Kratos Defense & Security Solutions [KTOS] this week said it has agreed to acquire Composite Engineering, Inc. (CEI), for $155 million, giving it capabilities in composite structures and in the development and manufacture of unmanned aerial target systems.

Kratos said that CEI has positioned itself within “significant competitive barriers” in a business that is expected to see strong growth. Most of CEI’s contracts are sole-source and its main customers are the Air Force, Navy, other national security organizations and some international agencies.

CEI, which is based in California, had $94 million in sales last year, a 25 percent-plus organic improvement over 2010, and $16 million in earnings before interest, taxes, depreciation and amortization (EBITDA). Kratos says that CEI’s future organic growth is expected to be at least 20 percent and that the company has a backlog of $160 million and a bid pipeline exceeding $1 billion.

In addition to being the prime contractor on several unmanned aerial targets, CEI is also a major subcontractor on the Air Force Miniature Air Launched Decoy and the Navy’s Multi-State Supersonic Target.

“CEI is clearly a world leader in the design, engineering, development, manufacturing and production of leading edge unmanned aerial targets and airframe structures,” Eric DeMarco, president and CEO of Kratos, said in a statement. “Similar to the Kratos Aegis Readiness Assessment Vehicles, or ARAVs, certain of CEI’s products are also designed to replicate some of the most advanced aerial threats and potential adversary fighter aircraft in the world today, including next-generation threats.”

The two companies have partnered on business for a number of years, with Kratos supplying electronics payloads, avionics and satellite communications capabilities, to CEI’s aerial systems. CEI’s management will remain with the company.

The purchase price consists of $135 million in cash and $20 million in Kratos’ stock. To help fund the deal, Oak Investment Partners, a Kratos shareholder, plans to invest $55 million in Kratos stock to help facilitate the transaction. The transaction also includes a vesting of $10 million in Kratos stock in four years to certain members of CEI’s management as an incentive to remain with the company.

Kratos said the deal will be accretive to its EBITDA margins and boost its free cash flow in future years. The company also said the structure of the deal will allow it to write off $130 million in federal and state tax deductions over a 15-year period.

CEI’s financial adviser on the deal is Janes Capital Partners while Kratos is advised by Sagent Advisors.