Dear Friends,

Hope your 2016 is off to a productive start; for both the public equity markets and the A&Dindustry there was quite a bit of volatility and headline grabbing events to begin the year. Wewitnessed the equity markets briefly dip into correction mode and just as quickly snap-backto finish the quarter basically flat. From an A&D perspective, the market continues todiscount the growth prospects of commercial aerospace focused names as industrybellwethers, Boeing and Spirit Aerosystems finished the quarter down 12% and 9%,respectively. Defense names continued their trend of consistent outperformance withsignificantly less volatility. For our clients and M&A practice, equity market gyrations are adata point but are not fully correlated to valuation trends within the private markets. Forour clients the first quarter saw a continuation of the same supportive industry dynamics thathave characterized the past several years.

In this edition of our quarterly newsletter, we address a few of the major events and trendswithin the world of aerospace M&A. First, is the continued consolidation of the ultimatecustomer, the airlines. Virgin America capitalized on a supportive M&A environment andstrong operating performance to sell itself to Alaska Airlines for a premium price. Thesuccess of Virgin is emblematic of a now accepted truth that an outsourced operating modelis the best way for airlines to drive profitable growth. The industry is increasingly followingthe lead of the low-cost carriers and looking to leverage the supply-chain for previously“sacred cow” capabilities including MRO and line maintenance. Additionally, we highlightarguably the most premium portion of our market, businesses with proprietary products.This sub-segment remains active with serial acquirers like Transdigm driving multiples tosky-high levels.

Our book of business remains strong with a few transactions in each of our key sub-sectors.

We always welcome your thoughts or questions, and would be happy to reach out to discussthese topics or any others that may interest you.

Sincerely,

Trevor Bohn Ryan Murphy

Managing Director Vice President

Quarter in Review Q1 2016Introduction

© Salem Partners, 2015

Salem Partners – Aerospace & DefenseQuarterly Review

Market SnapshotSelect Aerospace & Defense M&A Activity

Q1 Deal Volume by End-Market and Product Category A&D M&A activity

remains strong in first quarter of 2016

Notable A&D acquisitions demonstrate heightened interest in aerostructures and IT sectors

HIGHLIGHTS

Target Buyer Price ($mm) EV / EBITDA

Lockheed Martin (IS&GS) Leidos $5,000 10.0x

API Technologies J.F. Lehman & Co. $306 12.2x

AIM Aerospace Liberty Hall Capital Partners $220 9.0x

Harris (Aerostructures) Albany International $187 13.0x

Leidos acquires Lockheed Martin IS& GS Business

Leidos Holdings acquired the bulk of Lockheed Martin’sInformation Systems and Global Solutions business. Lockheedexited the highly competitive federal IT services market in order tofocus on its core competencies in defense platforms. Lockheedwill keep the mission IT and services, energy solutions, and spaceservices part of IS&GS.

Liberty Hall Capital Partners acquires AIM Aerospace

Liberty Hall Capital Partners acquired AIM aerospace for $220million. AIM is Liberty Hall’s second platform investment in thecommercial aerostructures space with the goal of capitalizing onthe demand for next-gen aircrafts by building a fully-integrated,diversified composites supplier.

Albany International acquires Harris Aerostructures Division

Aerospace composites manufacturer Albany International acquiredthe aerostructures division of Harris Corporation for $187 million.In addition to combining the two companies’ highlycomplementary capabilities, Albany hopes to capitalize on thedivision’s significant positions on high growth commercial anddefense platforms including F-35, B787, and CH-53K.

Q1 Notable Transactions

25

42

9

Defense Commercial GovernmentServices

IT, Cybersecurity & Intelligence, 15

Electronics, Optics, and Sensors, 14

Composites, 3Aerostructures,

10

MRO and Aftermarket, 3

OEMs, 2

Engineering, Consulting & Analytics, 12

Training, Testing and Simulation, 5

Land and Soldier Systems, 4

Space and Satellite, 4

Marine & Naval Systems, 3

Aerostructures Business

IS&GS Business

Market SnapshotSelect Aerospace & Defense Public Markets Activity

Source: Capital IQ, analyst estimates, and other publicly available information

Enterprise Value/EBITDA by Subsector

Q1 Relative Performance

Q1 Share Price Performance

Boeing -12.2%

Bombardier -1.5%

Crane 12.6%

Embraer -10.8%

General Dynamics -4.4%

L-3 Communications -0.8%

Lockheed Martin 2.0%

Moog -24.6%

Northrop Grumman 4.8%

Raytheon -1.5%

Rockwell Collins -0.1%

Spirit Aerosystems -9.4%

Textron -13.2%

Triumph Group -20.8%

United Technologies 4.2%

Jan-16 Feb-16 Mar-16

Aerospace and defense equity experienced a slight decline in February but rebounded by the end of the quarter

HIGHLIGHTS

As earnings reports for 2015 were released, the market reactedaccordingly.

