2016: Year-End Review

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1 INDUSTRY OUTLOOK / March 2017 AEROSPACE AND DEFENSE INVESTMENT BANKING M&A Overview After reaching new heights in 2015, merger and acquisition ( M&A ) activity in the aerospace and defense ( A&D ) sector slowed during A multitude of factors, including slowing economic growth and concerns over where we sit in the aerospace cycle, have impacted both the broader markets as well as M&A deal flow. On a year-over-year basis, deal volume declined in 2016, reaching only 197 total deals as compared to 216 total deals a year prior (see Chart 1). Similarly, deal values saw a decrease to $18.1 billion in 2016, down from $67.9 billion in M&A activity in the A&D sector has been dominated by strategic acquirers over the past several years, a trend that continued in As illustrated in Chart 2, the deal volume by financial acquirers accounted for only 11.3% of activity in 2016, representing a decrease since 2015 when financial acquirers contributed to 13.1% of deal activity. As in past years, private equity continues to find the A&D sector attractive, however, given the current position in the cycle, most financial investors are taking care to understand their downside risks in diligence. Sustainability and quality of earnings have become a greater diligence focus along with a desire for product and customer diversification. Finally, we are seeing renewed enthusiasm from financial sponsors for companies participating in the defense industry which is viewed as having significant growth potential after years of decline. North America continued to be the most acquisitive region, with 105 deals announced in 2016, accounting for 53% of global deal volume. North American deal activity was driven primarily by acquirers headquartered the United States. CHART 1 Aggregate A&D Deal Volume by Transaction Range: 2010 through 2016 Enterprise Value ($ in billions) IN THIS ISSUE...1 Transaction Spotlight...3 Featured Deal and Recent Transactions...5 Public Company Trading Analysis...6 $80.0 $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 $ $3.4 >$1B $500MM $1B <$500MM No. of Deals 219 $ $11.9 Source: S&P Capital IQ. 1 Only includes deals with disclosed deal value $9.5 $9.5 $ $ CHART 2 Number of A&D Transactions by Buyer Type (% of total deal count): 2016 Financial 11.3% No. of Deals (1) Commercial Aerospace The commercial aerospace industry continues to exhibit strong fundamentals, with solid demand for next generation aircraft and growing airline passenger traffic driving record backlogs and production rate increases by major aircraft manufacturers The Boeing Company and Airbus Group (collectively the OEMs ). Source: S&P Capital IQ. Strategic 88.7%

2 Boeing delivered 748 commercial aircraft in 2016, down slightly from 762 in 2015; however, the company is projecting that production rates of several of its aircraft will rise. As an example, the production rate of the 737 is estimated to increase from 42 per month currently to 47 per month in 2017 and 52 per month in By comparison, Airbus delivered yet another company-record of 688 aircraft in 2016, up from a 2015 total of 635. In addition to strong delivery numbers overall, commercial aircraft backlogs are at an all-time high of approximately 13,500 aircraft units, representing more than nine and a half years of current annual production rate. As of December 31, 2016, Boeing and Airbus reported backlogs of 5,715 and 6,874 aircraft, respectively. Strong global airline passenger traffic and improved global airline profits, primarily on account of lower fuel costs, will drive increased production and deliveries by large OEMs (see Charts 3 and 4). In addition to ramped up production plans for several aircraft, all major manufacturers are expected to unveil new jets over the next 12 months, thereby placing significant pressure on the supplier base. Boeing will launch two new versions of the 737 this year: the 737 MAX 8 and MAX 9. Airbus s A321neo orders will be delivered this year alongside a brand new A330neo and the A Embraer will also introduce two planes from the new E2 series the E190-E2 and the E195-E2. Driven by growing passenger traffic in the Asia-Pacific and Middle East regions and greater profitability in Latin America, the airline industry achieved a record net profit of $35.6 billion in 2016, according to the International Air Transport Association ( IATA ) (see Chart 5). Further, collective profitability continues to be supported by sustained low oil prices, exchange rate declines, approximately 6.0% passenger growth and load factors in excess of 80%. North American carriers accounted for a significant portion of the rise in net profits, while African carriers struggled in As the overall commercial aerospace market grows, the global supply chain will face challenges to ensure that increasing requirements for capacity, throughput, quality, on time delivery and pricing can be met. Suppliers are expected to continue efforts to reduce costs, improve responsiveness and invest in product innovation, which will likely drive further industry consolidation as companies focus on gaining economies of scale and providing required investment in people and capabilities. CHART Deliveries % Single-Aisle Widebody Very Large Aircraft A319-A % % Source: Boeing and Airbus websites. CHART Net Orders % A % A % % % 38% A % Single-Aisle Widebody Very Large Aircraft A319-A % % Source: Boeing and Airbus websites % % A % A % A % % CHART 5 Airline Net Post-Tax Profit by Region ( F) $40 $35 $30 $25 $20 $15 $10 $5 $0 ($5) Africa North America Europe Asia-Pacific Middle East Latin America $17.3 Source: IATA. $8.2 $9.2 $10.7 $ E 2017F CHART 6 Purchase Plans by Aircraft Class 8,600 new aircrafts projected through 2026 $35.3 $35.6 $255 billion valuation $ projected 2016 deliveries Business Aviation The business aviation market continues to face a slow near-term pace of orders due to a slow-growth economic environment across many global markets along with a multitude of political uncertainties. According to Honeywell International, approximately 8,600 new business jets worth $255 billion will be delivered worldwide in the next decade to 2026, representing a 6%-7% reduction from their 2015 forecast (see Chart 6) deliveries are projected to be slightly lower than the deliveries projected in 2016, reflecting transitions to new models slated for late 2017 and 2018 service entry. 57% Big Cabin 85% total valuation (Super midsized through business liner) Source: Honeywell Aviation Outlook. 21% Midsize 10% total valuation (Light-medium, medium) 22% Small Cabin 5% total valuation 2 Mesirow Financial

