Transcript Header - Metropolitan DC Chapter AAII

September 16, 2006
Is It Time To Play Offense or
Defense with Defense Stocks?
American Association of
Individual Investors (DC Chapter)
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
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Table of Contents
AAII Washington DC Metro Chapter
In t rod u ct ion ............................................................
Bu d get P ersp ect ives ................................................
In d u st ry P ersp ect ives ..............................................
M arket D yn am ics
Aerosp ace ...........................................................
D efen se ..............................................................
G overn m en t .......................................................
H om elan d Secu rit y ...........................................
Su m m ary .................................................................
Houlihan Lokey
1
2
3
4
5
6
7
8
2
Disclaimer
AAII Washington DC Metro Chapter
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completeness of the information provided within this publication. The material presented reflects information known to the
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Lokey.
Houlihan Lokey
3
Introduction
Introduction
Houlihan Lokey Overview
AAII Washington DC Metro Chapter
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# 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
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integrated financial services group headquartered in Tokyo
Houlihan Lokey
5
Introduction
Background of Kevin P. DeSanto
AAII Washington DC Metro Chapter
 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.
Kevin P. DeSanto
Vice President
[email protected]
T: (703) 714 – 1710
F: (703) 760 – 4864
1800 Tysons Boulevard,
Suite 300
McLean, Virginia 22102
Houlihan Lokey
 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).
6
Introduction
Discussion Summary
AAII Washington DC Metro Chapter
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)
Houlihan Lokey
7
Defense Industry Pyramid
Introduction
AAII Washington DC Metro Chapter
$30 Billion
Primes & major subs
$1 Billion
Few remaining
mid-tier Suppliers
Diversification
$200
$300Million
Million
Diversification
of customers and
technology more
common in >$50
million companies
Military technology
industrial base remains
fragmented among
thousands of small
suppliers
Pure-Play Niche
Houlihan Lokey
8
Introduction
How to Play in Defense
AAII Washington DC Metro Chapter
Aerospace
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?
Services Companies Supporting High Priority
Government Initiatives Within the DoD – How Low Can They
Go?
Homeland
Security
Houlihan Lokey
Where is the Value - Smaller Pure-plays,
Traditional Defense/Government Contractors or
Diversified Industrials?
9
Introduction
Other Ways to Play in Defense
AAII Washington DC Metro Chapter
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.)
Houlihan Lokey
10
Introduction
Why Investors Play in Defense
AAII Washington DC Metro Chapter
$500 Billion
Market
(Revenue and EV)
Strong Investment
Returns
$70 Billion Unused
Debt Capacity
Revenue & Margin
Visibility
ADG
Liquid
Private Market
(1,500 transactions
since 2000)
Supports
National
Priorities
Houlihan Lokey
Leverageable
