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Is It Time To Play Offense or  Defense with Defense Stocks? American Association of  Individual Investors (DC Chapter) Los...
Table of Contents
Disclaimer <ul><li>Houlihan Lokey Howard & Zukin and Houlihan Lokey are trade names for Houlihan, Lokey, Howard & Zukin, I...
Introduction
Houlihan Lokey Overview Premier Middle Market Investment Bank # 1 Advisor on Middle Market M&A Transactions # 1 Provider o...
Background of Kevin P. DeSanto <ul><li>Mr. DeSanto is a Vice President in the  Aerospace•Defense•Government (“ADG”) invest...
Discussion Summary <ul><li>Develop Framework for Analyzing the Publicly-traded Defense Companies </li></ul><ul><li>Perspec...
Defense Industry Pyramid $200 Million Introduction
How to Play in Defense Aerospace Homeland Security Defense Opportunities to Benefit From Diversified Business Models in a ...
Other Ways to Play in Defense <ul><li>State and Local (e.g., Maximus, Affiliated Computer Services, Tyler Technologies) </...
Why Investors Play in Defense ADG $500 Billion Market (Revenue and EV) Strong Investment Returns Revenue & Margin Visibili...
Signs of the Times Industry Trends M&A   Markets Public   Markets Companies Remain Enthusiastic About Growth Opportunities...
Budget Perspectives
Overall DoD Budget “Temperature” <ul><li>On-going Federal Budget Deficits </li></ul><ul><li>Slower Baseline Budget Growth ...
DoD Budget Relative to Federal Deficit 8% CAGR 6% CAGR Budget Perspectives
Healthy Defense Budget <ul><li>“ Better than expected…” </li></ul><ul><li>President’s Nearly $440 Billion FY2007 Defense B...
Projected Declines in Overall DoD Budget Budget Perspectives
FY2007 Appropriations Breakdown Budget Perspectives
Congressional Impact on Procurement Budget Perspectives
QDR Perspectives <ul><li>QDR Linked to FY2007 Defense Budget Request as They Were Submitted to Congress Simultaneously </l...
QDR Perspectives (Cont.) <ul><li>Transformational Communications  Architecture Enhances Land-based Network and Satellite C...
QDR Perspectives (Cont.) <ul><li>Accelerate Army’s Movement to  Modular/Deployable  Units and Headquarters </li></ul><ul><...
2005 BRAC Impact 2005 BRAC Losers 2005 BRAC Winners Budget Perspectives
2005 BRAC Impact (Cont.) <ul><li>$1.3 Billion in Expected Savings Over Next 20 Years </li></ul><ul><li>Creates Many Opport...
Program Funding Issues/Cost Estimates <ul><li>Program Cost Growth More Serious Issue as Budgets Slow </li></ul><ul><li>GAO...
Impact of News Events on Defense Stocks Budget Perspectives
Industry Perspectives
Major Themes That Impact Public Markets <ul><li>Financial Performance </li></ul><ul><li>Achieving Growth and Earnings Targ...
Company Attributes That Drive Value Long-Term Customer Relationships Deep Technical Expertise Priority Market Involvement ...
Company-Specific Strategy Focus <ul><li>Customer Priorities </li></ul><ul><li>Congressional Sentiments </li></ul><ul><li>T...
Customer Demand Continuing To Grow <ul><li>Outsourcing </li></ul><ul><li>Global War on Terrorism </li></ul><ul><li>Supplem...
Changing Nature of Customer Relationships <ul><li>GWACs, Schedules and Enterprise MACs </li></ul><ul><li>Contract Bundling...
Competition Increasing <ul><li>Highly Fragmented Industry </li></ul><ul><li>Larger Contracts = Do or Die </li></ul><ul><li...
Consolidation and Divestitures <ul><li>Active M&A Market </li></ul><ul><li>Portfolio Management </li></ul><ul><li>Energize...
Cash Flow <ul><li>Strong, Predictable Margins </li></ul><ul><li>Margin Expansion Opportunities </li></ul><ul><li>Limited C...
Factors That Could Reshape Market <ul><li>Changes in Security Threats and Priorities </li></ul><ul><ul><li>Old/On-going - ...
Market Dynamics Aerospace
Capabilities of Companies <ul><li>Aircraft Replacement Parts </li></ul><ul><li>Antennas </li></ul><ul><li>Avionics & Surve...
Pricing at Highest Levels in Past 10 Years <ul><li>Investors are Optimistic About Commercial Aerospace </li></ul><ul><li>O...
Public Company Pricing – EV/Revenue Aerospace x
Public Company Pricing – EV/EBITDA Aerospace x
Comparative Aerospace Subsector Public Multiples Aerospace
Current Performance Metrics <ul><li>EV calculated as of September 13, 2006 </li></ul>Aerospace ($251.4) 9.1x $125.0 15.6% ...
Aerospace vs. S&P 500 Aerospace Source: Factset Pricing as of 9/13/2006
Recent Pricing Changes <ul><li>YTD Pricing as of Stock Price Closes September 13, 2006 </li></ul>Aerospace 8.9% (7.4%) 7.7...
Subsectors Defined Aerospace Vector Aerospace Corp. Umeco Triumph Group Inc. Senior Penauille Polyserv Northstar Aerospace...
Market Dynamics Defense
Capabilities of Companies <ul><li>Combat Systems Development, Production and Support </li></ul><ul><li>Electronic Warfare ...