With $500 billion in backlog and cash flows continuing togrow, 2015 was another successful year for Boeing, but themarket reacted unfavorably to its conservative forecast forrevenue and earnings per share for 2016.

Both Moog and Triumph experienced substantial declines inQ1, due to mixed financial results in 2015 driven by decreasedaircraft production.

On the other hand, defense contractors Lockheed Martin andNorthrop Grumman were boosted by the DoD Budgetannouncement for FY’17 and FY’18 which lifted sequestrationbudget caps and increased funding for several next-genprograms.

1 2

-30%

-20%

-10%

0%

10%

Jan-16 Jan-16 Jan-16 Jan-16 Jan-16 Feb-16 Feb-16 Feb-16 Feb-16 Mar-16 Mar-16 Mar-16 Mar-16

Commercial Defense

-6%

-1%

10.7x

11.5x

10.0x

10.6x

9.9x

Aerostructures CommercialAerospace

Diversified DefenseContractors

DefenseElectronics

-15%

-10%

-5%

0%

5%

S&P 500 Index S&P 500 Aerospace & Defense (Industry) Index

0.8%

-0.1%

Alaska Airlines acquired Virgin America for about $4.0 billion

Alaska’s acquisition is a continuation of the consolidation trend in the airline industry since 2002

Alaska joins Delta, Southwest, United, and American Airlines become the 5th largest airline in the US in terms of passengers

HIGHLIGHTS Commercial Aerospace LandscapeAlaska Airlines Acquires Virgin America

Alaska Airlines won an auction with jetBlue to acquire the RichardBranson-owned airline, only 18 months after Virgin America filedfor IPO.

Alaska Airlines and Virgin are very similar operationally, as both canbe described as hybrids carriers between network and LCCs;focusing on low costs while still offering a high-quality travelexperience.

‘01’02‘03’04’05’06’07’08’09’10’11’12’13’14’15‘16

1 1

3

Airlines Consolidation Since 2002

3

The last decade of airline consolidation has strengthened the remaining pool of operators; fourairlines together (Delta, Southwest, United, and American) now control more than 80% ofdomestic air traffic. This strategy has proved to be a success as net profits reached record levelsfor airlines in 2015.

Demand from these customers isn’t expected to slow anytime soon; IATA forecasts project theU.S. to remain the largest air passenger market in the world through the next decade

The two carriers follow a similar operational model in terms of fleet; keeping a homogenousfleet with the same type of airplane to minimize maintenance costs by sharing parts betweenplanes, Virgin operates 50 A320s and 10 A319s while Alaska focuses mainly on B737s.

The merger will allow Alaska Airlines to shore up their West Coast presence and fend off Delta’srecent expansion into the region, while benefitting from the Virgin brand and substantial EastCost presence.

Launchedin

2007

The Department of Defense announced its budget for FY ‘17 and FY ’18

Among the winners were the Oshkosh’s Humvee replacement, the L-ATV, Northrop’s next-gen bomber, LRS-B, and Sikorsky’s CH-53K

The Losers in the budget were Sikorsky’s UH-60 Blackhawk, General Dynamics’ Stryker, and Boeing P-8A Poseidon

HIGHLIGHTS Defense Landscape: DoD Budget Winners & LosersHistorical Defense Spending 2001 – 2021E

-

$200.0

$400.0

$600.0

$800.0

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Base OCO Other

$32.9

$18.8

$11.1

$4.1 $3.4 $0.8 Aircraft

Shipbuilding

Missiles & Ord.