Assets
Identifiable
Long-Term
Growth Drivers
11
Introduction
Signs of the Times
AAII Washington DC Metro Chapter
Industry
Trends
Companies Remain Enthusiastic About Growth
Opportunities…But Investors are Becoming More
Cautious
Public
Markets
Support of IPOs, Secondaries and Acquisition
Strategies…But Investors are Becoming More
Cautious
Financing
Widely Available Sources of Capital at All Levels
of the Capital Structure…At Increased Cost
M&A
Markets
Broadened Buyer Universe, Stable Activity and
Pricing…But Increased Regulatory Scrutiny
Houlihan Lokey
12
Budget Perspectives
Budget
Perspectives
Overall DoD Budget “Temperature”
AAII Washington DC Metro Chapter
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
Houlihan Lokey
14
Budget
Perspectives
DoD Budget Relative to Federal Deficit
AAII Washington DC Metro Chapter
DoD Spending and Federal Budget Scenario
6% CAGR
3.0%
$125
2.0%
$75
1.0%
$25
0.0%
-$25
(1.0% )
-$75
(2.0% )
-$125
(3.0% )
-$175
(4.0% )
-$225
(5.0% )
Surplus (Defic it) as a % of GDP
($ in billions)
8% CAGR
1998 1999 2000 2001 2002 2003 2004 2005P 2006P 2007P 2008P 2009P
Procurement
Houlihan Lokey
RDT&E
Surplus (Deficit) as a % of GDP
15
Budget
Perspectives
Healthy Defense Budget
AAII Washington DC Metro Chapter
“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
Houlihan Lokey
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Budget
Perspectives
Projected Declines in Overall DoD Budget
AAII Washington DC Metro Chapter
D oD Spending as a % of GD P
$ 6 0 0 ,0 0 0
4 .5 %
4 .0 %
$ 5 0 0 ,0 0 0
3 .5 %
$MM
$ 4 0 0 ,0 0 0
3 .0 %
2 .5 %
$ 3 0 0 ,0 0 0
2 .0 %
$ 2 0 0 ,0 0 0
1 .5 %
1 .0 %
$ 1 0 0 ,0 0 0
0 .5 %
$0
0 .0 %
2004
S ource: D oD
Houlihan Lokey
2005
2006E 2007E 2008E 2009E 2010E 2011E
Su p p lemen t al
D oD Sp en d in g less Su p p lemen t al
% of G D P
17
Budget
Perspectives
FY2007 Appropriations Breakdown
AAII Washington DC Metro Chapter
FY 2 0 0 7 Appropriations Breakdow n
O t h er
4%
RD T& E
17%
M ilit ary
Person n el
25%
Procu remen t
19%
Source: D oD
Houlihan Lokey
FY 2 0 0 7 Budget by Service
D efen se W id e
16%
Army
25%
U SAF
30%
O&M
35%
N avy
25%
U SM C
4%
18
Budget
Perspectives
Congressional Impact on Procurement
AAII Washington DC Metro Chapter
$ 9 0 ,0 0 0
1 5 .0 %
$ 8 0 ,0 0 0
1 3 .0 %
$ 7 0 ,0 0 0
1 1 .0 %
$MM
$ 6 0 ,0 0 0
9 .0 %
$ 5 0 ,0 0 0
7 .0 %
$ 4 0 ,0 0 0
5 .0 %
$ 3 0 ,0 0 0
3 .0 %
$ 2 0 ,0 0 0
1 .0 %
$ 1 0 ,0 0 0
$0
-1 .0 %
1996
S ource: D oD
Houlihan Lokey
1997
1998
1999
2000
Presid en t ial Requ est
2001
Act u al
2002
2003
2004
2005
N et C h an ge
19
Budget
Perspectives
QDR Perspectives
AAII Washington DC Metro Chapter
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”)
Houlihan Lokey
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Budget
Perspectives
QDR Perspectives (Cont.)
AAII Washington DC Metro Chapter
Transformational Communications Architecture Enhances
Land-based Network and Satellite Communication and Highbandwidth, 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
Houlihan Lokey
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Budget
Perspectives
QDR Perspectives (Cont.)
AAII Washington DC Metro Chapter
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
on Guns/Ships/Planes to C4ISR Systems
Development of Tools for Assessing, Analyzing and
Delivering Information
Commitment to Spend for “Long War”