Valuations Steady Recently <ul><li>Valuations Remain Above 10-year Averages </li></ul><ul><li>Growth From On-going “Operat...
Public Company Pricing – EV/Revenue Defense x
Public Company Pricing – EV/EBITDA Defense x
Comparative Defense Subsector Public Multiples  Defense
Current Performance Metrics <ul><li>EV calculated as of September 13, 2006 </li></ul>Defense ($3,111.0) 10.5x $2,325.0 6.6...
Defense vs. S&P 500 Defense Source: Factset Pricing as of 9/13/2006
Recent Pricing Changes <ul><li>YTD Pricing as of Stock Price Closes September 13, 2006 </li></ul>Defense 17.6% (2.8%) 14.2...
Subsectors Defined Defense Harris Corp. General Dynamics Frequency Electronics Inc. Finmeccanica Spa Filtronic EDO Corp. D...
Market Dynamics Government
Capabilities of Companies <ul><li>Acquisition and Logistics Support </li></ul><ul><li>Information Assurance and Security <...
Multiples are Contracting <ul><li>Valuations in the Government Services Segment are Slightly Below 10-year Averages </li><...
Forward P/E vs Projected EPS Growth OPTIMISM GAP CONFIDENCE GAP As of September 13, 2006 Source: FACTSET, Houlihan Lokey  ...
Public Company Pricing – EV/Revenue Government x
Public Company Pricing – EV/EBITDA Government x
Comparative Government Subsector Public Multiples  Government
Current Performance Metrics <ul><li>EV calculated as of September 13, 2006 </li></ul>Government ($25.9) 7.1x $13.1 7.9% 49...
Public Company Composite Stock Performance Government Source: Factset Pricing as of 9/13/2006
Recent Pricing Changes <ul><li>YTD Pricing as of Stock Price Closes September 13, 2006 </li></ul><ul><li>Price Change Calc...
Subsectors Defined Government Unisys Wireless Facilities Fluor Group CIBER Analex VT Group Maximus Inc. SRA International,...
Market Dynamics Homeland Security
Market Overview <ul><li>30,000 Companies Currently Supporting the Federal Government (<20 in the Late 1990s) </li></ul><ul...
Capabilities of Companies <ul><li>Alarm, Security and Surveillance Systems </li></ul><ul><li>Biometrics </li></ul><ul><li>...
Volatile Valuations <ul><li>“ Buzzword” – What Does it Really Mean to the Investor? </li></ul><ul><li>Major Ramp-up in Thi...
Public Company Pricing – EV/Revenue Homeland Security x
Public Company Pricing – EV/EBITDA Homeland Security x
Current Performance Metrics <ul><li>EV calculated as of September 13, 2006 </li></ul>Homeland Security ($809.1) 9.2x $290....
Homeland Security vs. S&P 500 Homeland Security Source: Factset Pricing as of 9/13/2006
Recent Pricing Changes <ul><li>YTD Pricing as of Stock Price Closes September 13, 2006 </li></ul>Homeland Security 22.3% (...
Who Are The Real Players? <ul><li>An Incomplete List… </li></ul><ul><ul><li>GE </li></ul></ul><ul><ul><li>Honeywell </li><...
Summary
Closing Remarks <ul><li>Lots of Questions… </li></ul><ul><li>Lots of Opportunities… </li></ul><ul><li>Thank You For Your V...
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  • Maturity of ADG industry consolidation – reduction in the number of large suppliers – acquisitions of smaller companies with niche capabilities DoD spending focus on electronics upgrades to extend utility of existing platforms - Focus on high-value systems, subsystems, and critical new technologies - Funding for consumables and maintenance Push toward greater systems integration leading large suppliers to bolster technology credentials
  • Risk factors: - Budget deficit - Program cancellations - BRAC 2006 DoD budget $419 billion, up 5% from 2005 Defense stocks have remained resilient despite DoD cost reduction initiatives Pentagon spending cuts spurring acquisition activity as contractors reduce weapons programs exposure and strengthen technology base
  • Public Market Pricing exceeds 10 year highs 5 yr CAGRs: - Aerostructures: 33.0% - Aviation Services: 14.8% - Airframe: 5.7% - Controls: 15.7% - Space: 11.5%
  • Public Market Pricing exceeds 10 year highs 5 yr CAGRs: - Aerostructures: 33.0% - Aviation Services: 14.8% - Airframe: 5.7% - Controls: 15.7% - Space: 11.5%
