Is It Time To Play Offense or Defense with Defense Stocks? - - PowerPoint PPT Presentation

Is It Time To Play Offense or Defense with Defense Stocks?

American Association of Individual Investors (DC Chapter)

Los Angeles San Francisco Chicago New York Washington D.C. Minneapolis Dallas Atlanta London

Kevin P. DeSanto, Vice President Houlihan Lokey Investment Banking Services Aerospace •Defense • Government Group 1800 Tysons Blvd., 3rd Floor McLean, Virginia 22102 703.847.5225

Paris Frankfurt

September 16, 2006

Houlihan Lokey 2 AAII Washington DC Metro Chapter

Table of Contents

Introduction ............................................................ 1 Budget Perspectives ................................................ 2 Industry Perspectives.............................................. 3 M arket D ynamics Aerospace........................................................... 4 D efense .............................................................. 5 Government ....................................................... 6 H omeland Security ........................................... 7 Summary................................................................. 8

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Disclaimer

Houlihan Lokey Howard & Zukin and Houlihan Lokey are trade names for Houlihan, Lokey, Howard & Zukin, Inc. and its subsidiaries and affiliates which include: Houlihan Lokey Howard & Zukin Financial Advisors, Inc., a California corporation, a registered investment advisor, which provides investment advisory, fairness opinion, solvency opinion, valuation opinion, restructuring advisory and portfolio management services; Houlihan Lokey Howard & Zukin Capital, Inc., a California corporation, a registered broker-dealer and SIPC member firm, which provides investment banking, private placement, merger, acquisition and divestiture services; and Houlihan Lokey Howard & Zukin (Europe) Limited, a company incorporated in England which is authorized and regulated by the U.K. Financial Services Authority, which provides investment banking, restructuring advisory, merger, acquisition and divestiture services, valuation opinion and private placement services. Houlihan Lokey gathers its data from sources it considers reliable; however, it does not guarantee the accuracy or completeness of the information provided within this publication. The material presented reflects information known to the authors at the time this presentation was written, and this information is subject to change. Houlihan Lokey makes no warranties, expressed or implied, regarding the accuracy of this material. The views expressed in this material accurately reflect the personal views of the author regarding the subject securities and issuers. Officers, directors and partners in the Houlihan Lokey group of companies may have positions in the securities of the companies discussed. This presentation does not constitute a recommendation with respect to the securities of any company discussed herein, is not intended to provide information upon which to base an investment decision, and should not be construed as such. Houlihan Lokey or its affiliates may from time to time provide investment banking or related services to these companies. Like all Houlihan Lokey employees, the author of this presentation receives compensation that is affected by overall firm profitability. Any public companies included in the Houlihan Lokey indices are companies commonly used for industry information to show performance within a sector. They do not include all public companies that could be categorized within the sector and were not created as benchmarks; they do not imply benchmarking and do not constitute recommendations for a particular security and/or sector. The charts and graphs used in this report have been compiled by Houlihan Lokey solely for purposes of illustration. This presentation mentions a number of companies; however, none of these companies is the subject of this

• presentation. The companies mentioned include Houlihan Lokey financial restructuring and other financial advisory clients, as

well as companies involved in transactions where Houlihan Lokey has provided these services to other participants in the transactions. This material may not be reproduced in any format by any means or redistributed without the prior written consent of Houlihan Lokey.

Introduction

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Houlihan Lokey Overview

Premier Middle Market Investment Bank

# 1 Advisor on Middle Market M&A Transactions # 1 Provider of Fairness Opinions # 1 Financial Restructuring Practice  700+ people, in 11 offices worldwide, allow Houlihan Lokey to provide clients in-depth global exposure and end-to-end advisory solutions  Senior officers in the US and Europe have strong Wall Street credentials and serve more than 1,000 clients annually, ranging from closely-held companies to Fortune 500 Corporations  Partnered with ORIX Corporation (NYSE: IX, TSE: 8591), a leading integrated financial services group headquartered in Tokyo

Introduction

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Background of Kevin P. DeSanto

 Mr. DeSanto is a Vice President in the Aerospace•Defense•Government (“ADG”) investment banking group in the Washington, DC office of Houlihan

• Lokey. His responsibilities include overall engagement

management and execution for corporate finance assignments, primarily mergers and acquisitions. In addition,

• Mr. DeSanto coordinates the ADG Group’s defense and

government services industry coverage efforts and has been quoted in publications including Washington Technology, Government Corporate News and Fortune Magazine.  Regarding mergers and acquisitions experience, Mr. DeSanto provides clients both sell-side and buy-side transaction support. Select clients have included bd Systems, L-3 Communications, Development Alternatives, Manufacturing Technology, Impact Innovations Group, OAO Technology Solutions, Eagan, McAllister & Associates, Quality Research and Radian. In addition, he participates in a variety of financial advisory engagements including transaction fairness, solvency analysis and recapitalization strategies.  Mr. DeSanto earned a B.S. in business administration with a concentration in finance from Georgetown University’s McDonough School of Business. He is licensed with the NASD as a General Securities Representative (Series 7, 63). Kevin P. DeSanto Vice President kdesanto@hlhz.com T: (703) 714 – 1710 F: (703) 760 – 4864 1800 Tysons Boulevard, Suite 300 McLean, Virginia 22102