Houlihan Lokey
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Budget
Perspectives
2005 BRAC Impact
AAII Washington DC Metro Chapter
Fort Carson
Fort Knox
Ellsworth
Fort Riley
Wa shing to n
Indianapolis
Monta na
North Da ko ta
Portsmouth
Great Lakes
Minneso ta
New Ha m p shire
Verm ont
Ma ssa c husetts
Dayton
Oreg o n
New London
Ma ine
Wisc o nsin
So uth Da ko ta
Id a ho
New Yo rk
Mic hig a n
Wyo m ing
Pennsylva nia
Iowa
Ne b ra ska
Illinois
C olora do
Vir g inia
Missouri
Washington, DC
De la wa re
We st
Vir ginia
Ind iana
Uta h
Ka nsa s
New Je rsey
Ohio
Neva d a
Ca lifo rnia
Rho de
Island
C onne c tic ut
Aberdeen
Ma ryla nd
Kentuc ky
No rth C arolina
Fort Meade
Tenne sse e
Okla hom a
Arizo na
South
Ca ro lina
Arka nsa s
Ne w Me xic o
Mississip p i
San Diego
Texas
Geo g
r ia
Fort Belvoir
Flo rida
Louisia na
Fort Benning
Huntsville
Fort Bliss
Little Rock
San Antonio
Jacksonville
Eglin
New Orleans
Moline
2005 BRAC Losers
Houlihan Lokey
Ala b a m a
2005 BRAC Winners
23
Budget
Perspectives
2005 BRAC Impact (Cont.)
AAII Washington DC Metro Chapter
$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
Houlihan Lokey
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Budget
Perspectives
Program Funding Issues/Cost Estimates
AAII Washington DC Metro Chapter
 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?
Houlihan Lokey
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Budget
Perspectives
Impact of News Events on Defense Stocks
AAII Washington DC Metro Chapter
Stock Price Change
Expected Impact vs. Actual Change(1)
2004
Presidential
Election
4.8%
BRAC
2005
3.5%
Hurricane
Katrina
0.6%
0.5%
QDR
2005
-1.0%
= Actual change
(1)
July 7, 2005
London
Attacks
February 2006
Budget
Report
-1.0%
August 2006
London
Terror Plot
-2.8%
Mid-Term
Elections
?
= Expected change
Change in stock price one week after each announcement or event
Houlihan Lokey
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Industry Perspectives
Industry
Perspectives
Major Themes That Impact Public Markets
AAII Washington DC Metro Chapter
 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
Houlihan Lokey
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Industry
Perspectives
Company Attributes That Drive Value
AAII Washington DC Metro Chapter
Business / Qualitative
Priority Market Involvement
Market Share Gains
Business / Capability Focus
Employee Base/Security Clearances
Defensible Budget Access
Management Team
Long-Term Customer Relationships
Deep Technical Expertise
Prime Contract Positions
Proprietary Technology
Financial / Quantitative
Performance Track Record
Meet or Beat Estimates
Controlled Balance Sheet
No Historical Mishaps
Backlog and Long-term Contracts
Contract Types/Profitability
Houlihan Lokey
29
Industry
Perspectives
Company-Specific Strategy Focus
AAII Washington DC Metro Chapter
Customer Priorities
Congressional Sentiments
Technology Acceleration
DoD Transformation
Growing Importance of Software and Services
Priority Markets
 C4ISR
 Homeland Security
 Intelligence
 Training and Simulation
Houlihan Lokey
 Networking and
Communications
 Obsolescence Management
 Big-ticket Programs
30
Industry
Perspectives
Customer Demand Continuing To Grow
AAII Washington DC Metro Chapter
Outsourcing
Global War on Terrorism
Supplemental Budgets
Transformation
Technology Upgrades
Homeland Security
Aging Infrastructure (People and Technology)
Houlihan Lokey
31
Industry
Perspectives
Changing Nature of Customer Relationships
AAII Washington DC Metro Chapter
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
Houlihan Lokey
32
Industry
Perspectives
Competition Increasing
AAII Washington DC Metro Chapter
Highly Fragmented Industry
Larger Contracts = Do or Die
Knowledge Transfer
Partner or Competitor?
New Entrants
“Katrina Effect”
B&P Costs
Security Clearances
Houlihan Lokey
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Industry
Perspectives
Consolidation and Divestitures
AAII Washington DC Metro Chapter
Active M&A Market
Portfolio Management
Energizes Growth
Deployment of Capital
Differentiation and Diversification
Commercial?
