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Aerospace & Defense Update: Mergers, Acquisitions and the Operating EnvironmentWinter 2011

Contents 1 Executive summary 3 Mergers and acquisitions update 3 7 15 18 Activity overview Defense technology Component manufacturing MRO, component repair, distribution and support services

21 The operating environment 21 25 31 36 Aerospace market outlook Defense budget outlook European update 16th Annual Government Contractor Industry Survey

39 Grant Thornton Aerospace and Defense contactsAerospace & Defense Update: Mergers, Acquisitions and the Operating Environment Grant Thornton Corporate Finance Merger and Acquisitions Aerospace and Defense Group Contact information Ian Cookson Director, Investment Banking Grant Thornton Corporate Finance 226 Causeway Street Boston, MA 02114, USA T +1.617.848.4982 E [email protected]

40 About Grant Thornton

Executive summary

M&A update: A strong year for deal activity driven by defense technology transactions

Aerospace and defense (A&D) mergers and acquisitions within North America experienced a strong year in 2010 with the number of sector transactions up nearly 20%. Industry earnings rose 10% when measured by EBITDA, and public company valuation multiples remained broadly flat. Deal activity was lead by acquisitions within defense technology where the number of defense IT and electronics transactions increased nearly 30% as defense contractors sought to shift the core of their operations by acquiring products and capabilities that match priority areas of the defense budget. Defense contractors, government IT, and software and electronics providers sought to acquire capabilities, products and services in growth areas including: cyber security, logistics command and control (LogC2), unmanned systems, and intelligence, surveillance and reconnaissance (ISR) technology. Approximately a quarter of defense technology businesses acquired over the past five years have received funding under the federal governments Small Businesses Innovation Research (SBIR) program, as large firms within defense technology, prime defense and government IT actively acquired cuttingedge technologies.

Within component manufacturing, M&A activity resumed after a weak 2009, with the number of transactions increasing 6% in 2010, on the back of rising revenues (up 8%) and somewhat recovering earnings. However, component manufacturing M&A sector activity remained below peak 2007-2008 levels. Buyers of aerospace component businesses were primarily large U.S. component manufacturers and private equity groups. In MRO and support services, M&A transaction activity was flat in 2010, but with slightly larger deals. As if to highlight the growth and coming of age of the private security contractor industry, 2010 saw a number of acquisitions of such firms and related support services by private equity groups. As we look to the future, we generally expect these M&A trends to continue in the coming year, driven by a combination of both strategic considerations and financial availability.

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 1

The operating environment: Aircraft orders increase; reprioritizing of a flat defense budget creates winners and losers; Europe mirrors U.S. activity; government contractors insulated from recession

Despite a challenging economic environment, the aerospace industry was relatively flat in 2010, with sales increasing just under 1%. While commercial revenues fell slightly, the decline was more than offset by increased military aircraft spending. Going forward, the Aerospace Industries Association (AIA) projects a sales increase of roughly 2% in 2011, to nearly $220 billion, on the back of increased demand from Asia-Pacific. After two years of back-to-back declines, aircraft industry orders rose 16% in 2010, driven by strong growth in civil aircraft and parts. Jet leasing firms played a significant role in the recovery, accounting for 27% of aircraft orders at Boeing and Airbus last year, the highest proportion since 2000. In the defense budget, despite the rhetoric regarding cutting costs, the DoDs financial condition is generally sound. There are significant challenges, including reductions of Overseas Contingency Operations funds, poor performance of some major weapons systems acquisitions and general overprogramming in the budget. At this writing, Congress has yet to pass a 2011 Defense Appropriations Act, opting for a Continuing Resolution that precludes new program starts and requires operating at 2010 funding levels. However, the Global War on Contractors will affect a large number of firms, and challenges will not be limited to those in service support. Cuts proposed to major weapons system acquisitions will hit losing primes and their suppliers, and general costcutting will have an unanticipated impact on many firms. But there are bright spots: the DoD has over $700 billion to spend; manufacturers of proven legacy systems filling the void left by the cancellation of new systems will prosper; firms providing assistance to enable the DoD to become more efficient will see continued demand; and companies in the 21st century warfare renaissance of cyber security, soft power and unmanned vehicles will see robust investments.

In Europe, defense and commercial aerospace companies experienced broadly the same conditions as those affecting the U.S. markets. Conflict in the Middle East and procurement spending realignment dominated the defense arena, while cost-cutting and consolidation by Europes airlines continued against a backdrop of gradual recovery in the civil aviation market. After two quiet years, M&A returned to the European corporate agenda, although activity remained below U.S. levels. With Europes major contractors sitting on huge cash piles, further consolidation is inevitable as portfolios are reshuffled; the U.S. remains a favored destination for acquisition activity; alliances in emerging markets feature on the strategic agendas of large and mid-sized players; and concerns about cyber security, piracy and terrorism drive interest in targets with intelligence and sensor capabilities. Grant Thorntons annual survey of government contractors highlighted how government contractors are less vulnerable than commercial companies to recession. During the past year, the amount of revenue from government prime contracts grew for 55% of survey participants, with 23% experiencing no significant change and only 22% showing reductions. The profit rates reported by survey participants followed a predictable pattern given guidelines in procurement regulations. As a percentage of revenue, 40% of participants reported profit rates of 1%5%, 35% reported profit rates of 5%10%, 15% reported profit above 10%, and 10% either had no profit or experienced a loss. Regarding the M&A environment, 48% of respondents expected an improvement in the coming year and 41% expected it to remain the same. The sale of a company continued to be the most favored exit route, with private shareholder liquidity needs and market opportunities being the most frequently cited reasons for sale. Thirty-six percent of respondents planned to raise capital during the year, primarily for acquisitions or growth and operations. Forty-seven percent of respondent companies stated they had lost employees as a result of government in-sourcing.

2 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

Mergers and acquisitions update Activity increases on the back of defense technology transactions

Ian Cookson Director, Investment Banking Grant Thornton Corporate Finance Ian Cookson leads the Aerospace & Defense Group of Grant Thornton Corporate Finance in the U.S., where he advises on transactions for clients from leading multinationals to privately held companies.

Aerospace and defense mergers and acquisitions experienced a strong year within North America in 2010, with the number of sector transactions up 20%. Deal activity was headlined by acquisitions within the defense IT and electronics subsectors, which increased 25% and 34%, respectively, as traditional defense contractors sought to shift the core of their operations by acquiring products and capabilities that match priority areas of the defense budget. A&D component manufacturing also experienced a positive year, with M&A increasing around 6%, while MRO/other services was flat with the same number of transactions as the prior year. A&D M&A activity showed somewhat less of a rebound than U.S. M&A activity as a whole, principally as it suffered less of a decline in 2009 when defense spending insulated the sector from wider turmoil in the economy.

Aerospace and defense mergers and acquisitions experienced a strong year within North America in 2010, with the number of sector transactions up 20%.

North American aerospace and defense M&A activity Defense components Defense IT Defense electronicsNumber of transactions 280 240 200 160 120 80 40 0

MRO/distribution/related services Other

2006

2007

2008

2009

2010

Transactions where target is headquartered in U.S. or Canada. Sources: Company press releases, certain financial information provided by Capital IQ, Inc.

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 3

Buyers and sellers

Buyer composition within the A&D sector remained broadly the same in 2010, with strategic acquirers accounting for threequarters of activity. Private equity groups accounted for 30% of acquisitions in the more traditional areas of component manufacturing and MRO and related activities, while strategic players were dominant in defense technology. Seller composition, on the other hand, shifted slightly with sales by corporations and founders declining, and sales by private equity increasing (as a percentage of total deal volume). The greater amount of private equity divestitures during the year can be attributed to rising valuations combined with portfolio companies reaching the end of their holding periods. Nearly 70% of sector portfolio companies were bought and sold within the three to five year investment window (median holding period of four years for divestitures). However, private equity was still a net investor in the sector during 2010, accounting for 24% of buyers and 18% of sellers. The past year also saw an increasing number of publicly traded businesses being taken over by both larger companies and financial sponsors (21 in 2010 vs. 7 in 2009), with an average transaction value of over $500 million.

The greater amount of private equity divestitures during the year can be attributed to rising valuations combined with portfolio companies reaching the end of their holding periods.

4 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

Earnings and valuation

The market value of our public company A&D index rose 11% in 2010 (compared with a 13% increase in the S&P), and reflected a 10% increase in earnings (EBITDA). Component manufacturing experienced the greatest increase (37%) and was the only subsector to climb back to the market highs witnessed in 2008. Public A&D company enterprise value multiples remained broadly the same as one year ago, with the exception of component manufacturers, which increased from 8x to 10x EBITDA. Valuations of prime defense contractors lagged at around 6x EBITDA as investors showed concern over future growth in defense spending. Defense IT providers traded slightly higher at roughly 7x EBITDA, while defense electronics manufacturers remained at around 9x EBITDA.

A&D disclosed M&A transaction values were generally higher than those of their publicly traded counterparts, which was not surprising given the vast majority of disclosed transactions were takeovers of public companies at a premium to the stock price. Defense IT and electronics players commanded the highest multiples at 18x and 14x EBITDA, respectively, reflecting either premiums paid in large public company takeovers or the prices demanded for high-growth cutting-edge technologies.