  • Since September 2001, Homeland Security Companies have outperformed aerospace, defense, and government services companies: Homeland Security public company pricing 5 yr CAGR: 98.6% Valuations driven by expected funding increases, albeit to unrealistic levels. Market is very receptive to public capital raises Cogent was the largest defense IPO in 2004 There have not been any meaningful public capital raises in 2005 Publicly traded companies still have significant amount of cash from earlier raises. IPO Momentum: Global Secure Corp Security Products and Services FY04 Rev: $5.1 M Seeking $100 M Colt Defense Inc Small Arms and Weapons FY04 Rev: $75.0 M Seeking $86.3 M LTM as of 6/05 Revenues for Constituent Homeland Security Firms ($MM): American Science &amp; Engineering (ASEI) 106.7 Cogent (COGT) 130.4 Identix (IDNX) 73.8 Ionatron (IOTN) 15.4 Lakeland Industries (LAKE) 96.4 OSI Systems (OSIS) 385.0 RAE Systems (RAE) 53.1 Taser International (TASR) 61.6 TVI Corp (TVIN) 35.5 Verint Systems (VRNT) 279.8 Armor Holdings (AH) 1,331.0 Flir Systems (FLIR) 493.8
  • Transcript of "Header"

    1. 1. 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., 3 rd Floor McLean, Virginia 22102 703.847.5225 Paris Frankfurt September 16, 2006
    2. 2. Table of Contents
    3. 3. Disclaimer <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>This material may not be reproduced in any format by any means or redistributed without the prior written consent of Houlihan Lokey. </li></ul>
    4. 4. Introduction
    5. 5. 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 <ul><li>700+ people, in 11 offices worldwide, allow Houlihan Lokey to provide clients in-depth global exposure and end-to-end advisory solutions </li></ul><ul><li>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 </li></ul><ul><li>Partnered with ORIX Corporation (NYSE: IX, TSE: 8591), a leading integrated financial services group headquartered in Tokyo </li></ul>Introduction
    6. 6. Background of Kevin P. DeSanto <ul><li>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 . </li></ul><ul><li>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. </li></ul><ul><li>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). </li></ul>Introduction McLean, Virginia 22102 1800 Tysons Boulevard, Suite 300 F: (703) 760 – 4864 T: (703) 714 – 1710 [email_address] Kevin P. DeSanto Vice President
    7. 7. Discussion Summary <ul><li>Develop Framework for Analyzing the Publicly-traded Defense Companies </li></ul><ul><li>Perspectives on Key Trends in the DoD Budget </li></ul><ul><li>Overview of Critical Industry and Company-specific Factors </li></ul><ul><li>Assess Current Pricing on a Relative Basis </li></ul><ul><li>Identify the Multiple Avenues Available to Invest in “Defense” </li></ul><ul><li>Answer Your Questions (When I Know the Answer) </li></ul>Introduction
    8. 8. Defense Industry Pyramid $200 Million Introduction
    9. 9. 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
    10. 10. Other Ways to Play in Defense <ul><li>State and Local (e.g., Maximus, Affiliated Computer Services, Tyler Technologies) </li></ul><ul><li>Engineering & Construction (e.g., Jacobs Engineering, Fluor, Tetra Tech, URS) </li></ul><ul><li>Diversified IT (e.g., CSC, EDS, Perot, Unisys, Wireless Facilities) </li></ul><ul><li>Foreign (e.g., VT Group, Serco Group) </li></ul><ul><li>SPACs (e.g, Good Harbor, Federal Services Acquisition Corp.) </li></ul>Introduction
    11. 11. Why Investors Play in Defense ADG $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
    12. 12. 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 of the Capital Structure…At Increased Cost Introduction
    13. 13. Budget Perspectives
    14. 14. Overall DoD Budget “Temperature” <ul><li>On-going Federal Budget Deficits </li></ul><ul><li>Slower Baseline Budget Growth </li></ul><ul><li>Administration – Democrat vs. Republican </li></ul><ul><li>DoD vs. Civilian vs. Homeland Security </li></ul><ul><li>“ War Tax” </li></ul><ul><li>QDR/BRAC </li></ul><ul><li>Investment Accounts vs. O&M Spending </li></ul>Budget Perspectives
    15. 15. DoD Budget Relative to Federal Deficit 8% CAGR 6% CAGR Budget Perspectives
    16. 16. Healthy Defense Budget <ul><li>“ Better than expected…” </li></ul><ul><li>President’s Nearly $440 Billion FY2007 Defense Budget Request was Approximately 5% Greater Than FY2006 </li></ul><ul><li>Investment Accounts (Total Procurement and RDT&E) Expected to Grow at 4.6% CAGR from FY2007 to FY2011 </li></ul><ul><li>Mismatch Between Outlays and Actual Expected Costs of Conflicts Raise Concerns About Viability of Major Programs (e.g., JSF, F-22) </li></ul><ul><li>Supplemental Budgets Unlikely to Continue </li></ul>Budget Perspectives