Introduction

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Discussion Summary Develop Framework for Analyzing the Publicly-traded Defense Companies Perspectives on Key Trends in the DoD Budget Overview of Critical Industry and Company-specific Factors Assess Current Pricing on a Relative Basis Identify the Multiple Avenues Available to Invest in “Defense” Answer Your Questions (When I Know the Answer)

Introduction

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Defense Industry Pyramid

$30 Billion $1 Billion $300 Million

Primes & major subs Few remaining mid-tier Suppliers Military technology industrial base remains fragmented among thousands of small suppliers

D i v e r s i f i c a t i

• n

Pure-Play Niche

Diversification

• f customers and

technology more common in >$50 million companies

$30 Billion $1 Billion $300 Million

Primes & major subs Few remaining mid-tier Suppliers Military technology industrial base remains fragmented among thousands of small suppliers

D i v e r s i f i c a t i

• n

D i v e r s i f i c a t i

• n

Pure-Play Niche

Diversification

• f customers and

technology more common in >$50 million companies

$200 Million Introduction

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How to Play in Defense

Aerospace

Homeland

Security

Defense

Opportunities to Benefit From Diversified Business Models in a Recovering Market that has Meaningful Defense Exposure? A Bevy of Options for Capitalizing on Key DoD Themes and Strategies – Where Will the $ Flow? Where is the Value - Smaller Pure-plays, Traditional Defense/Government Contractors or Diversified Industrials?

Government

Services Companies Supporting High Priority Initiatives Within the DoD – How Low Can They Go?

Introduction

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Other Ways to Play in Defense State and Local (e.g., Maximus, Affiliated Computer Services, Tyler Technologies) Engineering & Construction (e.g., Jacobs Engineering, Fluor, Tetra Tech, URS) Diversified IT (e.g., CSC, EDS, Perot, Unisys, Wireless Facilities) Foreign (e.g., VT Group, Serco Group) SPACs (e.g, Good Harbor, Federal Services Acquisition Corp.)

Introduction

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ADG ADG

Why Investors Play in Defense

$500 Billion Market

(Revenue and EV)

Strong Investment Returns Revenue & Margin Visibility Leverageable Assets Identifiable Long-Term Growth Drivers Supports National Priorities $70 Billion Unused Debt Capacity Liquid Private Market

(1,500 transactions since 2000)

Introduction

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Signs of the Times

Industry Trends M&A Markets Public Markets Companies Remain Enthusiastic About Growth Opportunities…But Investors are Becoming More Cautious Support of IPOs, Secondaries and Acquisition Strategies…But Investors are Becoming More Cautious Broadened Buyer Universe, Stable Activity and Pricing…But Increased Regulatory Scrutiny Financing Widely Available Sources of Capital at All Levels

• f the Capital Structure…At Increased Cost

Introduction

Budget Perspectives

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Overall DoD Budget “Temperature” On-going Federal Budget Deficits Slower Baseline Budget Growth Administration – Democrat vs. Republican DoD vs. Civilian vs. Homeland Security “War Tax” QDR/BRAC Investment Accounts vs. O&M Spending

Budget Perspectives

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DoD Budget Relative to Federal Deficit

8% CAGR 6% CAGR

Budget Perspectives

DoD Spending and Federal Budget Scenario

• $225
• $175
• $125
• $75
• $25

$25 $75 $125 1998 1999 2000 2001 2002 2003 2004 2005P 2006P 2007P 2008P 2009P ($ in billions) (5.0%) (4.0%) (3.0%) (2.0%) (1.0%) 0.0% 1.0% 2.0% 3.0% Surplus (Deficit) as a % of GDP Procurement RDT&E Surplus (Deficit) as a % of GDP

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Healthy Defense Budget “Better than expected…” President’s Nearly $440 Billion FY2007 Defense Budget Request was Approximately 5% Greater Than FY2006 Investment Accounts (Total Procurement and RDT&E) Expected to Grow at 4.6% CAGR from FY2007 to FY2011 Mismatch Between Outlays and Actual Expected Costs of Conflicts Raise Concerns About Viability of Major Programs (e.g., JSF, F-22) Supplemental Budgets Unlikely to Continue

Budget Perspectives

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Projected Declines in Overall DoD Budget

Budget Perspectives

$0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 2004 2005 2006E 2007E 2008E 2009E 2010E 2011E $MM 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% Supplemental DoD Spending less Supplemental % of GDP Source: DoD

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FY2007 Appropriations Breakdown

Budget Perspectives

FY 2007 Budget by Service

Defense W ide 16% USMC 4% Army 25% Navy 25% USAF 30%

FY 2007 Appropriations Breakdown

Other 4% RDT&E 17% O&M 35% Military Personnel 25% Procurement 19%

Source: DoD

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Congressional Impact on Procurement