Space Systems

Ground Systems

C4ISR

Major ProgramBy Defense Department

Winners Losers

25%

28%29%

18%Army

Navy

Air Force

Defensewide

L-A

TV

LRS-

BC

H-5

3K

UH

-60

Bla

ckha

wk

IAV

Str

yker

P-8A

Pos

eido

n

Funding ($mm)FY ’16 FY ’17 % Change$375 $735 96.4%

Funding ($mm)FY ’16 FY ’17 % Change$1,508 $2,198 45.7%

Funding ($mm)FY ’16 FY ’17 % Change$634 $842 32.9%

Funding ($mm)FY ’16 FY ’17 % Change$1,769 $976 44.8%

Funding ($mm)FY ’16 FY ’17 % Change$1,181 $727 -38.4%

Funding ($mm)FY ’16 FY ’17 % Change$3,373 $2,164 -35.8%

Focus: Aviation Proprietary ProductsProprietary Products in the Aerospace Industry

Select Recent Strategic M&A Activity

Proprietary aviation products cover a wide-range of functions and components on commercialand defense aerospace platforms. Due to the unique IP, high engineering, and specialty materialsinvolved in the manufacturing process, companies producing niche aviation proprietaryproducts often garner a premium valuation. Over the past few years, Companies such asTransDigm, Heico, Zodiac, Cobham, and Thales have focused on amassing a portfolio ofhighly-engineered, proprietary aerospace products through M&A. Niche aviation proprietaryProducts include:

Key Drivers of Premium Valuation

Proprietary products require specialized, cutting-edge knowledge and capabilities that are difficult to develop organically OEMs typically offer

sole-source contracts for proprietary products

Significant investment in R&D and engineering is required at the product level to address OEMs most challenging technical issues Stringent certifications

and technical requirements

Given the niche nature of proprietary products, suppliers work closely with OEMs on design, and thus replicating the functionality without infringing on the supplier’s IP is very difficult

Limited New Entries Technology-Driven Intellectual Property

• Actuation & Motion Control• Specialized Pumps & Valves• Engineered Connectors & Elastomers• Cockpit Components & Avionics

• Aircraft Seating and Seatbelts• Engineered Interior Panels & Surfaces• In-Flight Entertainment Systems• Complex Door Assemblies

2013 2013 2014 2015

2011 2015 2015 2015

2012 2014 2014 2014

2014 2015 2014

Public Market A&D ValuationsSelect Company Trading Levels as of March 31, 2016

Market data as of March 31st, 2016; financial data per most recent filing available as of March 31st, 2016$US in mm; conversion rate, if applicable, based on historical exchange rate as of most recent filing dateSource: Capital IQ, analyst estimates, and other publicly available information

Company MarketCap.