    17. 17. Projected Declines in Overall DoD Budget Budget Perspectives
    18. 18. FY2007 Appropriations Breakdown Budget Perspectives
    19. 19. Congressional Impact on Procurement Budget Perspectives
    20. 20. QDR Perspectives <ul><li>QDR Linked to FY2007 Defense Budget Request as They Were Submitted to Congress Simultaneously </li></ul><ul><li>Evolutionary QDR Focus Areas </li></ul><ul><ul><li>Defending the Homeland </li></ul></ul><ul><ul><li>Defeating Terrorist Extremism </li></ul></ul><ul><ul><li>Helping Shape the Choices of Countries at Strategic Crossroads </li></ul></ul><ul><ul><li>Countering Weapons of Mass Destruction (“WMD”) </li></ul></ul>Budget Perspectives
    21. 21. QDR Perspectives (Cont.) <ul><li>Transformational Communications Architecture Enhances Land-based Network and Satellite Communication and High-bandwidth, Survivable Internet protocol </li></ul><ul><li>Long-term Programs Maintained – FCS, F-22 and JSF </li></ul><ul><li>Doubling of UAV Capacity and Development of New Long Range Bomber by FY2018 </li></ul><ul><li>Investment in Joint Mobility, Intelligence, Surveillance and Reconnaissance </li></ul><ul><li>Increase in Special Operations Forces </li></ul><ul><li>Acquisition Reform </li></ul>Budget Perspectives
    22. 22. QDR Perspectives (Cont.) <ul><li>Accelerate Army’s Movement to Modular/Deployable Units and Headquarters </li></ul><ul><li>Orienting Joint Air Capabilities – Larger Payloads, Longer Range and Penetration of Denied Areas </li></ul><ul><li>Build Joint Maritime Forces for “Closer-to-Conflict” Support </li></ul><ul><li>“ Knowledge-Based Forces” Partially Shifts Traditional Focus on Guns/Ships/Planes to C4ISR Systems </li></ul><ul><li>Development of Tools for Assessing, Analyzing and Delivering Information </li></ul><ul><li>Commitment to Spend for “Long War” </li></ul>Budget Perspectives
    23. 23. 2005 BRAC Impact 2005 BRAC Losers 2005 BRAC Winners Budget Perspectives
    24. 24. 2005 BRAC Impact (Cont.) <ul><li>$1.3 Billion in Expected Savings Over Next 20 Years </li></ul><ul><li>Creates Many Opportunities, Mostly IT and Communications Related </li></ul><ul><ul><li>Secure Systems Transition </li></ul></ul><ul><ul><li>Uninterrupted IT Infrastructure </li></ul></ul><ul><ul><li>Network Storage </li></ul></ul><ul><ul><li>Business Process Re-Engineering </li></ul></ul><ul><ul><li>Business System Modernization </li></ul></ul><ul><li>Commitment to Outsource Non-core DoD Functions </li></ul>Budget Perspectives
    25. 25. Program Funding Issues/Cost Estimates <ul><li>Program Cost Growth More Serious Issue as Budgets Slow </li></ul><ul><li>GAO </li></ul><ul><ul><li>30% of FY2006 RDT&E Budget Spent on “Rework” </li></ul></ul><ul><ul><li>Planned Future Investments in New Weapons Systems up 100% ($700 Billion to $1.4 Trillion) Despite Flawed Process </li></ul></ul><ul><li>Future Combat Systems (Boeing/SAIC) </li></ul><ul><ul><li>$82.7 Billion < $127.2 Billion (54% Excess) </li></ul></ul><ul><li>Joint Strike Fighter (Lockheed Martin) </li></ul><ul><ul><li>$62 Million/Plane < $82 Million/Plane (33% Excess) </li></ul></ul><ul><li>Another Comanche? </li></ul>Budget Perspectives
    26. 26. Impact of News Events on Defense Stocks Budget Perspectives
    27. 27. Industry Perspectives
    28. 28. Major Themes That Impact Public Markets <ul><li>Financial Performance </li></ul><ul><li>Achieving Growth and Earnings Targets </li></ul><ul><li>Budget Chatter - Perception vs. Reality </li></ul><ul><li>Large Cap vs. Small Cap </li></ul><ul><li>Receptivity to IPOs, Secondary Offerings and SPACs </li></ul><ul><li>Sector Rotation </li></ul><ul><li>Shareholders vs. Customers </li></ul><ul><li>M&A – Buy vs. Divestiture </li></ul><ul><li>Share Buybacks </li></ul><ul><li>Contract Awards </li></ul><ul><li>Credit Markets </li></ul>Industry Perspectives
    29. 29. 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
    30. 30. Company-Specific Strategy Focus <ul><li>Customer Priorities </li></ul><ul><li>Congressional Sentiments </li></ul><ul><li>Technology Acceleration </li></ul><ul><li>DoD Transformation </li></ul><ul><li>Growing Importance of Software and Services </li></ul><ul><li>Priority Markets </li></ul><ul><ul><li>C4ISR </li></ul></ul><ul><ul><li>Homeland Security </li></ul></ul><ul><ul><li>Intelligence </li></ul></ul><ul><ul><li>Training and Simulation </li></ul></ul><ul><ul><li>Networking and Communications </li></ul></ul><ul><ul><li>Obsolescence Management </li></ul></ul><ul><ul><li>Big-ticket Programs </li></ul></ul>Industry Perspectives
