. As technology continues to evolve and “next-gen” communication protocols are introduced equipment manufacturers and network providers need both test and measurement products that are compatible with new technology and products that work with older generation equipment.

Products:

  • Wireless test equipment
  • Military radio and Private Mobile Radio (PMR) test equipment
  • Avionics test equipment
  • Synthetic test equipment
  • General purpose test equipment and other:

Competitive Advantages:

  • Leadership positions in specialty communications test equipment market segments within end markets, long history and proven track record
  • High performance products and technologies
  • Integrated hardware/software focus
  • Pioneer in synthetic testing market
  • State-of-the-art manufacturing processes

 

ATS’s strength in testing and measurement stems from their expertise with RF and microwave signals and innovative product design and development to meet the changing needs of the end markets. ATS has hardware and software expertise across a number of wireless markets: cell infrastructure, cell device, mobile radio and satellite markets.

  • ATS’s products consist of flexible application software and multifunction hardware that customers combine with industry-standard computers, networks and other third-party devices to create measurement, automation and embedded systems. This approach gives customers the ability to quickly and cost-effectively design, prototype and deploy unique custom-defined solutions for their design, control and test applications.

 

Examples of ATS products and applications include:

  • Wireless test equipment, which is used to develop and test handsets and base stations
  • Military and PMR test equipment which is used in the design, manufacture and maintenance of electronic systems for aircraft
  • Synthetic test equipment, which used to test satellites and transmit/receive modules prior to launch and deployment
  • General test equipment which includes spectrum analyzers and signal generators

 

Industry Overview

The volume of mobile traffic from multiple data streams is rising rapidly and has resulted in significant technological innovation to address the increasing need for higher rates of data transmission and more efficient use of existing spectrum. This has led to the development of a number of advanced data transmission systems and technologies that use RF, microwave and millimeter wave frequencies that are used in a broad range of end markets including, space, avionics, defense, commercial wireless communications, medical and other markets. The growing number of applications include data transmission, video transmission, control of UAVs, growing number of satellites are driving increased demand for RF, microwave and millimeter wave technologies. Also, the “next-gen” wireless communication network to accommodate the rapidly growing volume of data being transmitted to smart phones and tablets requires new test and measurement equipment for R&D, conformance testing, production testing, installation and commissioning, monitoring and optimization, and service and maintenance.

 

 

ARX’s Business Model

  • High Revenue Growth and Visibility: ARX has a high visible sales pipeline because of their backlog and long term customer relationships; contracted backlog has grown at a compound annual growth rate of 8.3% over the past five fiscal years. The majority of backlog is recognized as revenue within one year.
  • Focus on High Margin Products: ARX’s strategy is to design, develop and manufacture products and solutions that address customers’ technically demanding requirements. The sophistication of the products is what drives ARX’s margins Efficient R&D: ARX’s products typically enjoy a long product life cycle, which equates to an attractive return on R&D dollars.
  • Limited Capital Expenditure Requirements
  • Strong and Experienced Management Team: Since 1991, the management team has transformed ARX into a focused, high margin, leading provider of RF and microwave solutions. Over that time, the team has completed 29 acquisitions, divested non-core operations and increased net sales from $63MM in FY1991 to $647MM in FY13.

 

Board of Directors/Insiders

  • Hugh Evans,  Ramzi Musallam, Mark Ronald and Joe Benavides from Veritas Capital, a leading private equity defense investor are all on the Board with Hugh being the Chairman of the Board. Veritas  owns 26.6MM shares.
  • Prescott Ashe and John Knoll, both from Golden Gate Capital are on the Board and own 15.5MM shares.
  • Brad Gross from Goldman Sachs is on the Board and owns 14.3MM shares.
  • Len Borow, the President and CEO has been with ARX since November of 1989.

 

I mention the makeup and ownership dynamics of the Board to emphasize insiders are motivated and concerned shareholders. And this is an opportunity to invest along with great stewards of capital.

 

Balance Sheet & Highlights

  • ARX repaid $60MM of debt in fiscal 2013, including $25MM in Q413, bringing gross debt balance down to $587MM or net debt of $548MM. The expectation is a similar amount will be repaid in fiscal 2014.
  • In May of 2013 ARX refinanced their debt by extending the maturity out 18 months, eliminated the total leverage ratio covenant relating to the term loan and reduced the interest rate by 125 basis points. This reduced annual cash interest expense by 7.3MM based on the current debt level.
  • In September of 2013 ARX sold a division of their Aeroflex Test Equipment Services to Trescal Limited for $18.7MM.