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 $MM

• 1.0%

1.0% 3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% Presidential Request Actual Net Change Source: DoD

Budget Perspectives

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QDR Perspectives QDR Linked to FY2007 Defense Budget Request as They Were Submitted to Congress Simultaneously Evolutionary QDR Focus Areas

Defending the Homeland Defeating Terrorist Extremism Helping Shape the Choices of Countries at Strategic

Crossroads

Countering Weapons of Mass Destruction (“WMD”)

Budget Perspectives

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QDR Perspectives (Cont.) Transformational Communications Architecture Enhances Land-based Network and Satellite Communication and High- bandwidth, Survivable Internet protocol Long-term Programs Maintained – FCS, F-22 and JSF Doubling of UAV Capacity and Development of New Long Range Bomber by FY2018 Investment in Joint Mobility, Intelligence, Surveillance and Reconnaissance Increase in Special Operations Forces Acquisition Reform

Budget Perspectives

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QDR Perspectives (Cont.) Accelerate Army’s Movement to Modular/Deployable Units and Headquarters Orienting Joint Air Capabilities – Larger Payloads, Longer Range and Penetration of Denied Areas Build Joint Maritime Forces for “Closer-to-Conflict” Support “Knowledge-Based Forces” Partially Shifts Traditional Focus

• n Guns/Ships/Planes to C4ISR Systems

Development of Tools for Assessing, Analyzing and Delivering Information Commitment to Spend for “Long War”

Budget Perspectives

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2005 BRAC Impact

Washington Oregon California Idaho Montana Nevada Utah Arizona Colorado Wyom ing New Mexic o Texas Oklahom a Kansas Nebraska S

• uth Dakota

North Dakota Minnesota Wisc onsin Illinois Missouri Arkansas Louisiana Missis- sippi Alabama North Carolina Virginia Mic higan New York P ennsylvania Dela ware New Ham pshire Maine Tennessee Kentuc ky West Virginia Iowa S

• uth

Carolina New Jersey Geor gia Florida Indiana Ohio Maryland Connec tic ut Massa- c husetts Rhode Island Verm ont

Washington, DC Huntsville Ellsworth Fort Meade Fort Bliss Fort Belvoir San Diego Fort Carson New London Eglin Jacksonville Fort Benning Fort Riley New Orleans Little Rock Portsmouth Aberdeen Moline Great Lakes Indianapolis San Antonio Dayton Fort Knox

2005 BRAC Losers 2005 BRAC Winners

Budget Perspectives

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2005 BRAC Impact (Cont.) $1.3 Billion in Expected Savings Over Next 20 Years Creates Many Opportunities, Mostly IT and Communications Related

Secure Systems Transition Uninterrupted IT Infrastructure Network Storage Business Process Re-Engineering Business System Modernization

Commitment to Outsource Non-core DoD Functions

Budget Perspectives

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Program Funding Issues/Cost Estimates

 Program Cost Growth More Serious Issue as Budgets Slow  GAO

 30% of FY2006 RDT&E Budget Spent on “Rework”  Planned Future Investments in New Weapons Systems up 100%

($700 Billion to $1.4 Trillion) Despite Flawed Process  Future Combat Systems (Boeing/SAIC)

 $82.7 Billion < $127.2 Billion (54% Excess)

 Joint Strike Fighter (Lockheed Martin)

 $62 Million/Plane < $82 Million/Plane (33% Excess)

 Another Comanche?

Budget Perspectives

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Impact of News Events on Defense Stocks

BRAC 2005 July 7, 2005 London Attacks February 2006 Budget Report August 2006 London Terror Plot Mid-Term Elections QDR 2005 Hurricane Katrina 2004 Presidential Election

(1) Change in stock price one week after each announcement or event

Stock Price Change

Expected Impact vs. Actual Change(1)

4.8% = Actual change = Expected change

• 1.0%

3.5% ? 0.6% 0.5%

• 1.0%
• 2.8%

Budget Perspectives

Industry Perspectives

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Major Themes That Impact Public Markets

 Financial Performance  Achieving Growth and Earnings Targets  Budget Chatter - Perception vs. Reality  Large Cap vs. Small Cap  Receptivity to IPOs, Secondary Offerings and SPACs  Sector Rotation  Shareholders vs. Customers  M&A – Buy vs. Divestiture  Share Buybacks  Contract Awards  Credit Markets

Industry Perspectives

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Company Attributes That Drive Value

Long-Term Customer Relationships Deep Technical Expertise Priority Market Involvement Defensible Budget Access Prime Contract Positions Market Share Gains Employee Base/Security Clearances Performance Track Record Management Team Controlled Balance Sheet Meet or Beat Estimates No Historical Mishaps Business / Capability Focus

Business / Qualitative Financial / Quantitative

Proprietary Technology Backlog and Long-term Contracts Contract Types/Profitability

Industry Perspectives

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Company-Specific Strategy Focus Customer Priorities Congressional Sentiments Technology Acceleration DoD Transformation Growing Importance of Software and Services Priority Markets