Public company aerospace/defense index valuation multiples by sector Defense components MRO/component repair* Prime defenseMedian EV/EBITDA multiple 14.0x 13.0x 12.0x 11.0x 10.0x 9.0x 8.0x 7.0x 6.0x 5.0x 4.0x2005 2006 2007 2008 2009 2010 2011

Public company aerospace/defense index earnings by sector Defense components MRO/component repair Prime defenseCumulative LTM earnings growth index (EBITDA) 300%

Defense IT Defense electronics

Defense IT Defense electronics

250%

200%

150%

100%

2005

2006

2007

2008

2009

2010

2011

*MRO valuation skewed by weighting to Asia-Pacific market Sources: Company press releases; certain financial information provided by Capital IQ, Inc.

Sources: Company press releases; certain financial information provided by Capital IQ, Inc.

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 5

M&A outlook

Looking to the future, we expect these M&A trends to continue, driven by both strategic considerations and financial availability: Primedefensecontractorsareproactivelyseekingout acquisition targets in growth areas of the defense budget and cutting-edge defense technology. They have near record cash piles to deploy and are ideally seeking acquisitions large enough to positively impact their groups overall financial results. Largecomponentmanufacturersmaintaintheir consolidation ambitions of building primary suppliers of integrated systems to OEM airframe and engine manufacturers. Commercial business is improving with requests for commercial parts to be released and orders picking up. Larger public component companies can be expected to capitalize on their favorable capital market valuations.

Privateequitygroupsareactivelyseekingtodeploycapital. The backlog of private equity capital seeking investment is at an all-time high of over $400 billion, particularly among larger funds. Debt capital, which has traditionally accounted for two-thirds of private equity acquisition capital, is also becoming increasingly available. Loan terms have eased and banks are again demonstrating competitive behavior for attractive credits. On middle-market transactions we are seeing a variety of flexible private equity transaction structures.

Deal activity was headlined by acquisitions within defense IT and electronics, as traditional defense contractors sought to shift the core of their operations by acquiring products and capabilities that match priority areas of the defense budget.

6 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

Defense technology: A driver of M&A activity

Defense technology experienced a significant increase in North American M&A activity in 2010, as transaction volume within the defense electronics and defense IT subsectors rose 30% during the year. Strategic players drove acquisition activity as they sought to acquire capabilities, products and services that matched growth areas of the pressured federal defense budget, including cyber security, logistics command and control (LogC2), unmanned systems, and intelligence, surveillance and reconnaissance (ISR) technology. Sector earnings increased during the year, with our defense IT public company index rising 6%, and earnings of our defense electronics public company index increasing 11%.

North American defense IT M&A activity Financial Strategic# of transactions 70 60 50 40 30 20 10 0 2006 2007 2008 2009 2010

Transactions where target is headquartered in U.S. or Canada. Sources: Company press releases, certain financial information provided by Capital IQ, Inc.

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 7

Growth in defense IT transactions: As strategic buyers make ISR, LogC2 and cyber security acquisitions

Within defense IT, M&A transaction activity increased 22%. Subsectors C4ISR/LogC2, cyber security and SETA/systems integration each accounted for around 30% of activity in 2010, while simulation, training or other services comprised the remainder. Not surprisingly, strategic buyers accounted for the majority of defense software and services purchases at around 80% of acquisitions, with prime defense contractors, government IT providers, and software and electronics players all being active acquirers. Prime contractors Boeing, Raytheon and BAE were involved in transactions within ISR/LogC2 and cyber security (each making two or more subsector acquisitions in 2010), as they sought to shift their core operations to mirror priority areas of the defense budget. Illustrative sector acquisitions by prime contractors included: BoeingsacquisitionsofC4ISRsystemsandsolutions provider Argon ST ($775 million), decision supporter CDM Technologies and IP network traffic manager Narus; BAEspurchaseofL-1IdentitySolutionssecurityand intelligence assets ($303 million) and defense consulting firm Durango Group; and Raytheonsacquisitionofcybersecurityexperts Technology Associates ($42 million) and Trusted Computer Solutions.

Meanwhile, government IT providers, not wanting to cede ground, also pursued acquisitions that added capabilities and expertise. Serial acquirers included: SAICsacquisitionofinfrastructureprotectionprovider CloudShield, the online simulation assets of Forterra Systems, and multisensor and information system solutions designer SET Corp.; CACIsacquisitionofC4ISRplayersAppliedSystems Research and TechniGraphics; and ManTechspurchaseoftheNorthAmericansecurityand intelligence assets of QinetiQ (Analex) and engineering and systems integration services provider MTCSC. Defense software and electronics providers, including KEYW, Kratos, Cubic and Global Defense Technology & Systems, were also active as they continued to build out growth areas of the defense budget via acquisition. Increased DoD attention on protecting against cyber threats has also encouraged investment by nondefense buyers, as highlighted by Hewlett Packards acquisition of cyber security player ArcSight for $1.5 billion.

8 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

Despite the increased acquisitions by large public acquirers, 25% of sector sales were strategic divestitures. Organizational conflict of interest (OCI) legislation passed in 2009 was the impetus behind a number of sales, as corporations audited existing contracts and assessed potential conflicts within large acquisition programs. OCI-related divestitures included sales of: LockheedMartinsEnterpriseIntegrationGrouptoprivate equity firm Veritas Capital; QinetiQsNorthAmericasSecurityandIntelligence Solutions business to ManTech; and ITT Corp.s defense weapon system analysis contractor (CAS Inc.) to Court Square Capital portfolio business Wyle.

As proof of the need to acquire leading players within defense IT, sector transactions changed hands at disclosed median enterprise values (EV) of around 18x EBITDA and 1.5x revenue. Explanation of higher sector valuation multiples is twofold, reflecting premiums paid for: largepubliccompaniesthatallowbuyerstorapidlyexpand within the sector; or cutting-edgesoftwareandtechnologysupportinghighgrowth areas of defense spending including cyber warfare/ security, critical intelligence and counterterrorism. Size also played a significant role in valuation. Top quartile businesses (by revenue multiple) most of which were purchased for more than $150 million were acquired at a median of 2.5x revenue, while bottom quartile companies which were generally smaller transactions acquired for less than $70 million changed hands at around 1.1x revenue.

Strategic players drove acquisition activity, purchasing capabilities, products and services that matched growth areas of the federal defense budget, including cyber security, LogC2, unmanned systems and ISR technology.

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 9

Illustrative defense IT transactions DateDec-10 Dec-10 Dec-10 Dec-10 Dec-10 Nov-10 Nov-10 Nov-10 Nov-10 Nov-10 Nov-10 Nov-10 Nov-10 Oct-10 Oct-10 Oct-10 Oct-10 Oct-10 Oct-10 Oct-10 Oct-10 Sep-10 Sep-10 Sep-10 Sep-10 Sep-10 Sep-10 Sep-10 Sep-10 Aug-10 Aug-10 Aug-10 Aug-10 Aug-10 Aug-10 Aug-10 Aug-10 Jul-10 Jul-10 Jul-10 Jul-10 Jul-10 Jul-10 Jun-10 Jun-10 Jun-10 Jun-10 Jun-10 May-10 May-10 May-10 May-10 May-10 Apr-10 Apr-10 Mar-10 Feb-10 Feb-10 Feb-10 Jan-10 Jan-10 Jan-10 Jan-10 Jan-10 Jan-10 Jan-10

TargetInnovative Technology Systems Centauri Solutions SPADAC EchoStorm Worldwide Everest Technology Solutions Oasis Systems MTCSC CDM Technologies Abraxas Peace Technology Signature Government Solutions Trusted Computer Solutions Sycamore. US Applied Systems Research NetStar-1 Holdings IT Services TechniGraphics Lockheed Martins Enterprise Integration Group Platinum Solutions Johnston Mclamb Case Solutions Vulnerability Research Labs Technology Associates Analexs Security and Intelligence Solutions Novii Design INPUT, Inc. SRA Internationals Airport Operations Solutions L1 Identitys SpecTal, Adv. Concepts, & McClendon Arxan Defense Systems Zytel Corporation ArcSight Black Ram Engineering Services Akimeka Mission Solutions Engineering CmdLabs DEI Services Asynchrony Solutions CAS, Inc. Airborne Technologies McNeil Technologies Research and Engineering Development Vision Systems & Technology Alion Sciences Expert Program Management Narus Intergraph Corporation Argon ST SGIS Safe Harbor Systems Secure Data TechTeam Government Solutions SignaCert Impeva Labs Matrikon Stanley Veratect Durango Group Seismic LLC Intellitactics Integrated Systems Improvement Services OSI Geospatials Land-Based, Situational Awareness Forterra Systems On-Line Virtual Environments VUANCEs Government Solutions Division Science, Engineering, and Technology Associates National Interest Security Company CloudShield Technologies ICOR Partners Enterprise Services Group SENSA Solutions

