by Maureen Flanagan
Since 1984, Kelly Aerospace has played a vital role in the continuing growth and development off the U.S. general aviation market, manufacturing electrical and fuel system components that power propeller driven aircraft. As a result of strategic acquisitions, it is now the dominant world-wide supplier of turbochargers and the related control systems for piston powered aircraft. In addition, Kelly has, through its Turbonetics Inc. acquisition, become a market leader in automotive high performance turbochargers.
In a February 15th transaction, Kelly facilitated the completion of the acquisition of two more product lines - the AlliedSignal/Garrett aviation turbocharger line, purchased from Honeywell, and Spearco Performance Products, Inc., a leading producer of intercoolers for performance automotive turbocharger applications. American Capital Strategies Ltd. (Nasdaq: ACAS) invested $20 million of senior notes and senior subordinated debt, enabling the company to complete the acquisitions and to position Kelly for further growth.
"With this financing Kelly becomes the sole supplier of turbochargers for general aviation planes and a leader in the performance automotive market," said Kent R. Kelly, Chairman and CEO of Kelly. "It also gives us a solid financial base to pursue future growth opportunities."
Kelly sells its products to Original Equipment Manufacturer (OEM) airframe producers such a Piper, Cessna and Raytheon (Beechcraft) and to OEM piston engine suppliers. It also sells to the aviation aftermarket through its extensive international distribution network.
With headquarters in Montgomery, AL, Kelly operates five divisions with interrelated products, distribution and marketing. The company's oldest unit, Electrosystems (ESI), was acquired by Kent Kelly in 1984. Based in Fort Deposit, AL, ESI now holds a leading market share in manufacturing and rebuilding alternators, voltage regulators, and starters for piston engine aircraft. ESI also manufactures combustion heaters under the 'Janitrol Heater' brand name for use in many general aviation aircraft and military helicopters.
In the late 1980's and 1990's, Kelly focused on acquisition and diversification. Consolidated Fuel Systems (CFS) was one of its key purchases in 1988, which enjoyed rapid internal growth and became the nucleus entity for entering the turbocharger market. In the mid 90's CFS began distributing the RAJAY turbocharger products and parts for AlliedSignal's Turbocharging Systems Division and subsequently acquired the manufacturing rights for RAJAY in 1997. The smooth sales and manufacturing transition, improved deliveries and excellent product support solidified the Allied/CFS alliance and facilitated the additional aircraft and industrial product line purchases from AlliedSignal/Garrett.
The second purchase from Garrett was the aircraft valves and controls line that control the operation of turbochargers on general aviation aircraft. And finally, the most recent purchase of all the design and manufacturing rights to all Garrett aircraft turbochargers places CFS in the dominant supplier position for general aviation turbochargers and it is the only supplier capable of manufacturing complete turbocharger systems for OEMs.
"Kelly is led by a top flight management team with years of successful acquisition experience. The Garrett aircraft turbocharger product line is the company's fourth acquisition from AlliedSignal/Honeywell; and Spearco Performance Products has been a co-supplier to Turbonetics of components for NHRA race teams," said ACAS Senior Investment Officer Ira Wagner. "The company has focused on strategically expanding its product lines, and putting into place a solid OEM base and aftermarket distribution network to give it a commanding presence in its chosen markets with great potential for growth."
In May 1999, Kelly moved into the performance automotive market with the acquisition of Simi Valley, CA based Turbonetics, Inc., a leading designer of 'hot rod' turbochargers used on car engines powering champion drag racing vehicles. The niche market for performance automotive turbochargers has been on the rise since the mid-1980's. The market is expected to grow significantly as enthusiasts modify smaller engines with turbochargers - generally spending an estimated $1000 to $5000 on enhancement projects. Also on the upswing are industrial applications for turbochargers such as machines that need extra power to transport heavy loads and commercial diesel vehicles. Turbonetics also makes diesel and natural gas engine turbocharger regulators and controls for large agricultural and mining equipment engines made by Caterpillar and Waukesha Engines.
American Capital's investment in Kelly comes at a time when the general aviation industry is strong and growing. Ever since the passage of the "General Aviation Revitalization Act" (GARA) in 1994, the industry has experienced steady growth and expansion. This particular tort reform legislation resulted in a limitation on manufacturers' liability on aircraft which are more than eighteen years old, and as a direct result, long term industry companies like Cessna, Piper, and Beechcraft and a host of new industry names have made significant investments in new aircraft designs and technology.
In addition to maintaining its solid relationships with OEMs and other customers, Kelly concentrates on enhancing customer service and operational efficiencies. In early 2000, Kelly created the Kelly Aerospace Customer Care Center in Dallas to integrate and enhance the aftermarket sales of Consolidated Fuel Systems, Electrosystems, and the other aircraft business units. In the future, Kelly expects to in-source as much manufacturing as possible to take advantage of available capacity of its various units. Synergies between the facilities and cross-training of engineering personnel further enhance production efficiencies.
The aftermarket parts business for general aviation aircraft is also strong, driven by the increasing age and number of piston powered planes as well as a continued growth in flight hours, which drives the need for replacement parts. Kelly is also pursuing interests in the market for new and remanufactured parts for turbine-powered aircraft.
In November 1997, Kelly acquired ESI's major competitor, Aero Electric, which expanded the piston engine market share and provided an entry to the turbine engine aircraft accessory market. Like ESI, Aero Electric manufactures alternators for Cessna Aircraft company and the aftermarket, and it also overhauls and repairs other turbine airframe accessories such as landing gear assemblies, pneumatic & hydraulic actuators, lighting components, oxygen systems, and fire bottles.
Kelly's engineering design teams concentrate on continuous design, product, and process improvements. One example of design innovation is its new Electrosystems "Magnaflite" starter that weighs 50% less than a conventional starter, and a line of light weight, high output alternators and electrical system control boxes for new generation 'all electric' aircraft models. With enhanced manufacturing efficiencies, integrated sales and marketing efforts, and extensive distribution network, Kelly is in a position to seize opportunities to 'turbocharge' the general aviation and performance automotive industries for years to come.
To support Kelly's strategic growth, American Capital invested $20 million of senior notes and senior subordinated debt. The financing is American Capital's second investment in the aerospace industry - in 1998, ACAS invested $20 million in a recapitalization of Piper Aircraft. These aerospace companies join American Capital's diversified portfolio of middle-market companies using ACAS capital for growth, acquisition, management and employee buyouts, liquidity and restructurings.