3 Transaction Spotlight Safran SA s Proposed Purchase of Zodiac Aerospace Deal Value $9.8 Billion Enterprise Value / Revenue 1.69x Enterprise Value / EBITDA 16.5x In January 2017, Safran SA announced an offer to acquire Zodiac Aerospace, which manufactures a wide range of aerospace equipment and systems for commercial, regional and business aircrafts. The combined groups would have global leadership across the entire aircraft value chain with world-class products and services. The transaction is also highly strategic as it combines the companies leading positions in different, yet complementary aerospace and aircraft equipment categories and technologies. Rockwell Collins, Inc. s Purchase of B/E Aerospace, Inc. Deal Value $8.3 Billion Enterprise Value / Revenue 2.90x Enterprise Value / EBITDA 13.6x In October 2016, Rockwell Collins announced that they had entered into a definitive agreement to acquire B/E Aerospace, a leading manufacturer of a broad range of aircraft cabin interior products for both commercial aircraft and business jets. The transaction is transformative, creating unparalleled reach across the cabin and cockpit, while increasing scale and diversifying revenue mix. Further, the combined portfolio uniquely supports integration of cabin products, smart network technologies and connectivity solutions with limited overlap. Over the next five years, operators plan to make new jet purchases near 27% of their fleets as replacements or additions to their current fleet an encouraging increase but one that is less than firm in timing. While this points to improved interest in new aircraft acquisition in the medium term particularly in the period operators plan to modestly increase usage of current aircraft in the next 12 months, providing some welcomed momentum to aftermarket activity, which has been flat recently. Bombardier Business Aircraft has published a similar forecast of 8,300 new business jet deliveries (representing $250 billion in industry revenues) from 2016 to 2025 in the Light, Medium and Large aircraft segments (see Chart 7). Similar to Honeywell s forecast, significant growth is expected in the long term, with larger aircraft continuing to dominate the market. North America will account for the greatest number of new business jet deliveries between 2016 and 2025 with 3,930 aircraft, followed by Europe, which remains the second largest market with 1,530 deliveries (see Chart 8). The China, South Asia, Middle East and Commonwealth of Independent States regions have the leading fleet compound annual growth at 10.0%, 8.5%, 6.0% and 5.0%, respectively. Further underscoring near-term softness, General Dynamics, in their 2016 Form 10-K, detailed a backlog of approximately $11.0 billion at year-end, representing a decline from $13.4 billion at 2015 year-end. Additionally, nearly $6.0 billion of the current backlog will not be completed in 2017, which aligns with the above remarks that growth will be more significant in 2018 to 2019 and the long term. Gulfstream continues to introduce new products and first-to-market enhancements that broaden customer choice, improve aircraft performance and set new standards for customer safety, comfort and in-flight productivity. The G600 achieved its first flight in 2016 and the G500 and G600 are expected to enter service in 2017 and The transactions above portend an active aerospace M&A environment in 2017 and will likely embolden other strategic consolidators. Note: Mesirow Financial did not represent any of the acquirers or targets in connection with the transactions noted on this page, and is not currently representing any of the listed acquirers or targets. CHART 7 Global Fleet Growth Forecast ( P) (units in actuals) Light Medium Large CHART 8 Fleet Growth by Region ( P) (units in actuals) ,300 2,000 22,485 10,355 12,895 16,185 2,835 1,435 2,015 2,500 2, ,095 1, Fleet 2015 Deliveries Retirements Fleet 2025 Source: Bombardier Business Aircraft Report, North America Europe Latin America Source: Bombardier Business Aircraft Report, China Africa ROW 3 Mesirow Financial

