Comprehensive Coverage and Global Reach Defense Market Developments - - PDF document

4/6/2011 1

Aerospace & Defense Market Developments March 2011

w w w . H L . c o m U . S . 8 0 0 . 7 8 8 . 5 3 0 0 E u r o p e + 4 4 . 2 0 . 7 8 3 9 . 3 3 5 5 H o n g K o n g + 8 5 2 . 3 5 5 1 . 2 3 0 0 J a p a n + 8 1 . 3 . 4 5 7 7 . 6 0 0 0 Los Angeles • New York • Chicago • San Francisco • Minneapolis • Washington, D.C. • Dallas • Atlanta • London • Paris • Frankfurt • Hong Kong • Tokyo • Beijing

Confidential

Comprehensive Coverage and Global Reach

Comprehensiv e Offering of

Fairness Opinions Solvency Opinions Valuation Opinions Tax & Financial Reporting Valuation Portfolio Valuation Investment Advisory Services Public and Private Equity Financings Share Buybacks PIPE Financing High-Yield Bonds Investment-Grade Debt Leveraged Loans General Advisory Sellside M&A Buyside M&A Leveraged Transactions Takeover Defense Secondary Advisory Corporate Alliance & JVs M&A Capital Markets Valuations/Opinions/Reporting Waivers and Amendments Tenders and Exchange Offers Debt for Equity Swaps Pre-Packaged and Pre- Negotiated Restructuring Plans Distressed M&A Insolvency and Sovereign Debt Advisory/Restructuring

Aerospace & Defense Market Developments

Independent Advice

y Financial Consulting g Dividend Recapitalizations Asset-Backed Financings p

• No. 1 M&A advisor for U.S.

transactions under $1.5 billion in 2010

• No. 1 global M&A fairness opinion

advisor over the past 10 years Perform over 1,000 valuation engagements, on average, annually Raised over $20 billion of capital in the past five years

San Francisco Minneapolis New York Chicago Paris Frankfurt London Beijing Tokyo Hong Kong

Global Reach

y g Advisory

• No. 1 global investment banking

restructuring advisor Largest global restructuring practice

Industry Specific Knowledge

Los Angeles Atlanta Dallas Washington D.C.

Aerospace • Defense • Government Business Services Consumer, Food & Retail Energy Financial Institutions Infrastructure Services & Materials Media & Telecom Real Estate and Lodging & Leisure Healthcare Technology Transportation & Logistics Industrials 1

4/6/2011 2

Deep Industry Knowledge & Relationships

20 fully dedicated Aerospace•Defense•Government Group professionals, plus additional industry-seasoned finance and valuation specialists Houlihan Lokey’s ADG Group has closed over $6 billion in transactions since January 2008 Over 600 ADG industry executives and capital sources attended our 8th Aerospace & Defense Market Developments

has sold a majority stake in its O a portfolio company of Carlyle Venture Partners II, L.P. has been acquired by S has acquired substantially all the assets

• f the North American Public Services

B id Ad i has acquired

Annual Private Company Conference on October 28, 2010 HL has client relationships with many of the most important market players

B id Ad i has acquired the satellite development and manufacturing business of

has been acquired by Fairness Opinion

Fairness Opinion Sellside Advisor Buyside Advisor Buyside Advisor

HL successfully engages with the industry’s most active and prominent buyers

Buyside Advisor

has been acquired by Sellside Advisor has been acquired by Sellside Advisor & Fairness Opinion has been acquired by Sellside Advisor has been acquired by Sellside Advisor has been acquired by Sellside Advisor has been acquired by Sellside Advisor

2

Contraction (1991-1995): Expansion (1996-1999): Contraction (2000-2003): Expansion (2004-2007): 7.5x / 9.1x (a) Expansion

Aerospace Sector is Fundamentally Strong

Aerospace & Defense Market Developments Cyclical Commercial Aerospace Market

Over the past 40 years, there have been five

Comments

The commercial aerospace sector was looking for a bottom in the early 1990’s. Today, the industry seems to have weathered similar uncertainty.

• 9 0%
• 6.0%
• 3.0%

0.0% 3.0% 6.0% 9.0% 12.0% 15.0% 0 0x 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x NBER Declared Recession

Boeing Book:Bill Ratio Rev Pass Ton‐Miles % Change

EV/EBITDA 8.3x (a) EV/EBITDA10.5x (a) EV/EBITDA 7.9x (a) EV/EBITDA11.6x (a) NBER Declared Recession NBER Declared Recession

distinct aerospace cycles averaging eight years in duration and ranging between six and eleven years. The chart illustrates the last three downturns with leading indicators. Declines in air traffic demand usually coincide with a recession. Aircraft deliveries peak during a recession as OEMs reduce backlogs

9.0% 0.0x Boeing's Book:Bill Ratio Rev Pass Ton-Miles % Change

3

Sources: (a) Selected Aerospace Public Composite; 9.1x represents current median multiple (b) Historical data from Boeings website and previous projections from Credit Suisse research (c) Bureau of Transportation Statistics

OEMs reduce backlogs and book:bill ratios fall below 1:1. Aerospace public company multiples are significantly better during expansionary periods.