DescriptionSoftware engineering & network services to the intelligence community. Program management, IT systems, & systems engineering. Provides spatial intelligence and predictive analytics solutions. Video and data management software technology for military/government. Provides geospatial intelligence, mission support, and cyber security. IT advisory and net-centric, battle management, and C2ISR services. Engineering and systems integration services for national defense. Decision-support software and technology for military. Risk mitigation technology solutions for public and private sector clients. IT, systems integration, and support services to governments. IT security, intelligence analysis, & program management. Cyber security solutions for government and commercial organizations. Software engineering and communications solutions for the federal govt. Geospatial intelligence and measurement/signatures intelligence. IT services for military and other government customers. Digital mapping and computer design services to GIS customers. System engineering services supporting government customers. Systems integration and collaborative solutions for national security. Technology consulting services for government. Cyber threat intelligence services. Cyber security and intelligence related services. Integrated security solutions to government and intelligence communities. Data fusion systems, cyber solutions & high-end enterprise architectures. Market intelligence, analysis, consulting, and events and training services. Technology and strategic consulting services to government organizations. Technical and professional services to intelligence and military. Anti-tamper protection for software protecting against reverse engineering. Cyber security supporting critical intelligence & counter-terrorism. Compliance and security management solutions protecting govt agencies. Engineering, system design, test, and business capture services. IT solutions to government customers. Systems/software engineering and integration for defense systems. Forensics investigation and incident response services. Deploys and supports operational and maintenance training systems. IT consulting focused on cyber security and weapons of mass destruction. DoD weapon system analysis contractor. Aeronautical engineering services for intelligence and defense. Intelligence support, language, mission support, IT, and logistical services. Engineering support services for military and navy. Software/systems engineering & technology integration to the DoD. Expert program management and technical services to the Navy. Security, intercept, and traffic management software. Engineering and geospatial software solutions. C5ISR systems and services. Intelligence analysis, engineering and systems integration to govt agencies. Security and networking infrastructure for government and defense clients. IT and program management to address critical issues. IT services in the areas of advisory/consulting & systems integration. IT compliance solutions for organizations and government agencies. Intelligent tracking solutions for military logistics. Intelligence solutions enhancing operating efficiency & cyber-security. IT services and solutions to the US defense & intelligence agencies. Warning and region-specific risk surveillance services. Consulting services in areas of acquisition, command/control, & cyber. Cybersecurity, software engineering, & integration solutions to DoD. Enterprise security management software solutions. Intelligence support services. Software for capturing/viewing/disseminating strategic & tactical info. Software platform generating 3D internet solutions. Security solutions for locating, credentialing, and managing personnel. Video and radar systems that detect human behaviors. IT & information management solutions in support of national security. IP service control and infrastructure protection solutions. Government/DoD management consulting service. Cyber security engineering services to the intelligence community. Organizational consulting services for government and defense.

Acquirer [ultimate parent]A-T Solutions Computer Sciences Corporation GeoEye ITT Corporation KEYW GF Fund ManTech Boeing Cubic ITSolutions [Snow Phipps] Global Defense Technology & Systems Raytheon KEYW CACI International ITSolutions [Snow Phipps] CACI International Veritas Capital SRA International CRGT, Inc. [Veritas Capital] Computer Sciences Corporation Raytheon ManTech Six3 Systems [GTCR Golder Rauner] Deltek ITT Corporation BAE Microsemi Corp. Global Defense Technology & Systems Hewlett-Packard Company SM&A [Odyssey Investment Partners] VSE Corp. Arctic Slope Regional The Newberry Group Kratos Defense & Security Schafer Corporation [Metalmark Capital] Wyle [Court Square Capital Partners] L-3 Communications AECOM DA Acquisition SAS Institute MCR, LLC [Harrison Street Real Estate Capital] Boeing Hexagon Boeing Salient Federal Solutions [Frontenac] Cubic Emtec Federal Jacobs Engineering Harris Corp. Cubic Honeywell CGI Group, Inc. GeoEye BAE Applied Signal Technology TrustWave Holdings KCB Management Harris Corp. SAIC WidePoint Corp. SAIC IBM SAIC Acquisition Solutions [Excellere Partners] FGM, Inc. Korn/Ferry

Sources: Company press releases; certain financial information provided by Capital IQ, Inc.

10 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

Deal volume within A&D electronics rose by more than 30% in 2010.

Growth in defense electronics transactions: Fueled by communication equipment and homeland security systems

Deal volume within A&D electronics rose over 34% in 2010, highlighted by the increase in larger sector acquisitions. Companies providing communication- and radar-related products accounted for 30% of activity, as acquirers strengthened product offerings within secure satellite communication equipment and microwave- and radiofrequency components and systems. Electronics surrounding homeland security accounted for 40% of activity, as buyers secured technologies within optics/imaging, intrusion detection, biometrics/identification and security inspection. Traditional electrical components and systems comprised the remaining third and included power transmission, electrical testing, interconnect devices and enclosures/packaging. Acquisitions were led by players within A&D (e.g., L-3 and Safran), specialty components/systems (e.g., Aeroflex, Microsemi and Spectrum), electronic instrumentation (e.g., Ametek and Danaher) and private equity (e.g., Veritas Capital).

Transactions within defense electronics were acquired at a median disclosed valuation of 13.5x EBITDA and 1.4x revenue. The majority of transactions disclosing valuation data were of publicly traded businesses and reflect premiums paid in public takeovers, including: RaytheonspurchaseofC4ISRsolutionsproviderApplied Signal Technology (1.9x revenue, 14x EBITDA), Danahersacquisitionofelectronicinstrument manufacturer Keithley Instruments (2.5x revenue, 13x EBITDA), SafranspurchaseofidentificationelectronicsproviderL-1 Identity Solutions (2.5x revenue, 24x EBITDA), and VeritasCapitalstakeoverofmicrowave-andradiofrequency product manufacturer CPI International (1.5x Revenue, 9x EBITDA). Again, size played a significant role in valuation. Top quartile businesses (by revenue multiple), all of which were purchased for more than $150 million, were acquired at a median 2.1x revenues. Meanwhile, bottom quartile companies, which were all smaller transactions acquired for less than $40 million, changed hands at around 0.9x revenue. Sales of portfolio companies by financial sponsors accounted for a quarter of sellers in 2010 (vs. 7% in 2009), with notable divestitures including: ABRYPartnerssaleofsatellitecommunicationprovider CapRock Communications to Harris Corp., AresCapitalssaleofelectroniccomponentmanufacturer TSI Group to BE Aerospace, and MilestonePartnerssaleofelectroniccontactandconnector manufacturer Interconnect Devices to Smiths Group.

North American defense electronics M&A activity Financial Strategic# of transactions 70 60 50 40 30 20 10 0 2006 2007 2008 2009 2010

Transactions where target is headquartered in U.S. or Canada. Sources: Company press releases, certain financial information provided by Capital IQ, Inc.

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 11

Illustrative defense electronics transactions DateDec-10 Dec-10 Dec-10 Dec-10 Dec-10 Dec-10 Dec-10 Dec-10 Dec-10 Dec-10 Nov-10 Nov-10 Nov-10 Nov-10 Nov-10 Oct-10 Oct-10 Oct-10 Oct-10 Oct-10 Sep-10 Sep-10 Sep-10 Sep-10 Sep-10 Sep-10 Sep-10 Sep-10 Aug-10 Aug-10 Aug-10 Aug-10 Aug-10 Aug-10 Jul-10 Jul-10 Jun-10 Jun-10 Jun-10 Jun-10 Jun-10 Jun-10 Jun-10 May-10 May-10 May-10 May-10 Apr-10 Apr-10 Apr-10 Mar-10 Mar-10 Mar-10 Mar-10 Mar-10 Mar-10 Mar-10 Mar-10 Feb-10 Feb-10 Feb-10 Jan-10 Jan-10 Jan-10 Jan-10 Jan-10 Jan-10

TargetEricsson Federal Eclipse Electronic Systems CenGen DALSA Corp. CHC Helicopters Flight Training Operations DSPCon Mechtronic Solutions Applied Signal Technology Trident Space & Defense rVision, Inc. Adaptive Flight OI Corp. Airco Industries Schlumbergers Global Connectivity Services CPI International Summit Instruments Wavestream Corporation Henry Bros. Electronics TSI Group Actel Corporation Keithley Instruments Copperlogic L-1 Identity Solutions RAE Systems 3Di Technologies Vision Technologies Pressure Systems OASYS Technology PerkinElmers Illumination and Detection Solutions Cogent Inc. Harvard Custom Manufacturing American Reliance ICx Technologies Reveal Imaging Technologies, Inc. X-COM Systems Crane Wireless Monitoring Solutions Radiation Assured Devices Vortex Systems Sage Laboratories TransTech Systems Advanced Control Components Optimum Optical Systems Technical Services for Electronics Hybricon Corporation CapRock Services AP Labs EF Johnson Technologies Sophia Wireless Optelecom-NKFs Electro Optics Coil Business Imago Scientific Instruments Retica Systems White Electronic Designs Bowmar LLC RO Associates Interconnect Devices RaySat Antenna Systems CVG, Inc. Optical Alchemy Insight Technology dB Control Fraser-Volpe Photonics Innovations Kuchera Industries SystemWare, Inc. Ahura Scientific PROCONs SafeLife Systems Davis Inotek Instruments

Description

Acquirer [ultimate parent]

