Business Case Challenge for

The Maverick Season 3

Business Situation
Our client, Milco, is a leading Aerospace & Defense provider
with ~$2B in revenue. The company offers a broad range
of electronic products and systems, largely used on military
platforms. Core products include military flight simulators and
Maintenance, Repair, & Overhaul (MRO) technology systems,
as well as services such as flight simulation instruction and
MRO system diagnostic & repair. Milco also has been growing
its Military Construction offering. Milcos customers include
the United States (U.S.) Department of Defense (DoD) and its
prime contractors, U.S. Government intelligence agencies, the
U.S. Department of Homeland Security (DHS), and select other
U.S. federal, state, and local government agencies.
While revenue in Milcos core segments have remained strong,
the dynamics of the U.S. defense industry are challenging the
way they will need to conduct business going forward, forcing
them to be more agile and cost effective. While traditional
defense contractors used to have a lock on the U.S. market,
new entrants have joined the mix, removing some of the
leverage Milco once had, making the environment much
more competitive. Additionally, in response to U.S. Defense
budget cutbacks, which have been steadily increasing over the
last few years, Milco, and their competitors, have started to
look beyond the U.S. market, exploring opportunities to offer
products and services to customers in emerging geographies.
Milco recognizes the need to change the way they operate
in order to reach their goals. Milcos executive team feels a
review of their current products and services is warranted to
allow them to successfully compete, as well as an exploration
of the potential for acquiring new capabilities to broaden their
portfolio. Additionally, the executive team believes there are
potential growth opportunities in several international markets.
You have been engaged to help assess how Milco should
move forward to strategically drive growth and margin.

The brief for your team involves

Financial Performance
Construct a basic income statement for Milco. How
would you assess the companys overall financial
performance and health?
Are there any products/service segments that Milco may
want to consider exiting from? Please support with data
points.
Competitive Position
What is Milcos current competitive position? Based on
the data provided, segment and assess each of Milcos
major competitors.
In what existing product/service offerings will Milco
possibly be able to capture additional share?
Recommendations
Based on your understanding of Milcos financial
performance and competitive positioning, what should
be managements top priorities. Recommend initiatives
or opportunities for Milco to improve its position.
Ground Rules
Feel free to use external research sources and make logical
assumptions where necessary. Please ensure that all external
sources, data, and assumptions are captured explicitly in your
deliverable.
Please make all submissions in PowerPoint format, limiting
the main deliverable to a maximum of eight slides (including
one-slide executive summary). Appendix can be used to
capture external research, assumptions, or any other references/analysis in detail.

Data sheet 1 Key Industry, Market and Competitive Trends

Overall
Aerospace & Defense industry is composed of many companies
that manufacture defense products, such as aircraft, weaponry,
and information systems along with supporting products
and services.
Most of these products are purchased by federal governments
for military purposes, with the United States being the worlds
largest Aerospace & Defense market accounting for ~40%
(+$650B) of the global $1.6 trillion market.

U.S. Market
The industry is very competitive with government contracts
and regulations providing challenges to suppliers.
The industry is led by several leading heavyweights, though
many smaller companies provide niche offerings.
The industry is expected to see continued consolidation, with
larger players plugging gaps through bolt-on acquisitions.
Operators in this industry have been focused on new
technologies as well as making planned divestitures to remain
profitable and meet customer demand.

The growth of the Aerospace & Defense industry depends

largely on the spending outlook of government departments,
which has been trimming its defense expenditures by reducing
investments on defense programs.

U.S. Annual Defense Budget ($B)

$700

Other Markets
Growing demand in international markets may provide some
relief to U.S.-focused corporations, though complexities with
government regulations on specific products and services
restrict the abilities of some corporations to expand.

$691

$687

$680
$660
$646
$640
$620

$614

$600
$580
$560
2010

2011

2012

2013

Data Sheet 2 Select Product & Services Data

Milco Product & Service Data
Product /
Service

2014 Average
Units/ Service
Contracts

2019 Projected
2014 Avg.
2019 Projected
2014 Avg.
2019 Projected
Avg. Units/
Revenue / Unit Revenue/Unit COGS / Unit or COGS / Unit or
Service
or Service
or Service
Service
Service
Contracts