C4ISR Homeland Security Intelligence Training and Simulation Networking and

Communications

Obsolescence Management Big-ticket Programs

Industry Perspectives

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Customer Demand Continuing To Grow Outsourcing Global War on Terrorism Supplemental Budgets Transformation Technology Upgrades Homeland Security Aging Infrastructure (People and Technology)

Industry Perspectives

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Changing Nature of Customer Relationships GWACs, Schedules and Enterprise MACs Contract Bundling Sole-Source vs. Competitive Set-Aside Programs Contract Terms Arcane Infrastructure Expedited Process? Prime vs. Sub vs. Teaming vs. JV Earmarks/Plus-Ups

Industry Perspectives

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Competition Increasing Highly Fragmented Industry Larger Contracts = Do or Die Knowledge Transfer Partner or Competitor? New Entrants “Katrina Effect” B&P Costs Security Clearances

Industry Perspectives

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Consolidation and Divestitures Active M&A Market Portfolio Management Energizes Growth Deployment of Capital Differentiation and Diversification Commercial? New Market Entrants Accretion/Dilution

Industry Perspectives

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Cash Flow Strong, Predictable Margins Margin Expansion Opportunities Limited Capital Expenditures Real Backlog/Bookings vs. Opportunities Earnings Visibility Clean Balance Sheets Availability/Cost of Capital for Financing

Industry Perspectives

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Factors That Could Reshape Market Changes in Security Threats and Priorities

Old/On-going - Iraq/Afghanistan New - Iran/China

Changes in Congress/Administration End of Supplemental Spending More Non-Defense Discretionary Spending Healthcare and Retirement Costs Talent Pool Tax Payer Revolt Excitement in Broader Markets

Industry Perspectives

Market Dynamics

Aerospace

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Capabilities of Companies Aircraft Replacement Parts Antennas Avionics & Surveillance Electronics and Power Systems Life Support Systems Lighting Products Modeling, Simulation and Training Motors, Actuators, Switches and Cables Process, Analytical and Test Instruments Sensors

Aerospace

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Pricing at Highest Levels in Past 10 Years

Investors are Optimistic About Commercial Aerospace Orders are Leading Indicator for Valuations

2005 Saw a Very Strong Spike in Aircraft Orders That Will

Provide the Backlog for Strong Future Deliveries

2005 Expected to be Peak in Order Cycle, but Strong Backlog

Exists Rise in Valuations Typically Precedes a Recovery

Valuations are Typically Highest in the Early Phases of a Market

Recovery Many “Aerospace” Companies Have Meaningful Portions of Business Derived From the Defense and Government Markets

Aerospace

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Aerospace

Public Company Pricing – EV/Revenue

0.00x 0.20x 0.40x 0.60x 0.80x 1.00x 1.20x 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

Aerospace

Average = 1.06x

*LT M as of September 13, 2006 Sources: FactSet, H oulihan Lokey `

x

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Aerospace

Public Company Pricing – EV/EBITDA

0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

Aerospace

Average = 8.6x

*LT M as of September 13, 2006 Sources: FactSet, H oulihan Lokey `

x

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Comparative Aerospace Subsector Public Multiples

Aerospace

Comparative Aerospace Subsector Public Company Multiples

12.0 x 12.7 x 14.5 x 13.4 x 16.2 x 9.6 x 10.1 x 9.9 x 10.1 x 13.2 x 0.0 x 2.0 x 4.0 x 6.0 x 8.0 x 10.0 x 12.0 x 14.0 x 16.0 x 18.0 x Aerostructures Airframe Manufacturers Aviation & Airport Services Aviation Controls Space

LTM Median EBIT Multiple LTM Median EBITDA Multiple

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Current Performance Metrics

Revenue Growth LTM EBITDA ($mm) EV/ EBITDA(1) Net Cash (Debt) ($mm) LFY NFY

AMETEK Inc. 16.4% 12.1% $320.9 11.6x ($647.3) CAE Inc. 12.3% 8.8% $184.7 12.2x ($198.3) Cobham plc 16.6% 9.7% $370.5 11.1x ($176.7) Ducommun Inc. 11.0% 19.8% $27.7 8.0x ($39.6) Esterline Technologies Corp. 36.1% 15.6% $125.0 9.1x ($251.4) Goodrich Corp. 14.8% 8.5% $846.9 7.6x ($1,543.6) HEICO Corp. 25.0% 41.6% $72.1 12.9x ($53.7) Moog Inc. 12.0% 22.7% $183.4 9.7x ($352.1) Rockwell Collins Inc. 17.6% 12.6% $772.0 12.1x ($120.1) Teledyne Technologies Inc 18.7% 14.9% $139.6 10.1x ($37.0) Median 16.5% 15.2% $184.0 10.6x ($187.5)

(1) EV calculated as of September 13, 2006

Aerospace

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Aerospace vs. S&P 500

Aerospace

Aerospace Pricing Index 2001 - September 2006

50 100 150 200 250 300 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06

Index Value Aerospace Sector Aerospace with Defense Exposure S&P 500

Source: Factset Pricing as of 9/13/2006

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Recent Pricing Changes

Stock Price Change  CY2004  CY2005  1Q2006  2Q2006  YTD (1)