New Market Entrants
Accretion/Dilution
Houlihan Lokey
34
Industry
Perspectives
Cash Flow
AAII Washington DC Metro Chapter
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
Houlihan Lokey
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Industry
Perspectives
Factors That Could Reshape Market
AAII Washington DC Metro Chapter
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
Houlihan Lokey
36
Market Dynamics
Aerospace
Aerospace
Capabilities of Companies
AAII Washington DC Metro Chapter
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
Houlihan Lokey
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Aerospace
Pricing at Highest Levels in Past 10 Years
AAII Washington DC Metro Chapter
 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
Houlihan Lokey
39
Aerospace
Public Company Pricing – EV/Revenue
AAII Washington DC Metro Chapter
1.20x
Average = 1.06x
1.00x
0.80x
0.60x
0.40x
`
0.20x
*LT M as of S eptember 1 3 , 2 0 0 6
S ources: FactS et, H oulihan
x Lokey
Houlihan Lokey
*
20
06
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
19
96
0.00x
Aerospace
40
Public Company Pricing – EV/EBITDA
Aerospace
AAII Washington DC Metro Chapter
12.0x
10.0x
Average = 8.6x
8.0x
6.0x
4.0x
`
2.0x
*LT M as of S eptember 1 3 , 2 0 0 6
S ources: FactS et, H oulihanx Lokey
Houlihan Lokey
*
20
06
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
19
96
0.0x
Aerospace
41
Aerospace
Comparative Aerospace Subsector Public Multiples
AAII Washington DC Metro Chapter
Comparative Aerospace Subsector
Public Company Multiples
18.0 x
16.2 x
16.0 x
14.5 x
13.4 x
14.0 x
13.2 x
12.7 x
12.0 x
12.0 x
9.6 x
10.0 x
10.1 x
9.9 x
10.1 x
8.0 x
6.0 x
4.0 x
2.0 x
0.0 x
Aerostructures
Airframe
Manufacturers
Aviation & Airport
Services
LTM Median EBIT Multiple
Houlihan Lokey
Aviation Controls
Space
LTM Median EBITDA Multiple
42
Aerospace
Current Performance Metrics
AAII Washington DC Metro Chapter
Revenue Growth
LFY
NFY
LTM EBITDA
($mm)
EV/
EBITDA(1)
Net Cash (Debt)
($mm)
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
Houlihan Lokey
43
Aerospace
Aerospace vs. S&P 500
AAII Washington DC Metro Chapter
Aerospace Pricing Index
2001 - September 2006
300
250
Index Value
200
150
100
50
0
6
l-0
Ju 6
r-0
Ap 6
0
nJa 5
-0
ct
O
5
l-0
Ju 5
r-0
Ap 5
0
nJa 4
-0
ct
O
4
l-0
Ju 4
r-0
Ap 4
0
nJa 3
-0
ct
O
3
l-0
Ju 3
r-0
Ap 3
0
nJa 2
-0
ct
O
2
l-0
Ju 2
r-0
Ap 2
0
nJa 1
-0
ct
O
1
l-0
Ju 1
r-0
Ap 1
0
n-
Ja
Aerospace Sector
Aerospace with Defense Exposure
S&P 500
Source: Factset
Pricing as of 9/13/2006
Houlihan Lokey
44
Aerospace
Recent Pricing Changes
AAII Washington DC Metro Chapter
Stock Price Change
 CY2004
AMETEK Inc.
 CY2005
 1Q2006
 2Q2006

YTD (1)
47.8%
19.3%
5.7%
5.4%
3.3%
(13.8%)
68.7%
7.7%
(7.4%)
8.9%
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%)
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%
CAE Inc.
Cobham plc
Goodrich Corp.
