4/6/2011 Aerospace & Defense Market Developments March 2011 Confidential 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 Aerospace & Comprehensive Coverage and Global Reach Defense Market Developments M&A Capital Markets Debt Advisory/Restructuring Valuations/Opinions/Reporting � General Advisory � Public and Private Equity � Waivers and Amendments � Fairness Opinions � Sellside M&A Financings � Tenders and Exchange Offers � Solvency Opinions � Buyside M&A � Share Buybacks � Debt for Equity Swaps � Valuation Opinions � Leveraged Transactions � PIPE Financing � Pre-Packaged and Pre- � Tax & Financial Reporting � Takeover Defense � High-Yield Bonds Negotiated Restructuring Plans Valuation Comprehensiv � Secondary Advisory � Investment-Grade Debt � Distressed M&A � Portfolio Valuation e Offering of � Corporate Alliance & JVs p � Leveraged Loans g � Insolvency and Sovereign y g � Investment Advisory Services y Independent � Dividend Recapitalizations Advisory � Financial Consulting Advice � Asset-Backed Financings No. 1 global M&A fairness opinion No. 1 global investment banking No. 1 M&A advisor for U.S. advisor over the past 10 years Raised over $20 billion of capital in restructuring advisor transactions under $1.5 billion in Perform over 1,000 valuation the past five years Largest global restructuring 2010 engagements, on average, practice annually Minneapolis Chicago London Frankfurt Beijing San Francisco New York Tokyo Hong Kong Global Reach Paris Washington D.C. Los Angeles Atlanta Dallas Aerospace • Business Consumer, Financial Defense • Energy Healthcare Services Food & Retail Institutions Government Industry Specific Knowledge Real Estate Infrastructure Media & Transportation Industrials Services & Technology and Lodging Telecom & Logistics Materials & Leisure 1 1
4/6/2011 Aerospace & Deep Industry Knowledge & Relationships Defense Market Developments � 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 Annual Private Company Conference on October 28, 2010 � HL has client relationships with many of the most important market players a portfolio company of Carlyle Venture has acquired substantially all the assets has acquired Partners II, L.P. of the North American Public Services has acquired has sold a majority stake in its the satellite development and manufacturing business of has been acquired by Buyside Advisor B id Ad i Buyside Advisor B Buyside Advisor id Ad i Sellside Advisor S Fairness Opinion O � HL successfully engages with the industry’s most active and prominent buyers 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 Sellside Advisor Fairness Opinion Sellside Advisor & Fairness Opinion Sellside Advisor Sellside Advisor Sellside Advisor Sellside Advisor 2 Aerospace & Aerospace Sector is Fundamentally Strong Defense Market Developments The commercial aerospace sector was looking for a bottom in the early 1990’s. Today, the industry seems to have weathered similar uncertainty. Cyclical Commercial Aerospace Market Comments � Over the past 40 years, Expansion Contraction Expansion Contraction Expansion 7.5x / there have been five (1991-1995): (1996-1999): (2000-2003): (2004-2007): 9.1x (a) EV/EBITDA 8.3x (a) EV/EBITDA10.5x (a) EV/EBITDA 7.9x (a) distinct aerospace cycles EV/EBITDA 11.6x (a) 4.0x 15.0% averaging eight years in duration and ranging 3.5x 12.0% Rev Pass Ton ‐ Miles % Change between six and eleven 3.0x 9.0% years. NBER Declared Recession NBER Declared Recession NBER Declared Recession Boeing Book:Bill Ratio � The chart illustrates the 2.5x 6.0% last three downturns with 2.0x 3.0% leading indicators. � Declines in air traffic 1.5x 0.0% demand usually coincide 1.0x -3.0% with a recession. � Aircraft deliveries peak 0.5x -6.0% during a recession as OEMs reduce backlogs OEMs reduce backlogs 0 0x 0.0x -9 0% 9.0% and book:bill ratios fall below 1:1. � Aerospace public company (b) (c) Boeing's Book:Bill Ratio Rev Pass Ton-Miles % Change multiples are significantly better during expansionary periods. 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 3 2
4/6/2011 Aerospace & Budget Forecasts: Rosy Bias? Defense Market Developments The drop in defense spending in the late 1980’s was significantly more drastic than anticipated at the peak of spending in 1985. 1985 Forecasted Budget Authority vs. Actual Budget Authority $700 ons) (in FY1985 $ billio $600 $500 $400 $300 Realized CAGR = 2% $200 $100 $0 1987 1988 1989 1990 National Defense Budget Estimates FY1985 Actual � 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. 4 Budget Environment: We’ve Been Here Aerospace & Defense Market Before Developments 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. Department of Defense Budgeted Authority (in FY2011 Constant $) 1,000 900 ons) 800 (FY 2011 $ billio 700 600 500 400 300 200 100 0 Supplemental / OCO Budgeted Authority RDT&E Procurement O&M OTHER 4% OTHER 4% Then (Late 1980’s) vs. Today RDT&E Preceded by significant increase in spending fueled by actual / potential 10% RDT&E 14% MIL MIL conflict PERSONNEL PERSONNEL 26% 28% � Then: Cold War – arms race � Today: Iraq & Afghanistan – active conflict PROCUREMENT PROCUREMENT Nature of threat dictates spending 20% 29% � Then: Focus on RDT&E and Procurement OPR & MAINT OPR & MAINT 29% � Today: O&M – sustaining two wars 36% Budget Outlooks reacting to political pressure to reduce deficit � Then: Reduced Soviet threat – domestic focus *Excludes supplemental / OCO funding � Today: Need to address deficit and currency value 5 Source: National Defense Budget Estimates for FY2011 3
4/6/2011 Aerospace & 2010 ADG M&A Market Highlights Defense Market Developments Then Now � Characterized By: � Characterized By: � Dramatic decrease in activity � Slight increase in activity � Overall price declines in transactions � Overall price increases in transactions � Continued credit market issues significantly curtailing - Premium valuations available to premium firms leverage � Return of more stable credit markets, creating an increase in financial sponsor activity � Returning confidence provides reason for optimism � M&A Activity Driven By: � M&A Activity Driven By: � Buyside: � Portfolio adjustment - Desire for diversification � Continued pursuit of diversification � Sellside: � Strategic buyers looking to acquire into priority DoD areas that provide customer “stickiness” - Portfolio adjustment � Concerns over budget cuts � Concerns over budget cuts - Delevering D l i � Bargain hunting - Liquidity 6 Aerospace & M&A Activity Reverts to the Mean Defense Market Developments Aerospace, Defense, and Government M&A Activity 450 429 400 381 368 150 350 113 306 284 129 Number of Transactions 300 264 244 242 242 96 250 233 94 203 137 190 111 200 79 140 93 77 94 155 133 65 98 72 150 101 46 76 80 80 86 81 59 42 42 100 100 40 40 142 128 112 106 50 87 89 79 76 76 69 71 67 67 0 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
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