AMETEK Inc. 47.8% 19.3% 5.7% 5.4% 3.3% CAE Inc. (13.8%) 68.7% 7.7% (7.4%) 8.9% Cobham plc 5.9% 37.0% 10.9% (11.2%) 5.6% Ducommun Inc. (6.7%) 2.4% 3.9% (16.6%) (16.9%) Esterline Technologies Corp. 22.4% 13.9% 15.0% (2.7%) (6.7%) Goodrich Corp. 9.9% 25.9% 6.1% (7.6%) (4.3%) HEICO Corp. 36.5% 14.6% 22.4% (10.5%) 24.4% Moog Inc. 37.7% (6.1%) 25.1% (3.6%) 19.9% Rockwell Collins Inc. 31.3% 17.8% 21.3% (0.9%) 15.9% Teledyne Technologies Inc. 56.1% (1.1%) 22.3% (8.0%) 37.7% Median 26.9% 16.2% 12.9% (7.5%) 7.3%

(1) YTD Pricing as of Stock Price Closes September 13, 2006

Aerospace

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Subsectors Defined

Aerospace

Aerostructures Airframe Manufacturers Aviation Controls Aviation & Airport Services Space

Alcoa Boeing Co. Aerosonic Corp. AAR Corp. Boeing Astronics Bombardier Inc. Ametek BBA Group Gilat Avcorp Industries Inc. Dassault Aviation CAE Inc. Fairchild Corp. Integral Systems Inc. CPI Aerostructures Inc. EADS Cobham Heico Corp. Lockheed Martin Ducommun Inc. Embraer-Empresa Bras Crane Co. Menzies Loral Space & Communications GKN plc Finmeccanica Spa Curtiss-Wright Corp. Northstar Aerospace Macdonald Dettwiler & Associates Heroux-Devtek Inc. Kaman Corp. Esterline Technologies Penauille Polyserv Orbital Sciences Corp Hexcel Corp. Textron Inc. Garmin Senior Spacehab Inc K&F Industries United Technologies Corp. Goodrich Corp. Triumph Group Inc. Ladish Co. Inc. Heico Corp. Umeco Latecoere Honeywell International Inc. Vector Aerospace Corp. LMI Aerospace Inc. Innovative Solutions & Supp. Inc. Magellan Aerospace L-3 Communications Northstar Aerospace Inc. Precision Castparts Corp. Reinhold Industries Senior plc

Market Dynamics

Defense

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Capabilities of Companies

 Combat Systems Development, Production and Support  Electronic Warfare Systems  Information Systems & Technology  Manned and Unmanned Airborne Systems  Marine Systems  Missile Defense  Ordnance and Tactical Systems  Radar and Air Defense Systems  Satellite and Space Systems  Technical Services

Defense

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Valuations Steady Recently Valuations Remain Above 10-year Averages Growth From On-going “Operations” and Subsequent “Replenishment” Big-ticket Programs Have Stabilized From a Budget Stand- point, Although Not Out of the Weeds Yet Budget Pressures Have Been Offset by Strong Recent Earnings Highest Valuations in Subsectors – C4ISR, Force Protection “Primes” are Consistent

Defense

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Public Company Pricing – EV/Revenue

Defense 0.00x 0.20x 0.40x 0.60x 0.80x 1.00x 1.20x 1.40x 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

Defense *LT M as of September 13, 2006 Sources: FactSet, H oulihan Lokey

Average = 1.18x

`

x

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Public Company Pricing – EV/EBITDA

Defense 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5 2 6 *

Defense *LT M as of September 13, 2006 Sources: FactSet, H oulihan Lokey

Average = 9.3x `

x

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Comparative Defense Subsector Public Multiples

Defense

Comparative Defense Subsector Public Company Multiples

12.8 x 11.9 x 11.9 x 11.8 x 13.1 x 10.5 x 10.1 x 10.1 x 10.4 x 10.4 x 0.0 x 2.0 x 4.0 x 6.0 x 8.0 x 10.0 x 12.0 x 14.0 x Communications Land Vehicles Propulsion Missiles & Ordnance Sensors

LTM Median EBIT Multiple LTM Median EBITDA Multiple

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Current Performance Metrics

Revenue Growth LTM EBITDA ($mm) EV/ EBITDA(1) Net Cash (Debt) ($mm) LFY NFY

Alliant Techsystems Inc. 14.8% 7.0% $424.9 9.5x ($1,192.6) BAE Systems plc 25.0% 24.9% $2,092.7 12.3x ($1,984.0) General Dynamics Corp. 11.1% 15.2% $2,838.0 10.6x ($2,250.0) L-3 Communications 36.9% 29.4% $1,346.4 10.4x ($4,518.0) Lockheed Martin Corp. 4.7% 6.4% $3,838.0 9.4x ($1,831.0) Northrop Grumman Corp. 2.9% (0.6%) $3,007.0 9.2x ($3,884.0) Raytheon Co. 8.1% 6.6% $2,325.0 10.5x ($3,111.0) Median 11.1% 7.0% $2,325.0 10.4x ($2,250.0)