4 Dassault Aviation also experienced some softness with 58 total deliveries in 2016 compared to 63 in Further, as of December 31, 2016, Dassault Aviation s business jet backlog included 63 Falcon, compared to 91 Falcon as of December 31, Decreases in deliveries, backlogs and orders further indicate a difficult business aviation market. Despite the near-term conditions, Dassault Aviation s chairman, Éric Trappier, has stated that while he does not see market conditions improving before 2018, waiting for a recovery would put Dassault Aviation behind the competition when the recovery does arrive. Textron Inc., which produces the Cessna and Beechcraft business aircraft, is restructuring its aviation business amid stubbornly soft market conditions and is trying to improve its cost position. The company s fourth quarter earnings release stated deliveries of business jets fell by two units year-over-year to 58 aircraft in Additionally, Textron s aviation backlog ended the year at $1.0 billion, down $73.0 million from the end of the third quarter. Defense In March 2017, the U.S. House of Representatives passed a revision to the fiscal year 2017 Defense Appropriations Act, affording the Pentagon a base of $516.1 billion and another $61.8 billion for Overseas Contingency Operations funding a decrease of approximately $2.4 billion from the fiscal year 2016 total enacted level (see Chart 9). The legislation funds critical national security needs, including military operations and readiness programs, as well as health and quality-of-life programs for U.S. troops and military families. The Trump administration s first budget proposal for fiscal year 2018 contemplates increasing the defense budget to $603.0 billion. While this represents a $54.0 billion increase over the budget caps installed by Congress in 2011, it is only 3.0% higher than President Obama s defense budget and has been met with criticism by many in the Republican Party who view the military as underfunded, undersized and unready to confront threats to our national security. The chairmen of the Senate and House Armed Services Committees have also called for spending increases to $640.0 billion to address readiness problems across the armed services. CHART 9 U.S. Department of Defense Budget (Fiscal Year 2008 to Fiscal Year 2017) U.S. Budget (US$ billions) $187 $146 $479 $520 $ Market Outlook $162 $159 $115 $528 $530 Strong demand for next-generation aircraft, growing passenger traffic and profitability continue to drive Aerospace OEMs. Both Boeing and Airbus have significant backlogs, which will also support demand for aerospace component and equipment manufacturers. However, orders have begun to soften for the near-term and uncertainty created by macro-economic factors has us cautiously optimistic on the 2017 outlook for commercial aerospace M&A activity and valuations. With proposed increases in the U.S. defense budget by the newly elected U.S. administration and increased defense budgets internationally, defense companies are looking to expand product lines to address today s global threats. While there may be little consolidation among major defense players, independent software developers, surveillance equipment manufacturers and cybersecurity providers are prime targets for acquisition. Given these factors, we predict M&A activity to continue at a steady pace with emphasis on achieving efficiencies and scale through consolidation. $82 $496 Department of Defense Base Budget Overseas Contingency Operations $85 $496 $64 $496 $59 $522 $62 $ Source: Deloitte Touche Tohmatsu Limited, Office of the Under Secretary of Defense (Comptroller). While the newly approved fiscal year 2017 U.S. defense budget represents a $2.4 billion decrease from 2016, U.S. defense spending appears to have bottomed out and additional growth is expected to be driven by the newly elected Trump administration. Amid diplomatic and potentially real threats from other top militaries and terror organizations, as well as the risk of a nuclear arms race in Asia, President Trump s administration has expressly stated the country s needs to bolster the development of missile defenses and cyber capabilities, increase shipbuilding and the manufacturing of military aircraft and increase armed services troops and personnel. As a result, it is likely there will be increased funding to address these security needs, accelerating growth and M&A activity in the defense industry. 4 Mesirow Financial

