INDUSTRY OVERVIEWFuture demand for simulation and training (S&T) activities is likely to mirror themacro developments that are driving the overall growth of the Aerospace &Defense industry. Namely, the pivot to a world of great military powercompetition raises the ante for simulation and training activities to keep pace withthe increases in spending on advanced equipment such as fighter jets, bombers,helicopters, and drones. While pilot and maintenance training are obvious needs,new training requirements also relate to other complex integrated activities suchas connectivity between air and ground combat assets, including close air support,dynamic targeting, and defensive counter-air operations. In addition, the civilianside of this market is poised to continue benefiting from increases in marketdemand for commercial aviation services, particularly business aviation, and thecorresponding increase in demand for the trained professionals needed to supportthe growth of this segment of the Aviation market.

In 2018, overall M&A activity in this market segment was slightly lower than in2016 and 2017 was still at heightened levels relative to prior years. These resultsare perhaps masking the true impact of M&A activity in this sector, as transactionswere also completed involving major defense contractors with broad basedoperations that are not S&T pure-plays but have a significant presence in thesimulation and training market. Recent examples include United TechnologiesCorporation’s acquisition of Rockwell Collins, SAIC’s acquisition of Engility, and themerger of L-3 Technologies and Harris.

Capstone Headwaters

TABLE OF CONTENTS Industry Overview Notable Transactions Public Company Data Firm Track Record

MILITARY AND COMMERCIAL SIMULATION AND TRAINING2018 YEAR IN REVIEW

CONTRIBUTORSTed PolkManaging Director 312.674.4531 tpolk@capstoneheadwaters.com

Lisa TolliverDirector 312.674.4532 ltolliver@capstoneheadwaters.com

Brianna ConwayAssociate312.674.4533 bconway@capstoneheadwaters.com

4053

84 83 77

020406080

100

2014 2015 2016 2017 2018

M&A Activity: Mapping, Modeling & Simulation

Source: Capital IQ, Pitchbook, FactSet, and Capstone Headwaters Research

Num

ber o

f Tra

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tions

Notable recent transactions that are indicative of majormarket trends include the acquisition of CubicCorporation’s Global Defense Services business by ValiantIntegrated Services in June 2018, CAE’s November 2018acquisition of Bombardier’s Business Aircraft Trainingbusiness, and the purchase of Strategic SimulationSolutions by Airbus in January 2018. The formertransaction was roughly $135 million in size and involved acompany with strong mission training and competences,while the middle transaction, approximately $645 million insize and 9x forward EBITDA, was motivated by the buyer’sinterest in accessing a higher growth segment of businessaviation training and the fact that there is an estimatedneed for 50,000 new business aviation pilots over the next10 years. This was also the case for the latter transaction,which involved a provider of A320 pilot training services toemployees of Frontier Airlines.

Technology innovation continues to enable market growthand should continue to do so over the near term formultiple reasons. First and foremost, computer-basedtraining is cost-efficient as it is replicable and does notrequire the utilization of actual military equipment. It alsolends well to performance-based measurement andreviews and the never-ending increases in computationalpower continue to enable the creation of virtual andconstructive training environments with increased fidelity.Novel service providers whose offerings are technology-forward are, and will remain, among the most attractiveM&A targets in this sector. Well-known technologyinnovators, such as Bohemia Interactive and DiSTICorporation, are good examples of entities acquired overthe past few years and notably both were acquired byprivate equity firms.

Overall, we expect M&A activity to remain at heightenedlevels for simulation and training over the near term. Themost recently witnessed transactions involvedopportunities for acquirers to either broaden their marketpresence or the scope of their services and we believe suchunderlying motivations will drive a significant portion ofsector acquisition activity. In addition, the aforementionedgrowth among businesses with innovative technology andthe increased importance of virtual and constructivesimulation to overall training methodologies should alsolead to increases in acquisition activity.

Has Acquired

Has Acquired

Global Defense Services business

Has Acquired

Business Aircraft Training

Strategic Simulation Solutions

MILITARY AND COMMERCIAL SIMULATION AND TRAINING | 2

NOTABLE TRANSACTIONS

Aerospace & Defense Public Company Valuation Multiples by Sector

*MRO valuation skewed by weighting to Asia/Pacific marketSource: Capital IQ, company press releases

Aerospace & Defense Public Company Earnings by Sector

By Subsector in Public Markets• Prime Defense and Component Manufacturing are

trading around 12x EBITDA.

• Support Services & MRO is trading around 10x EBITDA.

• Defense IT and Defense Electronics are trading around 14x EBITDA.

Steady Public Company Values Our public company Aerospace & Defense Enterprise ValueIndex rose 3% in 2018 compared with a 7% decline for theS&P. A&D public EV/EBITDA valuation multiples declined19% to 10.5x during the year on strong 20% EBITDAgrowth. Year to date, the A&D index has increased 12%,broadly in line with the S&P, while A&D multiples haveexpanded returning to 12x EBITDA.