(1) EV calculated as of September 13, 2006

Defense

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Defense vs. S&P 500

Defense

Defense Pricing Index 2001 - September 2006

50 100 150 200 250 300 350 1/12/2001 4/12/2001 7/12/2001 10/12/2001 1/12/2002 4/12/2002 7/12/2002 10/12/2002 1/12/2003 4/12/2003 7/12/2003 10/12/2003 1/12/2004 4/12/2004 7/12/2004 10/12/2004 1/12/2005 4/12/2005 7/12/2005 10/12/2005 1/12/2006 4/12/2006 7/12/2006

Index Value Defense Sector S&P 500

Source: Factset Pricing as of 9/13/2006

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Recent Pricing Changes

Stock Price Change  CY2004  CY2005  1Q2006  2Q2006  YTD (1)

Alliant Techsystems Inc. 13.2% 16.5% 1.3% (1.1%) 7.4% BAE Systems plc 37.2% 65.6% 10.2% (12.1%) 0.3% General Dynamics Corp. 15.7% 9.0% 12.2% 2.3% 21.3% L-3 Communications Holdings Inc. 42.6% 1.5% 15.4% (12.1%) 2.1% Lockheed Martin Corp. 8.1% 14.5% 18.1% (4.5%) 29.2% Northrop Grumman Corp. 13.7% 10.6% 13.6% (6.2%) 12.9% Raytheon Co. 29.3% 3.4% 14.2% (2.8%) 17.6% Median 15.7% 10.6% 13.6% (4.5%) 12.9%

(1) YTD Pricing as of Stock Price Closes September 13, 2006

Defense

Houlihan Lokey 56 AAII Washington DC Metro Chapter

Subsectors Defined

Defense

Land Vehicles Propulsion Missiles & Ordnance Sensors Communications

Armor Holdings Alliant Techsystems Inc. Alliant Techsystems Inc. Argon ST Inc. Aeroflex Inc. BAE Systems Gencorp Inc. Boeing Axsys Technologies Inc. Ametek General Dynamics General Electric Co. Chemring Group BAE Systems Anaren Inc. Oshkosh Truck Corp. Honeywell International Inc. EADS Boeing BAE Systems Singapore Technologies Rolls Royce General Dynamics DRS Technologies Inc. Boeing Co. United Technologies Corp. Textron L-3 Communications EDO Corp. Cubic Corp. United Technologies Lockheed Martin Elbit Systems DRS Technologies Inc. Raytheon Flir Systems Inc. EDO Corp. ITT Industries Filtronic L-3 Communications Finmeccanica Spa Northrop Grumman Frequency Electronics Inc. Raytheon General Dynamics Thales Harris Corp. Ultra Electronics United Industrial Corp.

Market Dynamics

Government

Houlihan Lokey 58 AAII Washington DC Metro Chapter

Capabilities of Companies Acquisition and Logistics Support Information Assurance and Security Information Technology Services Knowledge Management Outsourced Support Services Systems/Software Engineering and Integration Technical Services Training Systems and Services

Government

Houlihan Lokey 59 AAII Washington DC Metro Chapter

Multiples are Contracting Valuations in the Government Services Segment are Slightly Below 10-year Averages 2001 – 2005 Pricing Driven by Organic Growth Expectations 2006 is a Different Story as Market Reacts to Slower Realization of Growth Limited Universe of Public Companies, Especially Large Cap Companies

Government

Houlihan Lokey 60 AAII Washington DC Metro Chapter

Historical Price Earnings Growth

0.70 1.20 1.10 1.20 1.30 0.70 1.10 0.40 0.70 1.00 1.30 1.60 2000 2001 2002 2003 2004 2005 2006 PEG Ratio

Forward P/E vs Projected EPS Growth

OPTIMISM GAP CONFIDENCE GAP

As of September 13, 2006 Source: FACTSET, Houlihan Lokey

*

Government

?

x

Houlihan Lokey 61 AAII Washington DC Metro Chapter

Public Company Pricing – EV/Revenue

Government

0.00x 0.20x 0.40x 0.60x 0.80x 1.00x 1.20x 1.40x 1.60x 1.80x 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006*

EV/Revenue

Average = 1.09x * YT D as of September 13, 2006. Sources: FactSet, H oulihan Lokey

x

Houlihan Lokey 62 AAII Washington DC Metro Chapter

Public Company Pricing – EV/EBITDA

Government

0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x 18.0x 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5 2 6 *

EV/EBITDA

* YT D as of September 13, 2006 Sources: FactSet, H oulihan Lokey Average = 11.3x

x

Houlihan Lokey 63 AAII Washington DC Metro Chapter

Comparative Government Subsector Public Multiples

Government

Comparative Government Services Subsector Public Company Multiples

11.5 x 15.2 x 13.0 x 9.9 x 9.8 x 9.9 x 0.0 x 2.0 x 4.0 x 6.0 x 8.0 x 10.0 x 12.0 x 14.0 x 16.0 x Federal IT Diversified IT Technical Services