 

Breakup Value


  • The sum of the parts are worth more than the whole for ARX. These two disparate businesses are better suited for larger companies solely focused on the end markets each segment serves.
  • AMS is a solid high reliability microelectronic company that should be valued at ~1.8 to ~2.0x segment sales or $650MM to a strategic buyer. Eventually, this business will benefit from an uptick in RadHard products for the satellite industry.
  • ATS’s macro dynamics will ultimately align with the largest LTE network build-out in China and value the business at ~2.0x as well to $570MM.
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Sum of the Parts realization
PE exit
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    Description

    Overview

     

    ARX was founded in 1937 and has a long history of research and development focused on specialized technologies, often in collaboration with their customers. The proprietary technology was developed throughout the years from the “know-how” of their ~700 engineers and experienced management team.

     

    After 46 years as a public company, ARX was acquired on August 15, 2007 in a going-private transaction and returned as a public company via IPO in November 2010 at $13.50 per share. As a result of the going-private transaction, Leonard Borow was promoted to CEO upon consummation of the transaction and instilled a results oriented culture where business managers are encouraged to make strategic decisions to drive growth and margin enhancement.

     

    ARX is a leading provider of RF, microwave integrated circuits, components and systems used in the design, development and maintenance of technically demanding, high performance wireless communication systems. ARX’s solutions included highly specialized microelectronic components and test and measurement equipment used by companies in the (i) space, avionics and defense (ii) commercial wireless communications; and (iii) medical and other markets. These customers are targeted because ARX’s solutions address their technically demanding requirements.

    ARX is worth more on a sum of the parts basis than it is as a combined entity.

     

    ARX Segments

    ARX operates in two segments: Aeroflex Microelectronic Solutions (AMS) 55.8% of FY13 sales & Aeroflex Test Solutions (ATS) which was 44.2% of sales. In Q413, ARX reclassified their frequency synthesizer business from ATS to AMS, which will leverage the synthesizer group’s engineering, sales and marketing functions with AMS’s RFMW group.  The synthesizer business is close to $20MM in sales a year.

     

    Aeroflex Microelectronic Solutions(AMS): manufactures a range of RF, microwave and millimeter wave microelectronic components with a focus on HiRel and radiation hardened or RadHard, ICs and analog and mixed-signal devices. FY13 AMS generated $360.8MM in sales and $179.4MM in gross profit.

    Products:

    Competitive Advantages:

    AMS offers a broad range of microelectronics products and is a leading provider of high performance, high reliability specialty products for the space, defense, commercial wireless communications, medical and other markets.

     

    AMS offers a broad range of complementary products that provide connectivity and computing functionality for applications that are characterized by their high-performance, high reliability requirements.

     

    AMS Products Offered

     

    AMS: provides customers with high precision, high reliability, application specific standard products and ASICs including databuses, transceivers, microcontrollers, microprocessors and memory products. In addition AMS also sells sub-assemblies and multichip modules, or MCMs, as well as a diverse portfolio of commercial mixed signal ICs and RF, microwave and millimeter wave devices. “AMS’s broad product portfolio has a longstanding, field-tested, history of reliable performance often characterized by long product life cycles and mission-critical functionality.”

     

    HiRel Microelectronics/Semiconductors: AMS provides HiRel standard and custom ICs and circuit card assembly for the aerospace, high reliability altitude avionics, medical, x-ray, GPS receivers, networking and telecommunication markets. AMS’ HiRel products include transceivers, analog multiplexers, clock management

     

     

    Aeroflex Test Solutions (ATS): is a leading provider of a broad line of specialized test and measurement hardware and software products, primarily for the space, avionics, defense, commercial wireless and other markets. As technology continues to evolve and “next-gen” communication protocols are introduced equipment manufacturers and network providers need both test and measurement products that are compatible with new technology and products that work with older generation equipment.

    Products:

    Competitive Advantages:

     

    ATS’s strength in testing and measurement stems from their expertise with RF and microwave signals and innovative product design and development to meet the changing needs of the end markets. ATS has hardware and software expertise across a number of wireless markets: cell infrastructure, cell device, mobile radio and satellite markets.

     

    Examples of ATS products and applications include:

     

    Industry Overview

    The volume of mobile traffic from multiple data streams is rising rapidly and has resulted in significant technological innovation to address the increasing need for higher rates of data transmission and more efficient use of existing spectrum. This has led to the development of a number of advanced data transmission systems and technologies that use RF, microwave and millimeter wave frequencies that are used in a broad range of end markets including, space, avionics, defense, commercial wireless communications, medical and other markets. The growing number of applications include data transmission, video transmission, control of UAVs, growing number of satellites are driving increased demand for RF, microwave and millimeter wave technologies. Also, the “next-gen” wireless communication network to accommodate the rapidly growing volume of data being transmitted to smart phones and tablets requires new test and measurement equipment for R&D, conformance testing, production testing, installation and commissioning, monitoring and optimization, and service and maintenance.

     

     

    ARX’s Business Model

     

    Board of Directors/Insiders

     

    I mention the makeup and ownership dynamics of the Board to emphasize insiders are motivated and concerned shareholders. And this is an opportunity to invest along with great stewards of capital.

     

    Balance Sheet & Highlights

     

    Breakup Value

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    Sum of the Parts realization
    PE exit

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