Enterprise Value Revenue EBITDA EV/

RevenueEV/

EBITDADebt/

EBITDA

B/E Aerospace Inc. $4,709 $6,589 $2,730 $587 2.41x 11.2x 3.5xBAE Systems plc 23,223 25,293 24,756 2,306 1.02x 11.0x 2.6xBoeing Co. 84,098 82,110 96,114 9,003 0.85x 9.1x 1.1xBombardier Inc. 2,287 8,887 18,172 611 0.49x 14.5x 14.7xCAE Inc. 3,126 3,782 1,745 339 2.17x 11.2x 3.0xChemring Group plc 533 755 583 77 1.29x 9.8x 3.2xCobham plc 3,517 5,260 3,056 613 1.72x 8.6x 3.6xDassault Systemes SA 20,144 18,627 3,084 840 6.04x 22.2x 1.3xEmbraer SA 4,952 6,304 5,125 541 1.23x 11.6x 7.1xEsterline Technologies Corp. 1,898 2,556 1,873 238 1.36x 10.7x 3.2xFinmeccanica SpA 7,339 11,436 14,113 1,539 0.81x 7.4x 3.8xGeneral Dynamics Corp. 40,877 41,491 31,469 4,660 1.32x 8.9x 0.7xGKN plc 7,130 8,270 10,664 1,175 0.78x 7.0x 1.3xHexcel Corp. 4,060 4,584 1,861 409 2.46x 11.2x 1.4xHoneywell International Inc. 85,308 90,266 38,581 7,711 2.34x 11.7x 1.6xITT Corporation 3,314 3,082 2,486 405 1.24x 7.6x 0.6xL-3 Communications Holdings Inc. 9,186 12,705 10,466 1,118 1.21x 11.4x 3.3xLockheed Martin Corporation 67,666 81,837 46,132 6,292 1.77x 13.0x 2.4xMeggitt PLC 4,538 6,055 2,429 510 2.49x 11.9x 3.5xMTU Aero Engines AG 4,907 6,142 4,817 563 1.27x 10.9x 2.3xNorthrop Grumman Corporation 35,809 40,016 23,526 3,543 1.70x 11.3x 1.8xOrbital ATK 5,098 6,495 4,532 528 1.43x 12.3x 2.8xRaytheon Co. 36,666 39,353 23,247 3,283 1.69x 12.0x 1.6xRheinmetall AG 3,388 3,536 5,629 465 0.63x 7.6x 1.9xRockwell Collins Inc. 12,092 14,239 5,187 1,180 2.75x 12.1x 1.8xRolls Royce Holdings plc 18,061 18,381 20,240 2,902 0.91x 6.3x 1.7xSAAB AB 3,641 3,890 3,220 260 1.21x 14.9x 2.6xSafran SA 29,151 30,871 19,658 4,072 1.57x 7.6x 0.9xSmiths Group plc 6,123 7,558 4,043 711 1.87x 10.6x 2.7xSpirit AeroSystems Holdings, Inc. 6,026 6,202 6,644 989 0.93x 6.3x 1.1xTextron Inc. 9,887 12,551 13,340 1,574 0.94x 8.0x 2.3xThales SA 18,427 18,067 15,274 1,574 1.18x 11.5x 1.1xTransDigm Group Incorporated 11,781 19,378 2,822 1,249 6.87x 15.5x 7.1xTriumph Group, Inc. 1,553 3,193 3,909 517 0.82x 6.2x 3.5xUltra Electronics Holdings plc 1,821 2,247 1,071 173 2.10x 13.0x 2.9xUnited Technologies Corp. 83,757 98,715 56,098 10,265 1.76x 9.6x 2.0xZodiac Aerospace 5,556 6,998 5,524 440 1.27x 15.9x 3.6x

Average 1.73x 10.9x 2.9x

Median 1.32x 11.2x 2.4x

This presentation has been prepared by Salem Partners LLC (“Salem Partners”) for the exclusive use of the party to whom Salem Partners delivers this presentation(together with its subsidiaries and affiliates, the “Recipient”) using publicly available information. Salem Partners has not independently verified the informationcontained herein, nor does Salem make any representation or warranty, either express or implied, as to the accuracy, completeness or reliability of the informationcontained in this presentation, or any other information (whether communicated in written or oral form) transmitted to or made available to the Recipient. Anyestimates or projections as to events that may occur in the future (including projections of revenue, expense, net income and stock performance) are based onpublicly available information as of the date of this presentation. There is no guarantee that any of these estimates or projections will be achieved. Actual results willvary from the projections and such variations may be material. Nothing contained herein is, or shall be relied upon as, a promise or representation as to the past orfuture. Salem Partners expressly disclaims any and all liability relating to or resulting from the use of this presentation.

This presentation has been prepared solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or relatedfinancial instruments. The Recipient should not construe the contents of this presentation as legal, tax, accounting or investment advice or a recommendation. TheRecipient is urged to consult its own counsel, tax and financial advisors as to legal and related matters concerning any information described herein. Thispresentation does not purport to be all-inclusive or to contain all of the information that the Recipient may require. No investment, divestment or other financialdecisions or actions should be based solely on the information in this presentation. The Recipient should not rely on any information contained herein.

This presentation has been prepared on a confidential basis solely for the use and benefit of the Recipient. The Recipient agrees that the information containedherein and in all related and ancillary documents is not to be used for any other purpose, that such information is of a confidential nature and that Recipient willtreat it in a confidential manner. Distribution of this presentation to any person other than the Recipient and those persons retained to advise the Recipient whoagree to maintain the confidentiality of this material and be bound by the limitations outlined herein, is unauthorized without the prior consent of Salem Partners.This material must not be copied, reproduced, distributed or passed to others at any time without the prior written consent of Salem Partners.

Trevor BohnManaging Director(310) 806 – 4218

tbohn@salempartners.com

Ryan MurphyVice President

(310) 806 – 4209rmurphy@salempartners.com

Justus ZilsAnalyst

(310) 806 – 4214jzils@salempartners.com

11111 Santa Monica Blvd., Suite 2250Los Angeles, CA 90025

www.salempartners.comP: (310) 806-4200 F: (310) 806-4201

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