4.0x6.0x8.0x10.0x12.0x14.0x16.0x

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Defense Components Support Services & MRO*Prime Defense Defense IT & TechnologyAerospace & Defense Electronics

100%

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Defense Components Support Services & MRO*Prime Defense Aerospace & Defense ElectronicsDefense IT & Technology

*MRO valuation skewed by weighting to Asia/Pacific marketSource: Capital IQ, company press releases

3 | MILITARY AND COMMERCIAL SIMULATION AND TRAINING

PUBLIC COMPANY DATA

FIRM TRACK RECORD

MILITARY AND COMMERCIAL SIMULATION AND TRAINING | 4

has partnered with has been acquired byhas been acquired by

has been acquired by has been acquired by

has been acquired by has been acquired by has been acquired by

has been acquired by

has been acquired by has been acquired by

controlling interest has been acquired by

L-1 InvestmentPartners, LLC

Capstone Headwaters has represented companies that serve the needs of federal, state and local or foreign governments, aswell as the needs of civilian and defense-related agencies. We understand the nuances associated with sole-sourced, multi-year or subcontracted awards, the value of partnerships, GWACs, IDIQs and GSA schedules. We have completed transactionsrequiring complex CFIUS filings, ITAR registrations and contract negotiations, and those involving classified information.

Lisa TolliverDirectorltolliver@capstoneheadwaters.com | 312-674-4532

Lisa has over 18 years of experience in the investment banking industry, primarily focused on advisingmiddle market private business owners in liquidity related transactions. As a Director based in CapstoneHeadwaters’ Chicago office, she works closely with clients to advise and execute domestic and cross-border M&A transactions, recapitalizations and capital raises.

Prior to Capstone, Lisa worked in the Capital Strategies Group at Morgan Stanley Smith Barney and alsospent 10 years working for the middle market investment banking arm of Citigroup, where she wasinvolved in the evaluation, marketing and closing of numerous transactions involving private businessesand corporate divestitures. Over her career, Lisa has developed M&A expertise in several industrysectors including government & defense, training & simulation, infrastructure, technology, consumerproducts and e-commerce. Lisa received her BA on academic scholarship from Illinois State Universityand is a Series 7 and 63 Registered Securities Representative.

Ted PolkManaging Director tpolk@capstoneheadwaters.com | 312-674-4531

Ted is a Managing Director at Capstone Headwaters, based out of Chicago. Previously, Ted was also aManaging Director in Morgan Stanley’s Capital Strategies Group and with Citi Capital Strategies. He hasover 20 years of transactional experience in categories such as C4ISR and mapping, modeling andsimulation. Transactions he has led have been the recipient of multiple industry awards including Cross-Border Middle-Market Deal of the Year, Middle-Market M&A Financing Deal of the Year, Middle-MarketDeal of the Year, Professional Services Deal of the Year and Corporate M&A Deal of the Year. Previously,Mr. Polk worked at Valuemetrics, Inc. and in the Corporate Banking Group at The Bank of New York. Tedreceived his BSBA degree from Georgetown University and MBA from the University of Chicago. He is aChartered Financial Analyst (CFA), a Series 7 and 63 Registered Securities Representative, and a Series 24Registered Securities Principal.

Brianna ConwayAssociatebconway@capstoneheadwaters.com | 312-674-4533

Brianna is an Associate in the firm’s Chicago office, working closely with private business owners toadvise and execute mergers, acquisitions and strategic capital raises. Prior to joining CapstoneHeadwaters, Brianna was an Analyst at PwC Corporate Finance on their M&A team where she focusedon healthcare provider and services sell-side transactions. Brianna graduated with honors from IndianaUniversity’s Kelley School of Business with a major in Business Economics and Public Policy. She holdsher Series 7, 63 and 79 licenses.

5 | MILITARY AND COMMERCIAL SIMULATION AND TRAINING

MILITARY AND COMMERICAL SIMULATION AND TRAINING REPORT CONTRIBUTORS

Beau Roy Managing Director 415-265-6848broy@capstoneheadwaters.com

David BrinkleyManaging Director917-817-0375dbrinkley@capstoneheadwaters.com

Tom McConnell Managing Director 303-951-7125tmcconnell@capstoneheadwaters.com

Hilary Morrison Vice President917-763-0121 hmorrison@capstoneheadwaters.com

Ian Cookson Managing Director 617-470-9338icookson@capstoneheadwaters.com

Tess Oxenstierna Managing Director 203-524-0888toxenstierna@capstoneheadwaters.com

Scott FarnsworthManaging Director 818-309-5617sfarnsworth@capstoneheadwaters.com

EXTENDED AEROSPACE, DEFENSE, GOVERNMENT & SECURITY TEAM

MILITARY AND COMMERCIAL SIMULATION AND TRAINING | 6

MIDDLE-MARKET BOUTIQUE INVESTMENT

BANK OF THE YEAR

2019

US - DEBT FINANCING ADVISORY OF THE YEAR

2018

US MIDDLE MARKETS INVESTMENT BANK OF THE

YEAR

2018

INVESTMENT BANKING FIRM OF THE YEAR

2019

TURNAROUND AWARDS

12

www.capstoneheadwaters.com

Capstone Headwaters is an elite investment banking firm dedicated to serving the corporate finance needs of middle marketbusiness owners, investors and creditors. Capstone Headwaters provides merger & acquisition, private placement, corporaterestructuring and financial advisory services across 16 industry verticals to meet the life cycle needs of emerging enterprises.Headquartered in Boston, MA and Denver, CO, Capstone Headwaters has 19 offices in the US, UK and Brazil with a globalreach that includes over 450 professionals in 40 countries.

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