Network solutions for homeland security & network centric warfare. Tailwind Capital Receiver hardware to the airborne ISR market. Esterline Technologies Secure, mobile and fixed RF network solutions. DRS Technologies [Finmeccanica] Imaging products and services for aerospace & defense. Teledyne Technologies Flight training simulation systems. CAE Inc. Products/services supporting mission-critical signal processing applications. CDI Corp. Sensor systems for deployment onboard both manned and drone aircraft. National Technical Systems ISR solutions for the defense, intelligence, and homeland security markets. Raytheon Space & Airborne Systems Microelectronic products and services for aerospace and military. TeleCommunication Systems High-end security systems for military bases. domo Limited [Cobham] Avionics system solutions for small and medium-sized UAVs. Sikorsky Innovations Products and systems used to detect & analyze chemical compounds. ITT Corporation Night vision technology for airborne military operations. AbelConn, LLC [RFE Investment Partners] Global communication services for remote locations. CapRock Services Corp. [Harris Corp] Provides microwave, radio frequency, power, and control products. Veritas Capital Electronic measurement solutions and inertial sensors. Spectrum Control Solid-state power amplifiers for communications and sensing systems. Gilat Satellite Networks Security, communications, and control systems. Kratos Defense & Security Electronic, interconnect, and mechanical assemblies for military & defense. BE Aerospace Semiconductor solutions for aerospace & avionics. Microsemi Corp. Electronic instruments and systems. Danaher Corp. Industrial control products and other electrical components. Eaton Corporation Secure credentialing solutions and fingerprint-based background checks. Safran SA Multi-sensor chemical and radiation detection monitors for civil defense. Battery Ventures Satellite telecommunication solutions to government/military. L-3 Communications Camera systems for security checkpoints at airports, and military vehicles. Video Display Corp. Precision level and pressure instrumentation for aerospace. Measurement Specialties Electro-optical systems/components for reconnaissance and surveillance. BAE Systems Specialty lighting and sensor components, subsystems and solutions. Veritas Capital Automated fingerprint ID systems and biometrics solutions. 3M Co. Contract electronics manufacturing services for defense customers. Labinal Salisbury, Inc. [Safran] Electronic loads and dc power supply solutions for military. Ametek Inc. Advanced sensor technologies for homeland security & force protection. FLIR Systems, Inc. Security inspection systems that inspect airline passenger baggage. SAIC, Inc. RF test equipment, deployable signal sources, & military communications. Bird Technologies Group Wireless sensor products for industrial security & military markets. Textron Radiation hardened products for avionics and military electronics. Aeroflex Holding Intrusion detection systems for military and border patrol applications. Monument Capital Group Radio frequency and microwave components and subsystems. Spectrum Microwave Secure identification badge systems and components. Visualant Incorporated Electronic devices, RF/microwave components, & equipment. Aeroflex Holding Optics, optomechincal assemblies, and electro-optics. Teledyne Scientific & Imaging Custom cable assembly and precision interconnection systems. Ametek Inc. Electronics packaging for military & homeland security applications. Curtiss-Wright Satellite communications for remote sites. Harris Corp. Rugged systems packaging, enclosures, and integrated real-time systems. Kontron America Wireless radios and wireless communications infrastructure. Francisco Partners Management Component and system configurations for use in satellite and radar. Integral Systems Manufactures fiber optic gyroscope coils for defense. Nufern, Inc. Metrology and analysis equipment. Ametek Inc. Iris-based identity management and face capture systems. L-1 Identity Solutions Defense electronic components and systems for defense and aerospace. Microsemi Corp. Mechanical, electromechanical and electronic systems for aerospace. Private investor Power conversion modules/solutions for military and harsh environments. Astrodyne Corporation [Audax Group] Spring contact probes, test sockets, and custom interconnect solutions. Smiths Group Satellite antenna systems. Spacenet, Inc. Satellite-based communication solutions. Integral Systems Ultra-light sensor packages for manned and unmanned tactical systems. Teledyne Scientific & Imaging Night vision and electro-optical systems. L-3 Communications Wave tube amplifiers, microwave power modules, & radar transmitters. HEICO Gyro-stabilized electro-optic systems. Redstone Capital Corporation Middle-infrared laser materials for eye safe range-finding applications. IPG Photonics Electronic manufacturing services for defense customers. API Technologies Systems control, signal acquisition and security monitoring solutions. CACI International Optical systems for the real-time identification of chemicals. Thermo Fisher Scientific Cellular and satellite based communication devices. Cobham plc Instrument calibration and repair for the aerospace industry. Sypris Test & Measurement, Inc.

Sources: Company press releases; certain financial information provided by Capital IQ, Inc.

12 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

SBIR-funded businesses: Acquired by large corporations

Large firms within defense technology, prime defense and government IT have continued to actively acquire businesses that have received funds under the federal governments Small Businesses Innovation Research (SBIR) program, as they seek to stay on the cutting edge of defense technology. Approximately 15% of A&D businesses acquired in the past five years have received government funding under SBIR, and roughly a quarter of acquired defense technology businesses have received awards. In total, over 160 SBIR businesses have been purchased since 2006, with L-3 Communications, SAIC, Raytheon, Boeing and Lockheed Martin being particularly acquisitive. QinetiQ, API Technologies, Rockwell Collins and Textron were also active, each purchasing three SBIR businesses over that time period.

Acquired SBIR companies can be broadly categorized: 42%areinvolvedinsoftwareforsystemsintegrationor engineering, simulation or modeling, cyber security, or command and control; 36%areinvolvedinelectronicsandelectricalcomponents, particularly in communication, surveillance and optical equipment, as well as UAV support systems, and microelectronics or semiconductors; and 22%areactiveincomponentsandmaterialsforaerospace, naval and UAV applications.

A quarter of defense technology businesses acquired over the past five years have received federal funding under SBIR programs.

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 13

The DoD has spent over $10 billion to help fund research and development of military technologies by small U.S. companies through SBIR and STTR (Small Business Technology Transfer) programs since 2000, with annual funding rising to $1.4 billion in 2009 (more than a twofold fold increase compared with 2000 levels). In 2009, California and Massachusetts combined received over a third of the SBIR budget, while the remainder of the top 10 states (Virginia, Maryland, Colorado, New York, Texas, Ohio, Pennsylvania and Alabama) combined to receive 40% of the funding. Phase I, which supports six months of funding to test the technical merit or feasibility of an idea or technology, received on average $90,000 per award. Phase II, which facilitates the expansion of Phase I to develop potential plans for commercialization, received on average over $700,000 per award. For FY 2011, the Small Business Administration (SBA) has proposed amendments to raise the Phase I award threshold to $100,000-$150,000 and the Phase II award threshold to $750,000-$1 million.

Major acquirers Prime defense Raytheon Boeing Lockheed Martin BAE Systems Defense technology L-3 Communications API Technologies Rockwell Collins Ultra Electronics CAE ITT Corp. Alion Science and Technology Government IT SAIC QinetiQ CACI MacDonald Dettwiler

6 6 4 2

6 3 2 2

8 3 3 2 2 2 2

Components Textron Teledyne Technologies

3 2

Sources: DOD SBIR filing and company press releases; certain information taken from Capital IQ Inc.

SBIR acquisitions by target type (2006 - 2010) Electronics and electrical components 36% Components and materials 22% Defense IT 42%

SBIR acquisitions by buyer type (2006 - 2010) Public companies 74% Private equity 14% Private companies 12%

Sources: DOD SBIR filing and company press releases; certain financial information provided by Capital IQ, Inc.

Sources: DOD SBIR filing and company press releases; certain financial information provided by Capital IQ, Inc.

14 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

Component manufacturing: A return of larger transactions

After a weak 2009, component manufacturing M&A activity within North America resumed, with the number of transactions increasing nearly 6% in 2010 on the back of rising revenues (up 8%) and somewhat recovering sector earnings (up 3%). Sector M&A, however, was still below peak 2007-2008 levels. Within the A&D component manufacturing sector, sales of aircraft component businesses (e.g., structural, interior and engine components) accounted for nearly 60% of M&A activity, while ground support equipment (e.g., military vehicle equipment, armor, soldier products and shelter systems) comprised roughly a third. Acquisitions of composite businesses were less abundant in 2010, as the subsector failed to see expected growth for a second straight year due to continued delivery delays of the Airbus A400M and A350 and Boeing 787. This created a gap in valuation expectations between potential buyers looking at levels of current earnings and sellers pointing to record order books. Sellers, therefore, generally chose to defer transactions until revenues driven by production of composite-rich planes materialize as expected. Buyers of aerospace component businesses were primarily large U.S. component manufacturers and private equity firms. Prime defense contractors have generally avoided backward integration, although Boeing has made a number of acquisitions of component suppliers relating to the delayed 787 Dreamliner, including Summit Aeronautics in 2010. Boeing previously acquired Vought Aircraft, Global Aeronautica and BHA Aero Composites Parts (China).

North American aerospace and defense component manufacturing M&A activity Financial Strategic# of transactions 100 90 80 70 60 50 40 30 20 10 0 2006 2007 2008 2009 2010

Transactions where target is headquartered in U.S. or Canada. Sources: Company press releases, certain financial information provided by Capital IQ, Inc.