    31. 31. Customer Demand Continuing To Grow <ul><li>Outsourcing </li></ul><ul><li>Global War on Terrorism </li></ul><ul><li>Supplemental Budgets </li></ul><ul><li>Transformation </li></ul><ul><li>Technology Upgrades </li></ul><ul><li>Homeland Security </li></ul><ul><li>Aging Infrastructure (People and Technology) </li></ul>Industry Perspectives
    32. 32. Changing Nature of Customer Relationships <ul><li>GWACs, Schedules and Enterprise MACs </li></ul><ul><li>Contract Bundling </li></ul><ul><li>Sole-Source vs. Competitive </li></ul><ul><li>Set-Aside Programs </li></ul><ul><li>Contract Terms </li></ul><ul><li>Arcane Infrastructure </li></ul><ul><li>Expedited Process? </li></ul><ul><li>Prime vs. Sub vs. Teaming vs. JV </li></ul><ul><li>Earmarks/Plus-Ups </li></ul>Industry Perspectives
    33. 33. Competition Increasing <ul><li>Highly Fragmented Industry </li></ul><ul><li>Larger Contracts = Do or Die </li></ul><ul><li>Knowledge Transfer </li></ul><ul><li>Partner or Competitor? </li></ul><ul><li>New Entrants </li></ul><ul><li>“ Katrina Effect” </li></ul><ul><li>B&P Costs </li></ul><ul><li>Security Clearances </li></ul>Industry Perspectives
    34. 34. Consolidation and Divestitures <ul><li>Active M&A Market </li></ul><ul><li>Portfolio Management </li></ul><ul><li>Energizes Growth </li></ul><ul><li>Deployment of Capital </li></ul><ul><li>Differentiation and Diversification </li></ul><ul><li>Commercial? </li></ul><ul><li>New Market Entrants </li></ul><ul><li>Accretion/Dilution </li></ul>Industry Perspectives
    35. 35. Cash Flow <ul><li>Strong, Predictable Margins </li></ul><ul><li>Margin Expansion Opportunities </li></ul><ul><li>Limited Capital Expenditures </li></ul><ul><li>Real Backlog/Bookings vs. Opportunities </li></ul><ul><li>Earnings Visibility </li></ul><ul><li>Clean Balance Sheets </li></ul><ul><li>Availability/Cost of Capital for Financing </li></ul>Industry Perspectives
    36. 36. Factors That Could Reshape Market <ul><li>Changes in Security Threats and Priorities </li></ul><ul><ul><li>Old/On-going - Iraq/Afghanistan </li></ul></ul><ul><ul><li>New - Iran/China </li></ul></ul><ul><li>Changes in Congress/Administration </li></ul><ul><li>End of Supplemental Spending </li></ul><ul><li>More Non-Defense Discretionary Spending </li></ul><ul><li>Healthcare and Retirement Costs </li></ul><ul><li>Talent Pool </li></ul><ul><li>Tax Payer Revolt </li></ul><ul><li>Excitement in Broader Markets </li></ul>Industry Perspectives
    37. 37. Market Dynamics Aerospace
    38. 38. Capabilities of Companies <ul><li>Aircraft Replacement Parts </li></ul><ul><li>Antennas </li></ul><ul><li>Avionics & Surveillance </li></ul><ul><li>Electronics and Power Systems </li></ul><ul><li>Life Support Systems </li></ul><ul><li>Lighting Products </li></ul><ul><li>Modeling, Simulation and Training </li></ul><ul><li>Motors, Actuators, Switches and Cables </li></ul><ul><li>Process, Analytical and Test Instruments </li></ul><ul><li>Sensors </li></ul>Aerospace
    39. 39. Pricing at Highest Levels in Past 10 Years <ul><li>Investors are Optimistic About Commercial Aerospace </li></ul><ul><li>Orders are Leading Indicator for Valuations </li></ul><ul><ul><li>2005 Saw a Very Strong Spike in Aircraft Orders That Will Provide the Backlog for Strong Future Deliveries </li></ul></ul><ul><ul><li>2005 Expected to be Peak in Order Cycle, but Strong Backlog Exists </li></ul></ul><ul><li>Rise in Valuations Typically Precedes a Recovery </li></ul><ul><ul><li>Valuations are Typically Highest in the Early Phases of a Market Recovery </li></ul></ul><ul><li>Many “Aerospace” Companies Have Meaningful Portions of Business Derived From the Defense and Government Markets </li></ul>Aerospace
    40. 40. Public Company Pricing – EV/Revenue Aerospace x
    41. 41. Public Company Pricing – EV/EBITDA Aerospace x
    42. 42. Comparative Aerospace Subsector Public Multiples Aerospace
    43. 43. Current Performance Metrics <ul><li>EV calculated as of September 13, 2006 </li></ul>Aerospace ($251.4) 9.1x $125.0 15.6% 36.1% Esterline Technologies Corp. ($120.1) 12.1x $772.0 12.6% 17.6% Rockwell Collins Inc. ($352.1) 9.7x $183.4 22.7% 12.0% Moog Inc. ($187.5) ($37.0) ($53.7) ($1,543.6) ($39.6) ($176.7) ($198.3) ($647.3) Net Cash (Debt) ($mm) Revenue Growth 10.6x $184.0 15.2% 16.5% Median 10.1x $139.6 14.9% 18.7% Teledyne Technologies Inc 12.9x $72.1 41.6% 25.0% HEICO Corp. 7.6x $846.9 8.5% 14.8% Goodrich Corp. 8.0x $27.7 19.8% 11.0% Ducommun Inc. 11.1x $370.5 9.7% 16.6% Cobham plc 12.2x $184.7 8.8% 12.3% CAE Inc. 11.6x $320.9 12.1% 16.4% AMETEK Inc. EV/ EBITDA (1) LTM EBITDA ($mm) NFY LFY