(1) YTD Pricing as of Stock Price Closes September 13, 2006
Houlihan Lokey
45
Aerospace
Subsectors Defined
AAII Washington DC Metro Chapter
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
Houlihan Lokey
46
Market Dynamics
Defense
Defense
Capabilities of Companies
AAII Washington DC Metro Chapter
 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
Houlihan Lokey
48
Defense
Valuations Steady Recently
AAII Washington DC Metro Chapter
Valuations Remain Above 10-year Averages
Growth From On-going “Operations” and Subsequent
“Replenishment”
Big-ticket Programs Have Stabilized From a Budget Standpoint, 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
Houlihan Lokey
49
Public Company Pricing – EV/Revenue
Defense
AAII Washington DC Metro Chapter
1.40x
Average = 1 .1 8 x
1.20x
1.00x
0.80x
0.60x
`
0.40x
0.20x
*
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
19
96
0.00x
*LT M as of S eptember 1 3 , 2 0 0 6
S ources: FactS et, H oulihan xLokey
Defen se
Houlihan Lokey
50
Public Company Pricing – EV/EBITDA
Defense
AAII Washington DC Metro Chapter
12.0x
10.0x
Average = 9.3x
8.0x
6.0x
4.0x
`
2.0x
*
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
19
96
0.0x
*LT M as of S eptember 1 3 , 2 0 0 6
S ources: FactS et, H oulihanx Lokey
Defen se
Houlihan Lokey
51
Comparative Defense Subsector Public Multiples
Defense
AAII Washington DC Metro Chapter
Comparative Defense Subsector
Public Company Multiples
14.0 x
13.1 x
12.8 x
11.9 x
12.0 x
10.5 x
11.9 x
10.1 x
11.8 x
10.1 x
10.4 x
10.4 x
10.0 x
8.0 x
6.0 x
4.0 x
2.0 x
0.0 x
Communications
Land Vehicles
Propulsion
LTM Median EBIT Multiple
Houlihan Lokey
Missiles & Ordnance
Sensors
LTM Median EBITDA Multiple
52
Defense
Current Performance Metrics
AAII Washington DC Metro Chapter
Revenue Growth
LFY
NFY
LTM EBITDA
($mm)
EV/
EBITDA(1)
Net Cash (Debt)
($mm)
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)
11.1%
7.0%
$2,325.0
10.4x
($2,250.0)
Median
(1) EV calculated as of September 13, 2006
Houlihan Lokey
53
200
150
Index Value
Defense vs. S&P 500
Defense
AAII Washington DC Metro Chapter
Defense Pricing Index
2001 - September 2006
350
300
250
100
50
0
6
00
/2
12 6
7/ 200
/
12 6
4/ 200
/
5
12 0
1/ /20
2
/1 5
10 200
/
12 5
7/ 200
/
12 5
4/ 200
/
4
12 0
1/ /20
2
/1 4
10 200
/
12 4
7/ 200
/
12 4
4/ 200
/
3
12 0
1/ /20
2
/1 3
10 200
/
12 3
7/ 200
/
12 3
4/ 200
/
2
12 0
1/ /20
2
/1 2
10 200
/
12 2
7/ 200
/
12 2
4/ 200
/
1
12 0
1/ /20
2
/1 1
10 200
/
12 1
7/ 200
/
12 1
4/ 200
/
12
1/
54
Houlihan Lokey
S&P 500
Defense Sector
Source: Factset
Pricing as of 9/13/2006
Defense
Recent Pricing Changes
AAII Washington DC Metro Chapter
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%
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%
Lockheed Martin Corp.
(1) YTD Pricing as of Stock Price Closes September 13, 2006
Houlihan Lokey
55
Defense
Subsectors Defined
AAII Washington DC Metro Chapter
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.
Houlihan Lokey
56
Market Dynamics
Government
Government
Capabilities of Companies
AAII Washington DC Metro Chapter
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
Houlihan Lokey
58
Government
Multiples are Contracting
AAII Washington DC Metro Chapter
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
Houlihan Lokey
59
Government
Forward P/E vs Projected EPS Growth
AAII Washington DC Metro Chapter
Historical Price Earnings Growth
1.60
OPTIMISM GAP
1.30
1.20
1.30
1.10
1.20
1.00
1.10
?