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 15

Component transaction size trends upward

As the economy recovers, the appetite for larger sector acquisitions within component manufacturing has improved, with the average disclosed deal size increasing to over $250 million 2010 (vs. $127 million in 2009). Illustrative larger acquisitions within the sector included: TransDigms(themostactivebuyer)purchaseof McKechnie Aerospace ($1.3 billion) to expand its product portfolio, TriumphsacquisitionofVoughtAircraftfromtheCarlyle Group ($1.6 billion) to advance aerostructure systems, and AlleghenyTechnologiespurchaseofcomponent manufacturer Ladish Co. ($853 million) to move the company upstream. Consolidation within component manufacturing continues, and founders still account for more than half of sellers. Sales by private equity nearly doubled (to around a quarter of sellers) as sponsors sought to harvest their investments in a time of improving valuations. Sales by large corporations declined significantly in 2010 and comprised less than 20% of activity (compared to nearly half one year ago). This is likely due in part to the fact that median cash holdings of large A&D component manufacturers have doubled over the past five years, so with the outlook improving, these businesses are now seeking to deploy rather than accumulate excess cash.

Sellers of North American aerospace/defense component businesses by ownership type 2010 Founders 55% Private equity 22% Corporations 18% Public 5%

Transactions where target is headquartered in U.S. or Canada. Sources: Company press releases, certain financial information provided by Capital IQ, Inc.

As the economy recovers, the appetite for larger component manufacturing acquisitions has improved.

16 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

Illustrative aerospace and defense component manufacturer transactions DateDec-10 Dec-10 Dec-10 Dec-10 Dec-10 Nov-10 Nov-10 Nov-10 Nov-10 Nov-10 Oct-10 Oct-10 Oct-10 Sep-10 Sep-10 Sep-10 Sep-10 Sep-10 Sep-10 Aug-10 Aug-10 Aug-10 Aug-10 Aug-10 Jul-10 Jul-10 Jul-10 Jul-10 Jul-10 Jul-10 Jul-10 Jun-10 Jun-10 Jun-10 Jun-10 May-10 May-10 May-10 Apr-10 Apr-10 Apr-10 Apr-10 Mar-10 Mar-10 Mar-10 Mar-10 Mar-10 Mar-10 Feb-10 Feb-10 Feb-10 Jan-10 Jan-10 Jan-10 Jan-10 Jan-10

TargetArden Engineering HK Fittings Teledyne Continental Motors T&W Forge SCT Acquisition Whitcraft Telair Internationals Actuation Business Summit Aeronautics Group Ladish Co. Critical Solutions International Hawk Corp. ALEXCO Jameson LLC Hartzell Engine Technologies First Choice Armor & Equipment McKechnie Aerospace DE Hydrodyne Express Pattern Pacific Safety, headborne systems and liners Semco Instruments Crissair, Inc. DeCranes cabin management assets TMW Corporation Superior Air Parts M-DOT Aerospace and Astrotronics Maine Machine Products Integrated Armor Systems Enginetics Aerospace STADCO LifePort HaydonKerk Motion Solutions Allied Defense Group Cantwell, Cullen & Company Millenworks Enpro, Engineered Products NEA Electronics Accura Technics EBV Explosives Environmental Company W.H. Smith Hardware Company Routes AstroEngineering Gichner Systems Group Blackhawk Industries Products Vought Aircraft Holdings Filtration Development Co. Cyber Aerospace MTI PolyFab General Dynamics, spacecraft development business Fastener Innovation Technology Eagle Tool & Machine Co. Nordic Air RedTide Defense Group Airborne Systems United Aircraft Development Partners Chenega Integrated Systems Special Devices defense & aerospace group Protective Products of America

Description

Acquirer [ultimate parent]

Machining, assembly, and integration of structural aerospace components. PRV Aerospace [Platte River] Fluid fittings, nuts, and sleeves for aerospace. Designed Metal Connections Engine components and systems for manned and unmanned aircraft. AVIC International Precision forgings to the aerospace and power generation industry. SIFCO Industries Provides emergency shelters and disaster relief housings. Gichner Systems Group [Kratos] Formed, machined, and fabricated sheet metal aerospace components. Linsalata Capital Partners Engineered electro-mechanical products and components for aircraft. TransDigm Group Components for Boeing aircraft. Boeing Forged and cast metal components for jet engines. Allegheny Technologies Provides military countermine and humanitarian demining solutions. Sentinel Capital Parts for brakes, clutches, and transmissions. Carlisle Companies Hard alloy aluminum extrusions for aerospace applications. Kaiser Aluminum Military lighting for camps. Torch Hill Investment Partners Parts for piston engine aircrafts, helicopters, and light jets. Tailwind Technologies Body armor protection products for law enforcement and the military. Diamondback Tactical [Torch Hill] Structural components, systems, and assemblies for aircraft. TransDigm Group Components for fluid control applications. EnPro Industries Prototyping and manufacturing services to military and aerospace. 3D Systems Corp. Manufactures liner helmets. Revision Eyewear Precision sensors, specialty electrical molded cables, and wiring harnesses. TransDigm Group Hydraulic, fuel, and pneumatic system components. ESCO Technologies Inc. In-flight entertainment, communications, and cabin management systems. Goodrich Corp. Landing gears, hydraulics actuators, and mechanicals assemblies. Circor Aerospace Bearings, camshafts, crankcases and other aircraft components. Superior Aviation Manufactures aerospace assemblies and distributes aerospace machinery. Azmark Aero Systems Custom precision components and assemblies. GenNx360 Capital Partners Ballistic, blast, and improvised explosive device resistant armor. Protocall Technologies Engine parts and equipment for the aircraft markets. Morgenthaler Precision, close tolerance parts, assemblies, and tooling. Corinthian Capital Group Designs and manufactures aviation interior components. Sikorsky Support Services [UTC] Precision linear motion products for military and aerospace. Ametek Inc. Ammunition and related products. Chemring Group Electrical interconnect wiring systems. Zodiac Aerospace Vehicles and mobility solutions for the U.S. armed forces. Textron Passenger seating components and peripherals for commercial aircraft. Reinhold Industries [Jordan Company] Non-explosive separation mechanisms and electrical interconnect devices. Ensign-Bickford Precision grinding machines and automated machining systems. Edac Technologies Demilitarization services for grenades and mines, and other munitions. General Dynamics Fluid handling equipment, load securing, and material handling hardware. JWI Capital Scientific instruments and bus components for space applications. COM DEV International Tactical and logistic shelters for military and commercial applications. Kratos Defense & Security Tactical gear for military and law enforcement. Alliant Techsystems Aero structure products for commercial, military, and business aircrafts. Triumph Group Turbine engine filtration systems for helicopters. Aerometals Designs and manufactures unmanned aerial systems. Alas Defense Systems Thermal and acoustic insulation for the aerospace industry. Aearo Technologies [3M] Engages in development of space craft. Orbital Sciences Manufactures aerospace threaded fasteners. Emhart Teknologies Landing gear and steering system components. Heroux-Devtek Industrial heating and cooling equipment for the military. Hunter Defense Technologies [Metalmark] UAVs providing aerial surveillance solutions for the defense industry. Alas Defense Systems, Inc. Parachutes, and emergency, rescue, and survival equipment to the military. Hunter Defense Technologies [Metalmark] Manufactures light observation aircraft. Utilicraft Aerospace Industries Electrical control panels for four-wheeled armored security vehicles. Chenega Corporation Sealed propellant charges, bridgewire, lead wires, and filters. Ensign-Bickford Ballistic protection for military personnel and vehicles. Sun Capital Partners

Sources: Company press releases; certain financial information provided by Capital IQ, Inc.

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 17

MRO, component repair, distribution and support services: Higher value transactions

North American M&A transaction activity within MRO and other related services was flat in 2010; however, deal sizes were slightly larger than in the previous few years. Earnings within our MRO index rose by nearly 5% (EBITDA), as the larger MRO players gained market share. However, despite increasing passenger air traffic (up 4.5% in 2010 vs. down 4.1% in 2009), MRO spending overall fell 7.5% in 2010 to $43 billion, with the average annual maintenance cost per plane declining to $2.1 million (vs. $2.4 million in 2008). The drop in MRO spending can be primarily attributed to the implementation of newer, less maintenance-intensive aircraft combined with declines in utilization. However, industry commentators expect maintenance activity to increase over the next decade at an annual rate of 3.2%, reaching $58 billion by 2019.

North American MRO and support services M&A activity Financial Strategic# of transactions 40

30

As the airline industry recovers, we can expect to see this continuing dynamic between building in-house MRO capabilities versus outsourcing fleet maintenance services. Larger established carriers such as Delta, Lufthansa and British Airways have reinvested in maintenance personnel and infrastructure after cutting heavily over the last few years. Some airlines have hedged their bets by hiring temporary employees, allowing for easy downsizing when work slows. However, low-cost and startup carriers such as JetBlue, AirTran, Southwest and Spirit continue to depend heavily on third-party MROs for heavy maintenance, component repair and engine overhaul, as their smaller fleet sizes do not justify bringing work in-house. Sector activity continued to comprise a large portion of smaller transactions; however, the average deal size trended upward in 2010, with nearly a third of acquired businesses employing more than 200 people (vs. 15% in 2009 and 9% in 2008). MROs comprised 60% of sector M&A activity, of which half were spinoffs of subsidiaries or divisions of larger businesses, and the other half were sales by private owners. Notable divestitures include Volvos sale of VAS Aero Services to HIG Capital and ExelTech Aerospaces sale of its Canadian division to Sun Capitals portfolio company, Pemco World Air Services. Component repair and distribution accounted for just over 20% of activity.