5 Featured Mesirow Financial Deal Sell-side Advisor Sale of Star Aviation, Inc. to Carlisle Companies Incorporated Mesirow Financial acted as the exclusive financial advisor to Star Aviation, Inc. ( Star Aviation ) on its sale to Carlisle Companies Incorporated (NYSE:CSL) ( Carlisle ). Headquartered in Mobile, Alabama, Star Aviation is a leading provider of design and engineering services, testing and certification work and manufactured products for commercial, business and military aircraft. Star Aviation has manufacturing facilities in Mobile, Alabama and a technical services facility in Lynnwood, Washington. The company is a supplier to the world s leading providers of Wi-Fi and other in-flight connectivity systems used on a broad range of aircraft platforms. Star Aviation will operate as part of Carlisle Interconnect Technologies Inc., a subsidiary of Carlisle Companies Incorporated and a global provider of specialty wire and cable, and interconnect components for commercial and military aircraft, avionics systems, in-flight entertainment, communications systems and medical devices. Mesirow Financial developed a compelling investment thesis for Star Aviation, highlighting the valuable growth opportunities achievable through a combination of Star Aviation s engineering capabilities and manufacturing expertise, and Carlisle s strong market presence and resources. The transaction closed in October Recent Mesirow Financial Aerospace and Defense Transactions CSS Business Sell-side Advisor Sell-side Advisor Sell-side Advisor Sell-side Advisor 5 Mesirow Financial

6 Public Company Trading Analysis Selected Aerospace Suppliers CHART 10 Enterprise Value / LTM EBITDA 23.3x CHART 11 Enterprise Value / LTM Revenue 3.66x 14.5x 14.2x 2.86x 2.65x 2.59x 12.0x 11.4x 11.3x 11.1x 10.6x Median 11.4x 9.7x 1.61x 1.61x Median 1.61x 1.06x 0.98x 0.91x 0.82x NM ZC AME BEAV B COL KAMN ESL DCO LMIA TGI AME BEAV COL B ZC ESL LMIA KAMN DCO TGI CHART 12 Enterprise Value / NTM EBITDA 19.0x CHART 13 Enterprise Value / NTM Revenue 3.48x 13.5x 12.7x 10.9x 10.3x 10.0x 9.9x 8.5x 7.9x Median 10.2x 6.4x 2.72x 2.58x 2.36x 1.67x 1.58x 0.99x 0.96x 0.92x Median 1.63x 0.87x ZC AME BEAV B COL ESL KAMN DCO LMIA TGI AME BEAV COL B ZC ESL LMIA KAMN DCO TGI AME: Ametek, Inc., B: Barnes Group Inc., BEAV: B/E Aerospace Inc., DCO: Ducommun Inc., ESL: Esterline Technologies Corp., KAMN: Kaman Corporation, LMIA: LMI Aerospace Inc., COL: Rockwell Collins Inc., TGI: Triumph Group Inc., ZC: Zodiac Aerospace. 6 Mesirow Financial

7 Public Company Trading Analysis Selected Defense and Prime Contractors CHART 14 Enterprise Value / LTM EBITDA 14.5x 13.0x 12.7x 12.5x 12.3x 12.2x 11.9x Median 12.4x 10.8x CHART 15 Enterprise Value / LTM Revenue 1.95x 1.89x 1.87x 1.85x 1.51x 1.46x Median 1.68x 1.18x 1.09x LMT LLL NOC RTN BA. GD BA OA RTN NOC LMT GD LLL OA BA. BA CHART 16 Enterprise Value / NTM EBITDA 12.9x 12.4x 12.4x 12.1x 11.9x Median 12.0x 10.0x 9.6x 9.3x CHART 17 Enterprise Value / NTM Revenue 1.87x 1.85x 1.84x 1.77x 1.49x 1.47x Median 1.63x 1.13x 1.12x LMT NOC GD RTN LLL OA BA. BA RTN GD NOC LMT OA LLL BA. BA BA.: BAE Systems plc, BA: The Boeing Company, GD: General Dynamics Corp., LLL: L-3 Communications Holdings Inc., LMT: Lockheed Martin Corporation, NOC: Northrop Grumman Corporation, OA: Orbital ATK, Inc., RTN: Raytheon Co. 7 Mesirow Financial

8 Dedicated M&A Advisor to the Aerospace and Defense Sector Mesirow Financial Investment Banking is consistently focused on elevating the experience for our clients. With extensive sector-specific expertise and deep longstanding relationships, our dedicated aerospace and defense team has a proven track record of completing highly complex and successful transactions. Our highest priority is helping individuals and organizations achieve their financial and strategic goals. Contact Us Andrew Carolus acarolus@mesirowfinancial.com Adam Oakley aoakley@mesirowfinancial.com Mesirow Financial refers to Mesirow Financial Holdings, Inc. and its divisions, subsidiaries and affiliates. The Mesirow Financial name and logo are registered service marks of Mesirow Financial Holdings, Inc. 2017, Mesirow Financial Holdings, Inc. All rights reserved. Visit us online at mesirowfinancial.com/investmentbanking