(b) (c)

4/6/2011 3

$700

Budget Forecasts: Rosy Bias?

Aerospace & Defense Market Developments 1985 Forecasted Budget Authority vs. Actual Budget Authority

• ns)

The drop in defense spending in the late 1980’s was significantly more drastic than anticipated at the peak of spending in 1985.

$0 $100 $200 $300 $400 $500 $600 1987 1988 1989 1990 National Defense Budget Estimates FY1985 Actual

(in FY1985 $ billio Realized CAGR = 2% 4

At the peak of spending in 1985, the DoD estimated a three year CAGR of 11%. By 1989, the projected three year CAGR had dropped to 4%. 1985 estimates for the FY1990 defense budget were more than $150 billion higher than the actual budgeted authority in 1990. At present, the DoD has forecasted modest growth (3% CAGR) through 2015, with drastic cuts planned for certain areas in order to provide for wars in Iraq and Afghanistan. The potential that Congress goes further remains a legitimate risk.

800 900 1,000

Budget Environment: We’ve Been Here Before

Aerospace & Defense Market Developments Department of Defense Budgeted Authority (in FY2011 Constant $)

• ns)

The projected drop-off in defense spending is reminiscent of the end of the Cold War/Reagan era with similar pressure to reduce deficits and focus domestically. However, the spending mix reflects the prevailing threats.

100 200 300 400 500 600 700 Supplemental / OCO Budgeted Authority RDT&E Procurement O&M

OTHER 4% OTHER 4%

(FY 2011 $ billio 5

MIL PERSONNEL 28% OPR & MAINT 29% PROCUREMENT 29% RDT&E 10% MIL PERSONNEL 26% OPR & MAINT 36% PROCUREMENT 20% RDT&E 14%

Source: National Defense Budget Estimates for FY2011 *Excludes supplemental / OCO funding

Preceded by significant increase in spending fueled by actual / potential conflict Then: Cold War – arms race Today: Iraq & Afghanistan – active conflict Nature of threat dictates spending Then: Focus on RDT&E and Procurement Today: O&M – sustaining two wars Budget Outlooks reacting to political pressure to reduce deficit Then: Reduced Soviet threat – domestic focus Today: Need to address deficit and currency value

Then (Late 1980’s) vs. Today

4/6/2011 4

2010 ADG M&A Market Highlights

Then Now

Characterized By:

Slight increase in activity Overall price increases in transactions

Characterized By:

Dramatic decrease in activity Overall price declines in transactions

Aerospace & Defense Market Developments

• Premium valuations available to premium firms

Return of more stable credit markets, creating an

increase in financial sponsor activity

M&A Activity Driven By:

Portfolio adjustment Continued pursuit of diversification Strategic buyers looking to acquire into priority DoD

areas that provide customer “stickiness”

Concerns over budget cuts Continued credit market issues significantly curtailing

leverage

Returning confidence provides reason for optimism

M&A Activity Driven By:

Buyside:

• Desire for diversification

Sellside:

• Portfolio adjustment

D l i Concerns over budget cuts Bargain hunting

• Delevering
• Liquidity

6

M&A Activity Reverts to the Mean

400 450 Aerospace, Defense, and Government M&A Activity 381 429 368 Aerospace & Defense Market Developments 42 40 59 76 101 98 140 137 133 80 80 86 81 72 46 65 79 94 96 113 150 129 77 93 111 94 100 150 200 250 300 350 Number of Transactions 190 155 203 242 284 306 233 244 264 242 76 69 79 87 89 112 128 142 106 76 71 67 67 42 40 50 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 LTM** 2010 LTM* Aerospace Defense Government

__________________________ * LTM as of February 28, 2011 ** LTM as of February 28, 2010 Sources: Capital IQ and Press Releases

7

4/6/2011 5

Transaction Prices Stabilizing

10.6x 10.4x 10.2x 10 0x 12.0x Aerospace, Defense, and Government Transaction Pricing Aerospace & Defense Market Developments 7.9x 8.3x 9.1x 7.5x 7.9x 9.2x 8.7x 2.0x 4.0x 6.0x 8.0x 10.0x EV/EBITDA Multiple 0.0x 2003 2004 2005 2006 2007 2008 2009 LTM** 2010 LTM*

8

__________________________ * LTM as of February 28, 2011 ** LTM as of February 28, 2010 Sources: Capital IQ and Press Releases