LTM Median EBIT Multiple LTM Median EBITDA Multiple

Houlihan Lokey 64 AAII Washington DC Metro Chapter

Current Performance Metrics

Revenue Growth LTM EBITDA ($mm) EV/ EBITDA(1) Net Cash (Debt) ($mm) LFY NFY

Analex Corp. 49.5% 7.9% $13.1 7.1x ($25.9) CACI International Inc. 8.1% 10.3% $194.3 10.0x ($343.2) Dynamics Research Corp. 9.0% (11.5%) $22.0 5.2x ($23.1) DynCorp International Inc. 2.4% 19.4% $168.2 7.6x ($616.6) ManTech International Corp. 18.5% 18.5% $101.8 10.7x ($24.4) MTC Technologies Inc. 36.7% 17.3% $46.6 9.1x ($85.4) NCI Inc. 11.7% 5.4% $14.1 9.4x $17.0 QinetiQ Group plc 22.9% 13.8% $200.7 21.3x ($257.6) SI International Inc. 51.7% 19.1% $43.1 10.9x ($82.7) SRA International Inc. 33.7% 10.7% $128.3 12.0x $173.6 VSE Corp. 29.7% NA $11.8 5.8x $5.1 Median 22.9% 12.2% $46.6 9.4x ($25.9)

(1) EV calculated as of September 13, 2006

Government

Houlihan Lokey 65 AAII Washington DC Metro Chapter

Public Company Composite Stock Performance

Government

Government Services Price Index 2001 - September 2006

100 200 300 400 500 600 700 800 1/12/2001 4/12/2001 7/12/2001 10/12/2001 1/12/2002 4/12/2002 7/12/2002 10/12/2002 1/12/2003 4/12/2003 7/12/2003 10/12/2003 1/12/2004 4/12/2004 7/12/2004 10/12/2004 1/12/2005 4/12/2005 7/12/2005 10/12/2005 1/12/2006 4/12/2006 7/12/2006

Index Value Government Services S&P 500

Source: Factset Pricing as of 9/13/2006

Houlihan Lokey 66 AAII Washington DC Metro Chapter

Recent Pricing Changes

Stock Price Change  CY2004  CY2005  1Q2006  2Q2006  YTD(1)

Analex Corp. 20.5% (33.9%) (6.5%) (11.8%) (24.4%) CACI International Inc. 40.1% (15.8%) 14.6% (11.3%) (5.7%) Dynamics Research Corp. 10.5% (13.3%) (3.6%) (8.9%) (36.4%) DynCorp International Inc. NA NA NA (30.8%)(2) (21.7%)(2) ManTech International Corp. (4.8%) 17.4% 19.2% (7.1%) 14.4% MTC Technologies Inc. 4.2% (18.4%) 2.2% (15.6%) (19.5%) NCI Inc. NA (59.9%)(3) 2.0% (6.4%) (20.9%) QinetiQ Group plc NA NA (93.2%)(4) (9.5%) (93.8%)(4) SI International Inc. 57.2% (0.6%) 15.0% (12.8%) (0.3%) SRA International Inc. 49.0% (4.9%) 23.5% (29.4%) (4.7%) VSE Corp. 90.0% 67.2% (1.4%) (28.3%) (25.7%) Median 30.3% (13.3%) 2.1% (11.8%) (20.9%)

(1) YTD Pricing as of Stock Price Closes September 13, 2006 (2) Price Change Calculated from IPO on 05/03/2006 (3) Price Change Calculated from IPO on 10/24/2005 – 12/31/2005 (4) Price Change Calculated from IPO on 02/10/2006

Government

Houlihan Lokey 67 AAII Washington DC Metro Chapter

Subsectors Defined

Government

Federal IT Diversified IT Technical Services

NCI Inc. Affiliated Comp Svcs Atkins WS Analex CIBER Fluor Group CACI International Inc. Computer Horizons Dyncorp International Dynamics Research Corp. Computer Sciences Corp. Jacobs Engineering Group Inc. ManTech International Covansys Serco Group MTC Technologies Electronic Data Systems Tetra Tech Inc. SI International Inc. Keane Inc. URS Corp. SRA International, Inc. Maximus Inc. VT Group Perot Systems Corp. VSE Corp. Tyler Technologies Unisys Wireless Facilities

Market Dynamics

Homeland Security

Houlihan Lokey 69 AAII Washington DC Metro Chapter

Market Overview

30,000 Companies Currently Supporting the Federal Government (<20 in the Late 1990s) $130 Billion in Funding Since 9/11 $65 Billion to 10 Largest Contractors DHS Budget Growing From $28 Billion in 2002 to $42 Billion in 2007 (8.4% CAGR) HLS Industry Expected to Reach $170 Billion Per Year in FY2015

Homeland Security

Sources: Forbes Magazine, Office of Management and Budget, Homeland Security Research