    44. 44. Aerospace vs. S&P 500 Aerospace Source: Factset Pricing as of 9/13/2006
    45. 45. Recent Pricing Changes <ul><li>YTD Pricing as of Stock Price Closes September 13, 2006 </li></ul>Aerospace 8.9% (7.4%) 7.7% 68.7% (13.8%) CAE Inc. 19.9% (3.6%) 25.1% (6.1%) 37.7% Moog Inc. 24.4% (10.5%) 22.4% 14.6% 36.5% HEICO Corp. 37.7% (8.0%) 22.3% (1.1%) 56.1% Teledyne Technologies Inc. (4.3%) (7.6%) 6.1% 25.9% 9.9% Goodrich Corp. (6.7%) (2.7%) 15.0% 13.9% 22.4% Esterline Technologies Corp. (16.9%) (16.6%) 3.9% 2.4% (6.7%) Ducommun Inc. 5.6% (11.2%) 10.9% 37.0% 5.9% Cobham plc 3.3% 5.4% 5.7% 19.3% 47.8% AMETEK Inc. Stock Price Change 7.3% (7.5%) 12.9% 16.2% 26.9% Median 15.9% (0.9%) 21.3% 17.8% 31.3% Rockwell Collins Inc.  YTD (1)  2Q2006  1Q2006  CY2005  CY2004
    46. 46. Subsectors Defined Aerospace Vector Aerospace Corp. Umeco Triumph Group Inc. Senior Penauille Polyserv Northstar Aerospace Menzies Heico Corp. Fairchild Corp. BBA Group AAR Corp. Aviation & Airport Services Honeywell International Inc. Latecoere Innovative Solutions & Supp. Inc. LMI Aerospace Inc. L-3 Communications Magellan Aerospace Northstar Aerospace Inc. Precision Castparts Corp. Reinhold Industries Senior plc Gilat Ametek Bombardier Inc. Astronics Spacehab Inc Garmin Textron Inc. Hexcel Corp. Orbital Sciences Corp Esterline Technologies Kaman Corp. Heroux-Devtek Inc. Heico Corp. Ladish Co. Inc. Macdonald Dettwiler & Associates Curtiss-Wright Corp. Finmeccanica Spa GKN plc Loral Space & Communications Crane Co. Embraer-Empresa Bras Ducommun Inc. Lockheed Martin Cobham EADS CPI Aerostructures Inc. Integral Systems Inc. CAE Inc. Dassault Aviation Avcorp Industries Inc. Boeing Aerosonic Corp. Boeing Co. Alcoa Goodrich Corp. United Technologies Corp. K&F Industries Space Aviation Controls Airframe Manufacturers Aerostructures
    47. 47. Market Dynamics Defense
    48. 48. Capabilities of Companies <ul><li>Combat Systems Development, Production and Support </li></ul><ul><li>Electronic Warfare Systems </li></ul><ul><li>Information Systems & Technology </li></ul><ul><li>Manned and Unmanned Airborne Systems </li></ul><ul><li>Marine Systems </li></ul><ul><li>Missile Defense </li></ul><ul><li>Ordnance and Tactical Systems </li></ul><ul><li>Radar and Air Defense Systems </li></ul><ul><li>Satellite and Space Systems </li></ul><ul><li>Technical Services </li></ul>Defense
    49. 49. Valuations Steady Recently <ul><li>Valuations Remain Above 10-year Averages </li></ul><ul><li>Growth From On-going “Operations” and Subsequent “Replenishment” </li></ul><ul><li>Big-ticket Programs Have Stabilized From a Budget Stand-point, Although Not Out of the Weeds Yet </li></ul><ul><li>Budget Pressures Have Been Offset by Strong Recent Earnings </li></ul><ul><li>Highest Valuations in Subsectors – C4ISR, Force Protection </li></ul><ul><li>“ Primes” are Consistent </li></ul>Defense
    50. 50. Public Company Pricing – EV/Revenue Defense x
    51. 51. Public Company Pricing – EV/EBITDA Defense x
    52. 52. Comparative Defense Subsector Public Multiples Defense
    53. 53. Current Performance Metrics <ul><li>EV calculated as of September 13, 2006 </li></ul>Defense ($3,111.0) 10.5x $2,325.0 6.6% 8.1% Raytheon Co. ($2,250.0) ($3,884.0) ($1,831.0) ($4,518.0) ($2,250.0) ($1,984.0) ($1,192.6) Net Cash (Debt) ($mm) Revenue Growth 10.4x $2,325.0 7.0% 11.1% Median 9.2x $3,007.0 (0.6%) 2.9% Northrop Grumman Corp. 9.4x $3,838.0 6.4% 4.7% Lockheed Martin Corp. 10.4x $1,346.4 29.4% 36.9% L-3 Communications 10.6x $2,838.0 15.2% 11.1% General Dynamics Corp. 12.3x $2,092.7 24.9% 25.0% BAE Systems plc 9.5x $424.9 7.0% 14.8% Alliant Techsystems Inc. EV/ EBITDA (1) LTM EBITDA ($mm) NFY LFY
    54. 54. Defense vs. S&P 500 Defense Source: Factset Pricing as of 9/13/2006
    55. 55. Recent Pricing Changes <ul><li>YTD Pricing as of Stock Price Closes September 13, 2006 </li></ul>Defense 17.6% (2.8%) 14.2% 3.4% 29.3% Raytheon Co. 29.2% (4.5%) 18.1% 14.5% 8.1% Lockheed Martin Corp. 2.1% (12.1%) 15.4% 1.5% 42.6% L-3 Communications Holdings Inc. 21.3% 2.3% 12.2% 9.0% 15.7% General Dynamics Corp. 0.3% (12.1%) 10.2% 65.6% 37.2% BAE Systems plc 7.4% (1.1%) 1.3% 16.5% 13.2% Alliant Techsystems Inc. Stock Price Change 12.9% (4.5%) 13.6% 10.6% 15.7% Median 12.9% (6.2%) 13.6% 10.6% 13.7% Northrop Grumman Corp.  YTD (1)  2Q2006  1Q2006  CY2005  CY2004