Military Flight
Simulator

40

40

$15,000,000

$15,750,000

$9,000,000

$9,900,000

MRO IT System

60

80

$5,000,000

$5,500,000

$3,000,000

$3,300,000

Military Flight
Simulation Instruction

200

200

$1,750,000

$1,837,500

$600,000

$630,000

200

200

$2,000,000

$2,100,000

$1,000,000

$1,050,500

115

150

$2,000,000

$2,200,000

$1,000,000

$1,100,000

125

150

$1,000,000

$1,800,000

$600,000

$900,000

Military Flight
Simulator Service/
Maintenance
MRO IT System
Services
Military Facility
Construction

Flight simulators range in complexity and price from $250K (software-based) to +$15M for Full Flight/Mission simulators
Simulators have on average 10-year lifespan, though regularly scheduled enhancements are required to remain relevant
U.S. military simulator market is dominated by a small number of companies, with Milco holding 20% value share
Simulator instruction is contracted for new and existing units
Milco accounts for 10% of MRO industry revenue, with 15 companies accounting for top 80%
MRO IT systems have ~20-year lifespan before large enhancements are integrated; Service and maintenance is performed on all
MRO IT systems regardless of age to ensure mission critical operations
U.S. Military has 200 domestic facilities with an average of 30 contracts annually with Milco capturing approximately 0.7%
of construction contracts
2

Data sheet 3 Select Financial Data

Milco 2014/15 Tear Sheet from Balance Sheet
Assets

2014 Values
($M)

2015 Values
($M)

Liabilities and
Equity

2014 Values
($M)

2015 Values
($M)

Cash

$400

$500

A/P

$500

$600

A/R

$700

$800

Long Term Debt

(Current Portion)

$200

$200

Inventory

$500

$400

Long Term Debt

$1,600

$1,700

Plant & Equipment1

$2,000

$2,100

Shareholders Equity

$1,300

$1,300

Total Assets

$3,600

$3,800

Total Liabilities and

Shareholders Equity

$3,600

$3,800

US Corporate Tax Rate

Revenue ($B)

Tax Rate

Revenue ($B)

Tax Rate

0 to 1

15%

2.5+ to 5

35%

1+ to 1.5

20%

5+ to 10

37.5%

1.5+ to 2

25%

10+ to 50

40%

2+ to 2.5

30%

50+

42.5%

Other Data for Milco

Metric

Detail

SG&A

Typically ranges around 20% of revenue

Assets

The Military Facility Construction Service has IP assets valued at $500M

All other products and services are assumed to have an equal asset base

CapEx

Plans for $100M of investment in 2016 and another $150M in 2019

D&A

Product assets are depreciated based on useful life2

Service assets are assumed to be IP and amortized over 25 years

Market Cap

Market capitalization is $6.25B

WACC

Milcos Weighted Average Cost of Capital (WACC) is 20%

1 Includes IP assets as well.

2 Useful life for product assets are assumed to be in line with the lifespan of the products they manufacture.

Data sheet 4 Select Competitor Data

U.S. Competitors by 2014 Revenue

Product /
Service

Milco
Co.%

Competitor A

Market%

Co.%

Competitor B

Market %

Co.%

Competitor C

Market %

Co.%

Competitor D

Market %

Co.%

Competitor E

Market %

Co.%

Market %

Military Flight
Simulator

30%

20.0%

41.0%

15.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

MRO IT System

15%

10.2%

0.0%

0.0%

5.0%

2.0%

30.0%

7.0%

14.0%

1.0%

3.0%

0.2%

Military Flight
Simulation
Instruction

17.5%

20.0%

8.0%

5.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Military Flight
Simulator
Maintenance

20%

35.0%

1.0%

1.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

MRO IT System
Services

11.5%

20.0%

0.0%

0.0%

2.5%

2.0%

7.0%

4.0%

4.5%

1.0%

1.0%

0.2%

Military Facility
Construction

6%

0.1%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

Other

0%

50%

93%

63%

81%

98%

Notes

Seeks
international
growth

Expanding
MRO
offerings

Top 3 US
military IT
provider,
seeking to
expand IT
solutions

Considering
close of
MRO line

Civilian
focus
but seeks
military
market

Note: Co. % = Companys specific % of business; Market % = Overall market share

2014 U.S. Market by Segment

Military Flight
Simulator

Segment

MRO IT System

Military Flight
Simulation
Instruction

Military Flight
Simulator Service

MRO IT Services

Military Facility
Construction

2014 Total Revenue ($B)

$3.0

$3.0

$1.12

$1.75 -

$1.15

$125.0 -

# Companies / Top 80%

15

15

100

Note: ,

, - = 20142015 Trend

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