Houlihan Lokey 70 AAII Washington DC Metro Chapter

Capabilities of Companies Alarm, Security and Surveillance Systems Biometrics Data-processing Services First Responders Guard Services Inspection Systems Natural Disasters Non-Lethal Defense Products Safety and Survival Gear

Homeland Security

Houlihan Lokey 71 AAII Washington DC Metro Chapter

Volatile Valuations “Buzzword” – What Does it Really Mean to the Investor? Major Ramp-up in This Sector Post-9/11 Current Premium Compared to Balance of ADG Inconsistent Pricing/Valuations Tied to Inconsistent Funding “Perceptions” “Niche Plays” vs. “Real Players”

Homeland Security

Houlihan Lokey 72 AAII Washington DC Metro Chapter

Public Company Pricing – EV/Revenue

Homeland Security

0.00x 0.50x 1.00x 1.50x 2.00x 2.50x 3.00x 3.50x 2001 2002 2003 2004 2005 2006

H omeland Security

Average = 2.35x `

*LT M as of September 13, 2006 Sources: FactSet, H oulihan Lokey x

Houlihan Lokey 73 AAII Washington DC Metro Chapter

Public Company Pricing – EV/EBITDA

Homeland Security

0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x 2001 2002 2003 2004 2005 2006

H omeland Security *LT M as of September 13, 2006 Sources: FactSet, H oulihan Lokey

Average = 11.2x

` x

Houlihan Lokey 74 AAII Washington DC Metro Chapter

Current Performance Metrics

Revenue Growth LTM EBITDA ($mm) EV/ EBITDA(1) Net Cash (Debt) ($mm) LFY NFY

American Science & Engineering 85.3% (7.9%) $50.7 7.0x $41.3 Armor Holdings Inc. 67.1% 50.5% $290.4 9.2x ($809.1) Cogent Inc. 82.3% (29.5%) $60.2 15.9x $27.9 FLIR Systems Inc. 5.4% 12.5% $149.1 13.1x ($63.3) Ionatron Inc. 72.7% (6.2%) NA NA ($0.0) Lakeland Industries Inc. 3.6% 5.6% $10.1 7.4x ($4.7) OSI Systems, Inc. 55.8% 32.9% $16.1 19.1x $2.8 RAE Systems Inc. 32.4% 8.5% $1.2 NMF $11.8 TASER International Inc. (29.5%) 40.6% $7.0 NMF $15.3 TVI Corp. (13.3%) 13.3% $7.3 9.1x $1.9 Verint Systems Inc. 29.6% 26.3% $43.5 18.0x $58.0 Median 32.4% 12.5% $29.8 11.1x $2.8

(1) EV calculated as of September 13, 2006

Homeland Security

Houlihan Lokey 75 AAII Washington DC Metro Chapter

Homeland Security vs. S&P 500

Homeland Security

Homeland Security Price Index 2001 - September 2006

500 1000 1500 2000 2500 3000 1/12/01 4/12/01 7/12/01 10/12/01 1/12/02 4/12/02 7/12/02 10/12/02 1/12/03 4/12/03 7/12/03 10/12/03 1/12/04 4/12/04 7/12/04 10/12/04 1/12/05 4/12/05 7/12/05 10/12/05 1/12/06 4/12/06 7/12/06

Index Value Homeland Security S&P 500

Source: Factset Pricing as of 9/13/2006

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Recent Pricing Changes

Stock Price Change  CY2004  CY2005  1Q2006  2Q2006  YTD(1)

American Science & Engineering 242.0% 51.3% 49.8% (38.0%) (23.3%) Armor Holdings Inc. 78.7% (9.3%) 36.7% (5.9%) 22.3% Cogent Inc. NA (31.3%) (19.1%) (17.8%) (38.2%) FLIR Systems Inc. 74.8% (30.0%) 27.2% (19.4%) 23.6% Ionatron Inc. NA (10.8%) 33.6% (53.0%) (43.6%) Lakeland Industries Inc. 12.2% 1.4% 9.5% (27.0%) (25.7%) OSI Systems, Inc. 18.2% (19.0%) 14.9% (15.9%) (1.0%) RAE Systems Inc. 114.7% (51.9%) 1.7% 12.0% (15.7%) TASER International Inc. 361.1% (78.0%) 52.2% (25.3%) 9.3% TVI Corp. 53.4% (10.1%)

• 1.3%

(10.6%) (45.5%) Verint Systems Inc. 61.0% (5.1%) 2.6% (17.5%) (5.6%) Median 74.8% (10.8%) 14.9% (17.8%) (15.7%)

(1) YTD Pricing as of Stock Price Closes September 13, 2006

Homeland Security

Houlihan Lokey 77 AAII Washington DC Metro Chapter

Who Are The Real Players? An Incomplete List…

GE Honeywell IBM L-3 Lockheed Martin

Homeland Security

ManTech International Northrop Grumman Raytheon SAIC Smiths Group

Summary

Houlihan Lokey 79 AAII Washington DC Metro Chapter

Closing Remarks Lots of Questions… Lots of Opportunities… Thank You For Your Valuable Time and the Opportunity to Present to Your Organization

Summary