20

10

0

2006

2007

2008

2009

2010

Transactions where target is headquartered in U.S. or Canada. Sources: Company press releases, certain financial information provided by Capital IQ, Inc.

18 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

Illustrative MRO and other services transactions DateDec-10 Dec-10 Nov-10 Nov-10 Oct-10 Oct-10 Sep-10 Sep-10 Sep-10 Aug-10 Aug-10 Aug-10 Aug-10 Jul-10 Jul-10 Jun-10 Jun-10 May-10 May-10 Apr-10 Apr-10 Mar-10 Mar-10 Mar-10 Mar-10 Mar-10 Feb-10 Feb-10 Feb-10 Jan-10

TargetTodd Shipyards M7 Aerospace Global Aerosystems Aviation Systems of Northwest Florida Empire Aero Center PAS Technologies AvCraft Technical Services Pacific Aero Tech Aerothrust Corporation Global Aerosystems Kings Avionics RA Liquidating Complete Turbine Services Premier Aircraft VAS Aero Services Vitesse Aviation Services Nampa Valley Helicopters Air Transport Components Atlantic Marine Exeltech Canada Quality Performance Aviation Worldwide Services and EP Aviation Corporate Air Repair Aveos Fleet Performance The Telford Group Fabritech, Inc Soundair AMG Tracer LLC Wencor Group Global Aerospace Consulting

DescriptionRepair/overhaul, conversion, and construction of military ships. Aircraft parts, government logistics support, and MRO. Provides aerospace engineering and analysis services. MRO, modification, relocation, and support services for aviation training. Operates MRO facilities for military and commercial aircraft. MRO solutions for original equipment manufacturers. Provides MRO services for aircraft. Aircraft maintenance services for air and cargo carriers, and airlines. MRO for aircraft engines and parts. Aerospace engineering, analysis, and modification services for aircraft. Sale, installation, service, and repair of aircraft and related components. Aviation-related services to general and business aviation sectors. Provides MRO services for turbine engines and aircraft. Developing, certifying, and delivering Falcon 50-4 performance upgrades. Sells auxiliary power units, regional engines, and commercial engines. Aircraft maintenance, charter management, and fixed-base operations. MRO services for helicopters. Overhaul and repair services for component parts of commercial aircraft. Shipyards providing services including vessel MRO and conversions. Provides airport services. Distributes military spare parts and explosive detection systems. Provides aircraft services for the State and Defense departments. Provides aircraft repair, inspection, and restoration services. Airframe solutions and engine parts repair and overhaul. MRO services for regional, corporate, and private aircraft. MRO of aircraft components. Distributes aircraft parts to airlines, overhaul shops, and leasing companies. Wheel and brake repair and overhaul services for jet aircraft. Distributes aircraft parts for repair stations. Systems design, integration, certification, and aircraft technical publication.

Acquirer [ultimate parent]Vigor Industrial Elbit Systems Of America Kaman Aerospace Group LSI, Inc. Premier Aviation Overhaul [Desjardins Venture] KRG Capital Partners Indaer International McNally Industries [Treval Holdings] Air-Capital Group Supply Technologies Butler National Corp. Ross Aviation [Carlisle Enterprises] Neff Capital Management West Star Aviation H.I.G. Capital TWG Aviation Heli-Welders Canada Gen Cap America BAE Pemco World Air Services [Sun Capital] Alas Defense Systems AAR Corp. Quasar Aerospace Industries Air Canada C&L Aerospace Triumph Aftermarket Services Group Jetpower, Inc. Messier-Bugatti [Safran] Odyssey Investment Partners Southeast Aerospace

Sources: Company press releases; certain financial information provided by Capital IQ, Inc.

As the airline industry recovers, we can expect to see this continuing dynamic between building in-house MRO capabilities versus outsourcing fleet maintenance services.

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 19

Private security contractors account for around 20% of the DoDs armed forces in Iraq and 30% of the DoDs armed forces in Afghanistan. Contractors outnumber U.S. troops.

Private security contractors come under institutional ownership

Private security contractors (PSCs) have become an integral part of the U.S. response to the conflicts in Iraq and Afghanistan. A June 2010 report to Congress estimated that PSCs accounted for around 20% of the DoDs armed forces in Iraq and 30% of the DoDs armed forces in Afghanistan. The report highlighted that the total number of private contractors outnumbered U.S. troops in Iraq and Afghanistan by over 30,000 (207,000 contractors compared with troop levels of 175,000). Of these contractors, over 13% or 27,000, were armed PSCs. Between 2003 and 2007, the DoD, State Department and USAID collectively awarded $85 billion in contracts mostly in support of the wars in the Middle East accounting for roughly 20% of total war funding in the Iraq and Afghan theaters. Arguments for the use of PSCs include increased flexibility and the reduced costs due to the ease of hiring and firing, the freeing up of uniformed troops for combat missions, and being able to access unique skills as required.Contractor and U.S. troop levels in Iraq and Afghanistan Armed contractors Unarmed contractors U.S. troopsPersonnel levels 240,000 200,000 160,000 120,000 80,000 40,000 0 Oct 2007 Jan Apr Jul 2008 Oct Jan Apr Jul 2009 Oct Jan Apr 2010

As proof of its transition from a cottage industry, we saw significant acquisitions of private security contractor firms by private equity groups in 2010, including: DynCorp,asecurityandfacilitiesservicesprovider,taken private by Cerberus; Xe(formerlyknownasBlackwater),atrainingsolutions and security services provider, which was acquired by Forte Capital Advisors and Manhattan Capital; and BlueHackleGroup,aU.K.privatesecurityfirm,purchased by Torch Hill Capital. M&A activity among suppliers of products and services to private security and other ground forces included: Kratospurchaseoftacticalandlogisticsshelterprovider Gichner systems, as well as border patrol product manufacturer SCT Acquisition; MetalmarkCapitalspurchase(throughportfoliocompany Hunter Defense Technologies) of military heating and cooling equipment manufacturer Nordic Air and parachute survival equipment provider Airborne Systems; and TorchHillCapitalsacquisitionofcamplighting manufacturer Jameson LLC.

Sources: DoD, Use of PSCs in Iraq and Afghanistan, June 22, 2010

20 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

The operating environment Aerospace market outlook: Orders rise on return of lessors

Ari Goldschneider Senior Associate Grant Thornton Corporate Finance LLC Ari Goldschneider is a senior associate at Grant Thornton Corporate Finance and provides M&A support services to the Aerospace & Defense Group.

U.S. aerospace shipments Civil Military$ billions 70 60 50 40 30 20 10 0

Despite a challenging economic environment, the aerospace industry was relatively flat in 2010, with sales increasing just under 1%. While commercial revenues fell slightly, the decline was more than offset by increased military aircraft spending. Going forward, the Aerospace Industries Association (AIA) projects a sales increase of roughly 2% in 2011 to nearly $220 billion on the back of increased demand from Asia-Pacific. In the long term, Boeing expects the 5% annual growth of the last 20 years to continue, with the Asia-Pacific region comprising over a third of new civil aircraft purchases. Rapid growth in the Asia-Pacific region cannot be ignored by U.S. suppliers, as offset requirements and growth of local production creates pressure for component production to shift ever eastward. In addition, 2010 saw acquisitions by China within the United States, highlighted by Aviation Industries Corporation of Chinas (AVIC) purchase of Teledyne Continental Motors, a small aircraft and engine manufacturer, which will likely help AVIC exploit Chinas underdeveloped general aviation market. Jet leasing firms have also played a significant role in the recovery of the aviation market, with 27% of aircraft orders at Boeing and Airbus placed by lessors last year, the highest proportion since 2000. In 2010, lessors comprised 21% of Boeing orders (vs. 12% in 2009) and 35% of Airbus orders (vs. 5% in 2009). Investors have made financing available to lessors due to their relatively attractive and consistent financial performance, driven by geographic diversification and the ability to move aircraft around the world. Carriers, in contrast, have shown a far weaker, although well-publicized, profit position. Consequently, Boeing expects lessor-owned jets to account for one of every two flying within the next 10 years.

1997

1999

2001

2003

2005

2007

2009

2011 (E)

Source: Aerospace Industries Association (AIA)

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 21

Sales, orders and backlog

After two years of back-to-back declines, aircraft industry orders rose 16% in 2010, driven by strong growth in civil aircraft and parts. This increase reflects a rising demand for air travel and general improvement in the overall economy. After a decline in 2009, backlog increased slightly in 2010 to $422 billion, and stated backlog levels still remain more than double annual shipments. As a result of the weakening orders and increased cancellations of 2009, commercial aircraft sales fell nearly 6% in 2010; however, the decline was more than offset by an increase in military spending. The economic downturn played a significant role in the decline of the civil sector, while military sales benefitted from record defense spending (which will likely remain flat in fiscal 2011 and 2012) and the increased exporting of helicopters, missiles and rockets. Space sales were flat during the year and are expected to remain so through FY 2015, with NASAs year-to-year budget growth projected to average 2.5%. General aviation (including business jets and other private planes) declined for the second year in a row, as the sector continued to face a tight credit environment and an abundance of used aircraft on the market. However, sales of larger cabin business jets are beginning to rebound, especially in the Middle East.