    56. 56. Subsectors Defined Defense Harris Corp. General Dynamics Frequency Electronics Inc. Finmeccanica Spa Filtronic EDO Corp. DRS Technologies Inc. Cubic Corp. Boeing Co. BAE Systems Anaren Inc. Ametek Aeroflex Inc. Communications Northrop Grumman Raytheon Thales Ultra Electronics United Industrial Corp. Axsys Technologies Inc. Boeing Gencorp Inc. BAE Systems Flir Systems Inc. Raytheon Elbit Systems Lockheed Martin United Technologies L-3 Communications EDO Corp. L-3 Communications Textron United Technologies Corp. DRS Technologies Inc. General Dynamics Rolls Royce Singapore Technologies Boeing EADS Honeywell International Inc. Oshkosh Truck Corp. BAE Systems Chemring Group General Electric Co. General Dynamics Argon ST Inc. Alliant Techsystems Inc. Alliant Techsystems Inc. Armor Holdings ITT Industries Sensors Missiles & Ordnance Propulsion Land Vehicles
    57. 57. Market Dynamics Government
    58. 58. Capabilities of Companies <ul><li>Acquisition and Logistics Support </li></ul><ul><li>Information Assurance and Security </li></ul><ul><li>Information Technology Services </li></ul><ul><li>Knowledge Management </li></ul><ul><li>Outsourced Support Services </li></ul><ul><li>Systems/Software Engineering and Integration </li></ul><ul><li>Technical Services </li></ul><ul><li>Training Systems and Services </li></ul>Government
    59. 59. Multiples are Contracting <ul><li>Valuations in the Government Services Segment are Slightly Below 10-year Averages </li></ul><ul><li>2001 – 2005 Pricing Driven by Organic Growth Expectations </li></ul><ul><li>2006 is a Different Story as Market Reacts to Slower Realization of Growth </li></ul><ul><li>Limited Universe of Public Companies, Especially Large Cap Companies </li></ul>Government
    60. 60. Forward P/E vs Projected EPS Growth OPTIMISM GAP CONFIDENCE GAP As of September 13, 2006 Source: FACTSET, Houlihan Lokey * Government ? x
    61. 61. Public Company Pricing – EV/Revenue Government x
    62. 62. Public Company Pricing – EV/EBITDA Government x
    63. 63. Comparative Government Subsector Public Multiples Government
    64. 64. Current Performance Metrics <ul><li>EV calculated as of September 13, 2006 </li></ul>Government ($25.9) 7.1x $13.1 7.9% 49.5% Analex Corp. ($616.6) 7.6x $168.2 19.4% 2.4% DynCorp International Inc. ($24.4) 10.7x $101.8 18.5% 18.5% ManTech International Corp. ($25.9) $5.1 $173.6 ($82.7) ($257.6) $17.0 ($85.4) ($23.1) ($343.2) Net Cash (Debt) ($mm) Revenue Growth 9.4x $46.6 12.2% 22.9% Median 5.8x $11.8 NA 29.7% VSE Corp. 12.0x $128.3 10.7% 33.7% SRA International Inc. 10.9x $43.1 19.1% 51.7% SI International Inc. 21.3x $200.7 13.8% 22.9% QinetiQ Group plc 9.4x $14.1 5.4% 11.7% NCI Inc. 9.1x $46.6 17.3% 36.7% MTC Technologies Inc. 5.2x $22.0 (11.5%) 9.0% Dynamics Research Corp. 10.0x $194.3 10.3% 8.1% CACI International Inc. EV/ EBITDA (1) LTM EBITDA ($mm) NFY LFY
    65. 65. Public Company Composite Stock Performance Government Source: Factset Pricing as of 9/13/2006
    66. 66. Recent Pricing Changes <ul><li>YTD Pricing as of Stock Price Closes September 13, 2006 </li></ul><ul><li>Price Change Calculated from IPO on 05/03/2006 </li></ul><ul><li>Price Change Calculated from IPO on 10/24/2005 – 12/31/2005 </li></ul><ul><li>Price Change Calculated from IPO on 02/10/2006 </li></ul>Government (0.3%) (12.8%) 15.0% (0.6%) 57.2% SI International Inc. (21.7%) (2) (30.8%) (2) NA NA NA DynCorp International Inc. (20.9%) (6.4%) 2.0% (59.9%) (3) NA NCI Inc. (93.8%) (4) (9.5%) (93.2%) (4) NA NA QinetiQ Group plc (24.4%) (11.8%) (6.5%) (33.9%) 20.5% Analex Corp. Stock Price Change (20.9%) (11.8%) 2.1% (13.3%) 30.3% Median (25.7%) (28.3%) (1.4%) 67.2% 90.0% VSE Corp. (4.7%) (29.4%) 23.5% (4.9%) 49.0% SRA International Inc. (19.5%) (15.6%) 2.2% (18.4%) 4.2% MTC Technologies Inc. 14.4% (7.1%) 19.2% 17.4% (4.8%) ManTech International Corp. (36.4%) (8.9%) (3.6%) (13.3%) 10.5% Dynamics Research Corp. (5.7%) (11.3%) 14.6% (15.8%) 40.1% CACI International Inc.  YTD (1)  2Q2006  1Q2006  CY2005  CY2004