0.70
0.70
0.70
CONFIDENCE GAP
0.40
2000
2001
2002
2003
2004
2005
2006
*
PEG Ratio
As of September 13, 2006
Source: FACTSET, HoulihanxLokey
Houlihan Lokey
60
Public Company Pricing – EV/Revenue
Government
AAII Washington DC Metro Chapter
1.80x
1.60x
EV/Revenue
1.40x
1.20x
Average = 1 .0 9 x
1.00x
0.80x
0.60x
0.40x
0.20x
*
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
0.00x
* YT D as of S eptember 1 3 , 2 0 0 6 .
x Lokey
S ources: FactS et, H oulihan
Houlihan Lokey
61
Public Company Pricing – EV/EBITDA
Government
AAII Washington DC Metro Chapter
18.0x
16.0x
EV/EBITDA
14.0x
Average = 1 1 .3 x
12.0x
10.0x
8.0x
6.0x
4.0x
2.0x
*
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
0.0x
* YT D as of S eptember 1 3 , 2 0 0 6
S ources: FactS et, H oulihanx Lokey
Houlihan Lokey
62
Government
Comparative Government Subsector Public Multiples
AAII Washington DC Metro Chapter
Comparative Government Services Subsector
Public Company Multiples
16.0 x
15.2 x
14.0 x
12.0 x
10.0 x
13.0 x
11.5 x
9.9 x
9.8 x
9.9 x
8.0 x
6.0 x
4.0 x
2.0 x
0.0 x
Federal IT
Diversified IT
LTM Median EBIT Multiple
Houlihan Lokey
Technical Services
LTM Median EBITDA Multiple
63
Government
Current Performance Metrics
AAII Washington DC Metro Chapter
Revenue Growth
LFY
Analex Corp.
LTM EBITDA
($mm)
NFY
EV/
EBITDA(1)
Net Cash (Debt)
($mm)
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
Houlihan Lokey
64
6
00
/2
12 6
7/ 200
/
12 6
4/ 200
/
5
12 0
1/ /20
2
/1 5
10 200
/
12 5
7/ 200
/
12 5
4/ 200
/
4
12 0
1/ /20
2
/1 4
10 200
/
12 4
7/ 200
/
12 4
4/ 200
/
3
12 0
1/ /20
2
/1 3
10 200
/
12 3
7/ 200
/
12 3
4/ 200
/
2
12 0
1/ /20
2
/1 2
10 200
/
12 2
7/ 200
/
12 2
4/ 200
/
1
12 0
1/ /20
2
/1 1
10 200
/
12 1
7/ 200
/
12 1
4/ 200
/
12
1/
S&P 500
Government Services
65
Houlihan Lokey
400
Index Value
Public Company Composite Stock Performance
Government
AAII Washington DC Metro Chapter
Government Services Price
Index 2001 - September 2006
800
700
600
500
300
200
100
0
Source: Factset
Pricing as of 9/13/2006
Government
Recent Pricing Changes
AAII Washington DC Metro Chapter
Stock Price Change
 CY2004
 CY2005
 1Q2006
 2Q2006
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%)
NA
NA
NA
(30.8%)(2)
(21.7%)(2)
(4.8%)
17.4%
19.2%
(7.1%)
14.4%
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%)
DynCorp International Inc.
ManTech International Corp.
MTC Technologies Inc.
 YTD(1)
(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
Houlihan Lokey
66
Government
Subsectors Defined
AAII Washington DC Metro Chapter
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
Houlihan Lokey
67
Market Dynamics
Homeland Security
Homeland
Security
Market Overview
AAII Washington DC Metro Chapter
30,000 Companies Currently Supporting
Government (<20 in the Late 1990s)
the
Federal
$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 $170 Billion Per Year in
FY2015
Sources: Forbes Magazine, Office of Management and Budget, Homeland Security Research
Houlihan Lokey
69
Homeland
Security
Capabilities of Companies
AAII Washington DC Metro Chapter
Alarm, Security and Surveillance Systems
Biometrics
Data-processing Services
First Responders
Guard Services
Inspection Systems
Natural Disasters
Non-Lethal Defense Products
Safety and Survival Gear
Houlihan Lokey
70
Homeland
Security
Volatile Valuations
AAII Washington DC Metro Chapter
“Buzzword” – What Does it Really Mean to the Investor?