U.S. aerospace, backlog, orders and shipments Shipments Orders Backlog$ billions 500 450 400 350 300 250 200 150 100 50 0 2000 2002 2004 2006 2008 2010 (P)

Sources: U.S. Census Bureau, Manufacturers' Shipments, Inventories, and Orders; and Aerospace Industry Association (AIA) estimates

22 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

U.S. aerospace industry sales by segment Civil Military Space$ billions 180 160 140 120 100 80 60 40 20 0 2007 2008 2009 2010 (P) 2011 (E)

Related products Missiles

The economic downturn played a significant role in the decline of the civil sector, while military sales benefitted from record defense spending and the increased exporting of helicopters, missiles and rockets.

Source: Aerospace Industries Association (AIA)

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 23

Commercial outlook

Over the next 20 years, the commercial aircraft industry expects similar growth to that of the last two decades increasing roughly 5% per year. Growth will likely be driven by a number of factors, including the replacement of older aircraft with newer fuel-efficient and less maintenanceintensive models, demand for flights within emerging markets, and the expansion of low-cost carriers. Both Boeing and Airbus recently released favorable 20year outlooks both expecting that fleet sizes will double in the next two decades however, there are dissenting opinions regarding composition, which reflect the markets in which they themselves are based. Boeing expects smaller, economical single- and twin-aisle airplanes to account for over 92% (by value) of new deliveries, as customers seek direct flights to a wider range of destinations. Very large aircraft (VLAs) are expected to account for 6% (by value) of new deliveries over the next 20 years. Airbus, meanwhile, believes international long-haul demand will continue, as airlines trend to hub and spoke routes as opposed to point-to-point travel. Airbus believes VLAs will comprise 18% of deliveries (by value) due to increased traffic concentrated around mega-city hubs and growth in the size and number of mega cities, especially within the Asia-Pacific region.

Asia-Pacific will be increasingly important for Boeing and Airbus as they expect the region to account for over a third of deliveries (by value) over the next 20 yearstripling its fleet in that region over the period and nearly matching deliveries to North America and Europe combined. Boeing forecasts air traffic involving the Asia-Pacific region to grow at a rate of 6.8% over the next 20 years, driven by economic development and loosening regulations. China currently accounts for 22% of Airbus orders and 15% of Boeing orders. Development in China is also a cause of concern for the two major aircraft manufacturers, as state-owned businesses AVIC and Commercial Aircraft Corporation of China (COMAC) take aim at the Boeing-Airbus Duopoly. AVICs ARJ21 is expected to target the large Chinese domestic short-haul market in 2011. Meanwhile, COMAC has built relationships with Airbus and Boeing suppliers including GE, United Technologies and Honeywell and is developing the 168-passenter C919 (maiden flight set for 2014), which will compete with the Airbus A320 and Boeing 737. Activity is not limited to commercial aircraft, with China now developing high-tech military jets like the J-11B and stealth J-20.

Over the next 20 years, the commercial aircraft industry expects similar growth to that of the past two decades, increasing roughly 5% per year.

24 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

Defense budget outlook: Talk of cost cuts masks unchanged budget; reprioritizing of spending creates winners and losersGeneral considerations

Lou Crenshaw Defense and Intelligence Grant Thornton LLP Lou Crenshaw, Vice Admiral U.S. Navy (Ret.), is Partner of the Defense and Intelligence Sector of Grant Thorntons Global Public Sector Group. Prior to joining Grant Thornton, he was the senior resource and requirements manager for the U.S. Navy, where he was responsible for overseeing an annual budget of $130 billion.

Predicting what will happen with defense budgets is always an uncertain enterprise, even in the most stable of environments. The current situation appears to be unusually unstable, and there are many indications that there may be substantial shrinkage in the number and amount of certain types of contracting opportunities at the DoD. I do believe that even with this level of uncertainty, however, there is some degree of order and logic that those of us in the defense and defenserelated industries can rely on as we assess the future.

First and foremost is the fact that the DoDs financial condition heading into the new year is generally sound, despite the large amount of rhetoric and modest amount of action regarding cutting costs, saving money and increasing efficiency at the DoD. There are pressures to be sure that will present significant challenges to the DoD leadership in running the business of the department. Most notable are the reductions of Overseas Contingency Operations (OCO) funds, the poor performance of some major weapons systems acquisitions and the general state of over-programming present in the budget. Nonetheless, even in the face of a cost-reduction imperative driven by daunting financial realities, Congress will certainly continue to invest significant amounts of the national treasure in our nations defense. At this writing, Congress has yet to pass a 2011 Defense Appropriations Act, opting instead for a Continuing Resolution through March 4, 2011, which precludes the start of any new programs and requires operating under 2010 funding levels. Even this state of affairs is no reason for despair since it will leave at least $700 billion in base and supplemental funding available to the DoD. That is a lot of money, and we can be certain that the DoD will make every effort to spend it all, plus whatever supplementary funding Congress may award during the year to sustain military operations. Furthermore, the adoption of a Continuing Resolution means that the DoD budget cuts included in the presidents fiscal 2011 budget request will most likely fail to materialize. On the other hand, Congress may attempt to put limits on spending within the Continuing Resolution, most likely targeted at major weapons systems procurements. Continued stalemate could mean that none of the cuts in the presidents fiscal 2012 request would be adopted as well, though some in Congress say they plan to attach a full military appropriations bill to a further Continuing Resolution.

Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 25

Economic challenges facing the United States

Budget reduction pressures

One cannot discuss the funding of government programs without immediately focusing on the effects of the growing federal deficit. The Congressional Budget Office (CBO) has estimated that the 2010 deficit exceeded $1.3 trillion. At 9.1% of GDP, this is the second-largest deficit in the past 65 years, exceeded only by 2009s 9.9% of GDP. Sustained growth can be expected in mandatory spending accounts, up 8.3% in 2011, and outlays for net interest on the public debt will grow as well, from 62% of GDP this year to 66% by the end of 2011. Between 2010 and 2013, the CBO predicts that discretionary spending as a percentage of total outlays will remain around 38%, and that it will fall during that time period from 8.7% of GDP to 8.4%. In other words, there is a very low likelihood that additional discretionary spending, which includes defense spending, will grow significantly. Budget pundits for some time have been predicting minimal growth in the 1% range of the DoD budget. Given the economic outlook, some are now predicting a decline. At an October 2010 TechAmerica Foundation Vision Conference, the DoD budget was predicted to be subject to low real growth in 20112012 and to suffer a real decline from 2013 2015, resulting in a major shock for the defense market. The good news in all this is that nondefense discretionary spending is projected to fall from 49% of total discretionary spending in 2010 to 46% in 2013, indicating that some cuts are expected in the non-defense accounts. Baseline defense spending as a percentage of discretionary spending is therefore predicted to grow slightly, from $657 billion to $744 billion. Thus, even in the midst of the direst economic predictions, there is room for optimism with regard to well-positioned defense-related businesses.

There is a growing chorus of support for budget reform and deficit reduction. In the defense spending area, this can be seen on at least three fronts. The first involves the internal cost-cutting initiatives announced by Defense Secretary Robert Gates. Two other significant sources of pressure are the Defense Business Board and the National Commission on Fiscal Responsibility and Reform, the so-called Debt Commission. The Defense Business Board reported its preliminary findings in Reducing Overhead and Improving Business Operations to Secretary Gates in July 2010. The findings that have the most implications for the defense industry include: therehasbeenanexplosionofoverheadworkrelativeto warfighting due to a lack of adequate controls; morepersonnelhavebeenassignedtoconductthatwork, adding immense costs; themajorityofthatworkisbeingdonebycontractorsata cost that the DoD is unable to determine since it is buried in Operations and Maintenance accounts; and largenumbersofmilitarypersonnel(over340,000),who cost more and are needed for warfighting, are performing work that is non-inherently government or should be assigned to DoD civilians.

Despite the rhetoric around cutting costs, the DoDs financial condition is generally sound.

26 Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment

In November 2010, the Debt Commission co-chairs proposed savings that would affect the entire defense industrial community and would include cuts to major procurement programs in addition to those recommended by Secretary Gates in August. Those with the most significance to defenserelated industries include: Applyingthe$100billionsavingsfromSecretaryGates initiatives to deficit reduction instead of using those funds elsewhere in the DoD. The commissions emphasis on continuing efforts to improve audit readiness and financial management within the DoD should benefit firms engaged in assisting the DoD in those areas. As an example of the benefits that could result, the commission noted that the Marine Corps recently realized approximately $3 for every $1 it invested in improvements to its rudimentary financial operations. DoublingtheproposalinSecretaryGatesinitiativesto cut defense contractor personnel who aid or augment the DoD headquarters staff by 30% over three years in order to achieve a savings of $5.4 billion by 2015. Even after doubling those savings and reducing the number of contractor personnel by half, the commission notes that the contractor workforce would still number over 30,000 and remain 40% higher than it was in 2000. Reducingprocurementby15%by2015throughthe elimination or reduction of production of several major weapons systems. These include the V-22 Osprey, the Expeditionary Fighting Vehicle, the Marine Corps STOVOL version of the F-35, the Navys Maritime Future Prepositioning Force, the Joint Light Tactical Vehicle (JLTV), the Ground Combat Vehicle, and the Joint Tactical Radio System. In addition, reduce the buy of Navy and Air Force F-35s by half and replace them with less expensive F-16s and F- or A-18s. Even with this 15% reduction, procurement would remain only slightly below the average for the past 10 years.