Total Transaction Value Inches Upward

$89.9 $90.0 $100.0 Aerospace, Defense, and Government Aggregate Deal Value 2003 - Present Aerospace & Defense Market Developments $18 8 $40.3 $44.0 $43.1 $54.2 $25.7 $25.9 $32.1 $32.2 $20 0 $30.0 $40.0 $50.0 $60.0 $70.0 $80.0 Value ($ billions) $18.8 $0.0 $10.0 $20.0 2003 2004 2005 2006 2007 2008 2009 LTM** 2010 LTM*

9

__________________________ * LTM as of February 28, 2011 ** LTM as of February 28, 2010 Sources: Capital IQ and Press Releases

4/6/2011 6

Larger Transactions Making a Comeback

25 140 160

Aerospace, Defense, and Government M&A Announcements 2000 - Present Aerospace & Defense Market Developments 64 69 14 22 18 13 8 16 18 16 23 24 40 17 30 30 39 40

10 4 4 8 11 16 9 4 4 11 11 64 78 70 6 7 15 20 14 22 17 29 21 11 1 40 60 80 100 120 Number of Transactions 30 61 64 69 55 56 40 40 32 42 64 70 7 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 LTM** 2010 LTM* Purchase Price < = $50M Purchase Price $50M - $100M Purchase Price $100M - $1B Purchase Price >= $1B

__________________________ * LTM as of February 28, 2011 ** LTM as of February 28, 2010 Sources: Capital IQ and Press Releases Note: Only includes transactions which disclosed valuation information

10

Public Companies Back to Acquiring

22% 24% 25% 27% 26% 20% 18% 20% 21% 25% 90% 100%

Aerospace, Defense, and Government Transactions by Buyer Type Aerospace & Defense Market Developments 48% 51% 6% 9% 12% 10% 13% 13% 20% 21% 18% 17% 52% 44% 47% 46% 29% 19% 24% 18% 25% 23% 20% 15% 11% 10%

30% 40% 50% 60% 70% 80% Number of Transactions 44% 40% 35% 38% 46% 40% 0% 10% 20% 2003 2004 2005 2006 2007 2008 2009 LTM** 2010 LTM* Domestic Public Buyer Domestic Private Buyer Domestic Private Equity Foreign Buyer 11

__________________________ * LTM as of February 28, 2011 ** LTM as of February 28, 2010 Sources: Capital IQ and Press Releases Note: Only includes transactions which disclosed valuation information

4/6/2011 7

Makeup of Sellers Remains Largely Unchanged

4% 7% 13% 8% 7% 17% 21% 15% 16% 7% 7% 17% 13% 13% 6% 6% 90% 100% Aerospace, Defense, and Government Transactions by Seller Type Aerospace & Defense Market Developments 70% 71% 80% 69% 60% 68% 67% 64% 61% 4% 7% 13% 8% 7% 21% 20% 30% 40% 50% 60% 70% 80% Number of Transactions 11% 7% 6% 11% 10% 11% 12% 13% 12% 0% 10% 20% 2004 2005 2006 2007 2008 2009 LTM** 2010 LTM* PE-Owned Private Public Subsidiary of Public Company

12

__________________________ * LTM as of February 28, 2011 ** LTM as of February 28, 2010 Sources: Capital IQ and Press Releases Note: Only includes transactions which disclosed valuation information

George Odden

• Mr. Odden is a Managing Director in Houlihan Lokey’s Los Angeles office, where he is a member of the

Aerospace•Defense•Government Group. His responsibilities include managing sellside and buyside M&A advisory engagements, sourcing growth capital, and conducting strategic alternatives assessments.

• Mr. Odden’s recent experience includes the sale of NMC Group to Esterline and the sale of IAC to

Aerospace & Defense Market Developments p p Honeywell. Before joining Houlihan Lokey, Mr. Odden held positions at Honeywell, Rockwell International, UBS, and Dillon Read. With each organization, his primary role was the sourcing and execution of M&A assignments which included Honeywell’s acquisition of Dimensions International, the acquisition by Rockwell Collins of Airshow and Kaiser Electronics, the acquisition of BetzDearborn by Hercules and the sale of Loctite Corporation to Henkel. He has worked with companies throughout the world ranging in size from Fortune 50 to start-ups. Prior to becoming an investment banker, Mr. Odden was an officer in the U.S. Navy, serving aboard the USS Tripoli in support of Operation Desert Storm, and a teacher at the Surface Warfare Officer’s School in Newport, Rhode Island.

• Mr. Odden earned a B.A. in economics from Cornell University and an M.B.A. from the Columbia

Business School. He is registered with FINRA as a General Securities Representative (Series 7 and 63) and a Limited Representative – Investment Banking (Series 79).

13