    67. 67. Subsectors Defined Government Unisys Wireless Facilities Fluor Group CIBER Analex VT Group Maximus Inc. SRA International, Inc. URS Corp. Keane Inc. SI International Inc. Tyler Technologies Tetra Tech Inc. Electronic Data Systems MTC Technologies Serco Group Covansys ManTech International Jacobs Engineering Group Inc. Computer Sciences Corp. Dynamics Research Corp. Dyncorp International Computer Horizons CACI International Inc. Atkins WS Affiliated Comp Svcs NCI Inc. VSE Corp. Perot Systems Corp. Technical Services Diversified IT Federal IT
    68. 68. Market Dynamics Homeland Security
    69. 69. Market Overview <ul><li>30,000 Companies Currently Supporting the Federal Government (<20 in the Late 1990s) </li></ul><ul><li>$130 Billion in Funding Since 9/11 </li></ul><ul><li>$65 Billion to 10 Largest Contractors </li></ul><ul><li>DHS Budget Growing From $28 Billion in 2002 to $42 Billion in 2007 (8.4% CAGR) </li></ul><ul><li>HLS Industry Expected to Reach $170 Billion Per Year in FY2015 </li></ul>Homeland Security Sources: Forbes Magazine, Office of Management and Budget, Homeland Security Research
    70. 70. Capabilities of Companies <ul><li>Alarm, Security and Surveillance Systems </li></ul><ul><li>Biometrics </li></ul><ul><li>Data-processing Services </li></ul><ul><li>First Responders </li></ul><ul><li>Guard Services </li></ul><ul><li>Inspection Systems </li></ul><ul><li>Natural Disasters </li></ul><ul><li>Non-Lethal Defense Products </li></ul><ul><li>Safety and Survival Gear </li></ul>Homeland Security
    71. 71. Volatile Valuations <ul><li>“ Buzzword” – What Does it Really Mean to the Investor? </li></ul><ul><li>Major Ramp-up in This Sector Post-9/11 </li></ul><ul><li>Current Premium Compared to Balance of ADG </li></ul><ul><li>Inconsistent Pricing/Valuations Tied to Inconsistent Funding “Perceptions” </li></ul><ul><li>“ Niche Plays” vs. “Real Players” </li></ul>Homeland Security
    72. 72. Public Company Pricing – EV/Revenue Homeland Security x
    73. 73. Public Company Pricing – EV/EBITDA Homeland Security x
    74. 74. Current Performance Metrics <ul><li>EV calculated as of September 13, 2006 </li></ul>Homeland Security ($809.1) 9.2x $290.4 50.5% 67.1% Armor Holdings Inc. $11.8 NMF $1.2 8.5% 32.4% RAE Systems Inc. $15.3 NMF $7.0 40.6% (29.5%) TASER International Inc. ($63.3) 13.1x $149.1 12.5% 5.4% FLIR Systems Inc. $2.8 $58.0 $1.9 $2.8 ($4.7) ($0.0) $27.9 $41.3 Net Cash (Debt) ($mm) Revenue Growth 11.1x $29.8 12.5% 32.4% Median 18.0x $43.5 26.3% 29.6% Verint Systems Inc. 9.1x $7.3 13.3% (13.3%) TVI Corp. 19.1x $16.1 32.9% 55.8% OSI Systems, Inc. 7.4x $10.1 5.6% 3.6% Lakeland Industries Inc. NA NA (6.2%) 72.7% Ionatron Inc. 15.9x $60.2 (29.5%) 82.3% Cogent Inc. 7.0x $50.7 (7.9%) 85.3% American Science & Engineering EV/ EBITDA (1) LTM EBITDA ($mm) NFY LFY
    75. 75. Homeland Security vs. S&P 500 Homeland Security Source: Factset Pricing as of 9/13/2006
    76. 76. Recent Pricing Changes <ul><li>YTD Pricing as of Stock Price Closes September 13, 2006 </li></ul>Homeland Security 22.3% (5.9%) 36.7% (9.3%) 78.7% Armor Holdings Inc. 9.3% (25.3%) 52.2% (78.0%) 361.1% TASER International Inc. (15.7%) 12.0% 1.7% (51.9%) 114.7% RAE Systems Inc. (25.7%) (27.0%) 9.5% 1.4% 12.2% Lakeland Industries Inc. (1.0%) (15.9%) 14.9% (19.0%) 18.2% OSI Systems, Inc. (23.3%) (38.0%) 49.8% 51.3% 242.0% American Science & Engineering Stock Price Change (15.7 %) (17.8 %) 14.9% (10.8%) 74.8% Median (5.6%) (17.5%) 2.6% (5.1%) 61.0% Verint Systems Inc. (45.5%) (10.6%) -1.3% (10.1%) 53.4% TVI Corp. (43.6%) (53.0%) 33.6% (10.8%) NA Ionatron Inc. 23.6% (19.4%) 27.2% (30.0%) 74.8% FLIR Systems Inc. (38.2%) (17.8%) (19.1%) (31.3%) NA Cogent Inc.  YTD (1)  2Q2006  1Q2006  CY2005  CY2004
    77. 77. Who Are The Real Players? <ul><li>An Incomplete List… </li></ul><ul><ul><li>GE </li></ul></ul><ul><ul><li>Honeywell </li></ul></ul><ul><ul><li>IBM </li></ul></ul><ul><ul><li>L-3 </li></ul></ul><ul><ul><li>Lockheed Martin </li></ul></ul>Homeland Security <ul><ul><li>ManTech International </li></ul></ul><ul><ul><li>Northrop Grumman </li></ul></ul><ul><ul><li>Raytheon </li></ul></ul><ul><ul><li>SAIC </li></ul></ul><ul><ul><li>Smiths Group </li></ul></ul>
    78. 78. Summary
    79. 79. Closing Remarks <ul><li>Lots of Questions… </li></ul><ul><li>Lots of Opportunities… </li></ul><ul><li>Thank You For Your Valuable Time and the Opportunity to Present to Your Organization </li></ul>Summary
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