Reducinglevelsofotherprocurementby$48.5 billion by 2015. The commission specifically singled out communications and electronic equipment (e.g., tactical SINCGARs radios, radar, communications and information security), tactical vehicles (e.g., High Mobility Multipurpose Wheeled Vehicles (HMMWV), armored security vehicles, trailers, materials-handling equipment, ship support equipment) and other support equipment and spares (e.g., night vision goggles). This would still allow the services to conduct other procurement at levels 50% higher than in 2000. Reducing spending in Research, Development, Test and Evaluation by 10% to save $7 billion in 2015, with particular reference to R&D associated with the major procurements identified by the commission for reduction or elimination. There is a significant contractor component in this account and the effect of this cut could have a major impact. Reducingbasesupportby$2billionandfacilities maintenance spending by $1.4 billion. We can be certain that the chances of all of these recommendations actually being implemented are very low. Nevertheless, there are obviously winners and losers in the face of these recommendations, and it is difficult to draw any solid conclusions in light of the myriad of possibilities and combinations that may emerge from the discussion. Generally, however, it appears that: companiesprovidingservicesupportcontractorpersonnel can expect a tough future; major hardware manufacturers and their suppliers will be helped or hurt depending on what is cut and what replaces the cuts; suppliersofbasesupportandmaintenancecontractscan expect challenges to current levels of spending; and firmsinvolvedinimprovingtheefficiencyandeffectiveness of the DoD financial operations can expect continued investment.Aerospace & Defense Update: Mergers, Acquisitions and the Operating Environment 27

Congressional actions

Secretary of Defense Gates initiatives

It is clear now that there will not be a 2011 Defense Appropriations Act and that the DoD will be operating under a Continuing Resolution at least through March 4, 2011, if not for the remainder of FY 2011. The result will be essentially the FY 2010 budget with no new program starts. While it appears the 112th Congress will concentrate on non-defense cost-cutting measures, there will be unintended consequences that will affect the defense industry. The most notable example is the desire to eliminate earmarks. The DoD typically omits some required budget items with the knowledge that Congress will fund them as earmarks. Unfortunately, as these earmarks are eliminated, DoD organizations will be forced to either add them to an already oversized baseline budget or let them die. Many of these programs support small and mid-size local businesses, and they can therefore expect their congressionally sponsored funding to dry up. Congress may also intervene in several recommendations to reduce major procurements. Capitol Hill will also continue the pressure to eliminate Overseas Contingency Operations funds and force the DoD to focus on re-establishing baseline funding levels appropriate for the security environment. This will put the operations and support accounts of the armed services under enormous pressure. Many service support contracts reside in those accounts and vendors can expect a decline in money available to fund these contracts.

In August 2010, Secretary Gates announced a series of savings and efficiency initiatives that he explained would allow the DoD to reallocate $100 billion over the next five years, including: A30%reductionoverthreeyearsinfundingforservice support contractors. This could result in the elimination of 30,000 contractors. A freeze in the number of OSD, defense agency and combatant commander billets as well as a freeze at the 2010 levels of DoD senior uniformed and civilian leadership ranks. Theachievementofgreaterbenefitsincostandefficiency through economies of scale and the consolidation of IT infrastructure. Areductionintheenormousamountofreportsandstudies being conducted by the DoD as a result of congressional action, administrative oversight and internal tasking. Azero-basedreviewofallDoDintelligenceorganizations, including all contracts, with the goal of eliminating duplication. FlatteningandtrimmingtheDoDsstructure,including the elimination of the position of Assistant Secretary of Defense for Networks, Integration and Information. In January 2011, the secretary announced that the services had been successful in finding over $100 billion in cost-savings measures. It is very important in assessing the impact of these actions to note that even if they are fully successful in ways that previous cost-cutting efforts at the DoD have not been, they are not intended to represent cuts to the DoD budget, but reallocations in the name of efficiency and effectiveness.

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Initiatives by the undersecretary for acquisition, technology and logistics (AT&L)

Operational imperatives

As part of his effort to cut costs at the DoD, Secretary Gates announced that AT&L Undersecretary Ashton Carter had launched an initiative to improve efficiency and reduce costs in the contracting area, the goal being to get better buying power for the taxpayer and warfighter in defense goods and services. Although a part of Secretary Gates initiatives, the AT&L actions announced in June 2010 and explained further in September 2010 are significant in their own right and deserve separate treatment. They fall into five focus areas: target affordability and control cost growth; incentivize productivity and innovation in industry; promote real competition; improve tradecraft in services acquisitions; and reduce non-productive processes and bureaucracy. Unlike the other major areas discussed that have the potential to impact the defense industry, these AT&L initiatives have been or will be implemented. In general, vendors can expect greater scrutiny by the DoD in the performance of their contracts, and this is likely to increase costs.

While there are and will continue to be many calls to reduce DoD procurement spending, especially in major hardware accounts, the defense industry can expect to see continued investment by DoD in certain key areas: Cybersecuritywillundoubtedlycontinuetobeagrowth area in the defense budget, and vendors in that space can expect growth in DoD investments. Unmannedsystemswillcontinuetoprosperasthe DoD has clearly established its intent to continue robust investment in that area. Softpowerwillremainakeyfocusarea,andelementsof the defense industry associated with this area and other unconventional and special warfare programs will see a sustained investment by the DoD. And then, of course, there is the unknown but certain influence of future, unforeseeable global events that will force reconsideration of budget cuts and result in additional expenditures in the defense area.

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In summary

The supposed Global War on Contractors will certainly affect a large number of firms in that industry, and the challenges will not be limited to just those in the service support industry. The fact is that even though the DoD leadership stresses service support contractors, there is the danger that field personnel will only hear the contractor part. Any contractor can therefore expect pressure from local contracting officers to reduce their numbers. The cuts proposed to major weapons system acquisitions will hit losing primes and their suppliers hard. General budget cuts and cost-cutting measures will undoubtedly have unanticipated impacts on almost every firm doing business with the DoD. But there are some bright spots on the horizon: TheDoDhasover$700billiontospend. Themanufacturersofprovenlegacysystems,whichwill fill the void left by the cancellation of new systems, will prosper. ThosefirmsprovidingassistancetotheDoDtohelpit become more efficient or manage its money better will see a continued demand for their services (assuming they can overcome the contractor label). Thoseindustriesinthe21stcenturywarfarerenaissance of cyber security, soft power and unmanned vehicles will continue to see robust investments by the DoD.

This is a shortened version of a full article that can be obtained from Lou Crenshaw: T 703.837.4430 or E [email protected]

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European update: View from across the pond mirrors U.S. activity

Key developments in 2010

Ian Wilson Partner, Corporate Finance Grant Thornton UK LLP Ian Wilson leads the Aerospace & Defense Corporate Finance Group in the UK member firm of Grant Thornton International Ltd, where he advises European aerospace and defense companies on M&A transactions.

In 2010, Europes defense and commercial aerospace companies experienced broadly the same conditions as those affecting the U.S. markets. Conflict in the Middle East and procurement spending realignment dominated the defense arena, while cost-cutting and consolidation by Europes airlines continued against a backdrop of gradual recovery in the civil aviation market. Continuing recovery in commercial aviation: Notwithstanding the disruptive influence of ash clouds, severe weather and terror threats, the European civil aviation sector continued its steady improvement. According to the Air Transport Association, improving utilization, yields and load factors have driven European carriers operating cash flow generation (EBITDA) back up to around 10% of revenues, from a trough of 3.5% at the start of 2010. The return of lease financing to the aircraft financing menu (notably, the launch of Air Lease Corp.) has fueled the fleet expansion and modernization plans of both established carriers and emerging airlines.

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Rebirth of M&A: After two quiet years, mergers and acquisitions activity returned to the European corporate agenda in 2010, although activity remained substantially below U.S. levels. Notable deals included Babcock Internationals acquisition of VT Group for $2.1 billion and the acquisition of energetic materials group SNPE by Frances Safran for $405 million. Having survived both dramatic declines in commercial aerospace activity and the worst credit market conditions in many years, European aerospace and defense companies found renewed confidence last year. Dramatic costcutting and a relatively robust defense spending environment resulted in substantial cash balances for primes, supplemented by recovering public debt markets. The combined liquidity (cash plus undrawn facilities) of Europes three largest primes currently exceeds $32 billion. More attractive pricing in most segments of the commercial aerospace sector, combined with shifting defense procurement priorities, also contributed to higher levels of activity. By contrast, smaller companies lacking access to public debt markets and therefore reliant upon bank debt were less active in 2010, preferring to retain liquidity balances for what is widely expected to be a bumpy road to recovery. While most commercial aerospace M&A activity tended to be domestic or intra-European, the United States remained the focus for defense acquisitions, where U.K. defense groups BAE Systems and Chemring were active. European defense primes and their Tier 1 suppliers recognize that despite growing budget pressures, the U.S. spends as much on equipment and services as the rest of the world combined, and it is therefore critical to have a presence on the ground.

Fiscal constraints: Ballooning budget deficits combined with an economic recession have forced most European governments to take a scalpel to public expenditures. As one of the least politically-sensitive areas of outlay, defense budgets have been hardest hit. The impact of drastic cuts is