Major Ramp-up in This Sector Post-9/11
Current Premium Compared to Balance of ADG
Inconsistent Pricing/Valuations Tied to Inconsistent Funding
“Perceptions”
“Niche Plays” vs. “Real Players”
Houlihan Lokey
71
Homeland
Security
Public Company Pricing – EV/Revenue
AAII Washington DC Metro Chapter
3.50x
3.00x
2.50x
Average = 2.35x
2.00x
1.50x
`
1.00x
0.50x
06
20
05
20
04
20
03
20
02
20
20
01
0.00x
*LT M as of S eptember 1 3 , 2 0 0 6
S ources: FactS et, H oulihanxLokey
H om elan d Security
Houlihan Lokey
72
Homeland
Security
Public Company Pricing – EV/EBITDA
AAII Washington DC Metro Chapter
16.0x
14.0x
Average = 11.2x
12.0x
10.0x
8.0x
6.0x
`
4.0x
2.0x
06
20
05
20
04
20
03
20
02
20
20
01
0.0x
*LT M as of S eptember 1 3 , 2 0 0 6
S ources: FactS et, H oulihanxLokey
H om elan d Security
Houlihan Lokey
73
Homeland
Security
Current Performance Metrics
AAII Washington DC Metro Chapter
Revenue Growth
LFY
NFY
LTM EBITDA
($mm)
EV/
EBITDA(1)
Net Cash (Debt)
($mm)
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
5.4%
12.5%
$149.1
13.1x
($63.3)
72.7%
(6.2%)
NA
NA
($0.0)
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
FLIR Systems Inc.
Ionatron Inc.
Lakeland Industries Inc.
(1) EV calculated as of September 13, 2006
Houlihan Lokey
74
Homeland
Security
Homeland Security vs. S&P 500
AAII Washington DC Metro Chapter
Homeland Security Price Index
2001 - September 2006
3000
2500
Index Value
2000
1500
1000
500
0
6
/0
12
7/ 06
/
12
4/ 06
/
12
1/ /05
2
/1
10 05
/
12
7/ 05
/
12
4/ 05
/
12
1/ /04
2
/1
10 04
/
12
7/ 04
/
12
4/ 04
/
12
1/ /03
2
/1
10 03
/
12
7/ 03
/
12
4/ 03
/
12
1/ /02
2
/1
10 02
/
12
7/ 02
/
12
4/ 02
/
12
1/ /01
2
/1
10 01
/
12
7/ 01
/
12
4/ 01
/
12
1/
Homeland Security
S&P 500
Source: Factset
Pricing as of 9/13/2006
Houlihan Lokey
75
Homeland
Security
Recent Pricing Changes
AAII Washington DC Metro Chapter
Stock Price Change
 CY2004
 CY2005
 1Q2006
 2Q2006
242.0%
51.3%
49.8%
(38.0%)
(23.3%)
78.7%
(9.3%)
36.7%
(5.9%)
22.3%
NA
(31.3%)
(19.1%)
(17.8%)
(38.2%)
74.8%
(30.0%)
27.2%
(19.4%)
23.6%
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%)
American Science & Engineering
Armor Holdings Inc.
Cogent Inc.
FLIR Systems Inc.
Ionatron Inc.
 YTD(1)
(1) YTD Pricing as of Stock Price Closes September 13, 2006
Houlihan Lokey
76
Homeland
Security
Who Are The Real Players?
AAII Washington DC Metro Chapter
An Incomplete List…
 GE
 ManTech International
 Honeywell
 Northrop Grumman
 IBM
 Raytheon
 L-3
 SAIC
 Lockheed Martin
 Smiths Group
Houlihan Lokey
77
Summary
Summary
Closing Remarks
AAII Washington DC Metro Chapter
Lots of Questions…
Lots of Opportunities…
Thank You For Your Valuable Time and the Opportunity to
Present to Your Organization
Houlihan Lokey
79