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Slide 1: Se p te m b e r 1 6 , 2 0 0 6 I I Tim e To Pla y Offe n s e o r st De fe n s e w ith De fe n s e Sto c k s ? Am e ric a n As s o c ia tio n o f I d iv id u a l I v e s to rs (DC Ch a p te r) n n Kevin P . DeS a nto, Vice P res ident Houlihan Lokey Inves tment B anking S ervices Aeros pa ce •Defens e • G overnment G roup 1 8 0 0 Tys o n s Blv d ., 3 rd Flo o r M Le a n , Virg in ia 2 2 1 0 2 c 7 0 3 .8 4 7 .5 2 2 5 L s A e le s o ng N w Y rk e o Chic a go San Fra ncis co M a po lis inne W hing to n D as .C. D allas A tlanta L ndo n o Paris Fra nkfurt
Slide 2: Ta b le o f Co n te n ts AAII Washington DC Metro Chapter Ho u lih a n Lo k e y 2
Slide 3: Dis c la im e r AAII Washington DC Metro Chapter H o uliha n L o ke y H o w a r d & Zukin a nd H o uliha n L o ke y a r e tr ad e na m e s fo r H o uliha n, L o ke y, H o w a r d & Zukin, Inc . a nd its s ub s id ia r ie s a nd a ffilia te s w hic h inc lud e : H o uliha n L o ke y H o w a r d & Zukin F ina nc ia l A d vis o r s , Inc ., a C a lifo r nia c o r p o r a tio n, a r e g is te r e d inve s tm e nt a d vis o r , w hic h p r o vid e s inve s tm e nt a d vis o r y, fa ir ne s s o p inio n, s o lve nc y o p inio n, va lua tio n o p inio n, r e s tr uc tur ing a d vis o r y and p o r tfo lio m a na g e m e nt s e r vic e s ; H o uliha n L o ke y H o w a r d & Zukin C a p ita l, Inc ., a C a lifo r nia c o r p o r a tio n, a r e g is te r e d b r o ke r -d e a le r a nd SIP C m e m b e r fir m , w hic h p r o vid e s inve s tm e nt b a nking , p r iva te p la c e m e nt, m e r g e r , a c q uis itio n a nd d ive s titur e s e r vic e s ; and H o uliha n L o ke y H o w a r d & Zukin (E ur o p e ) L im ite d , a c o m p a ny inc o r po r a te d in E ng la nd w hic h is a utho r ize d a nd r e g ula te d b y the U .K . F ina nc ia l Se r vic e s A utho r ity, w hic h p r o vid e s inve s tm e nt b a nking , r e s tr uc tur ing a dvis o r y, m e r g e r , a c q uis itio n a nd d ive s titur e s e r vic e s , va lua tio n o p inio n a nd p r iva te p la c e m e nt s e r vic e s . H o uliha n L o ke y g a the r s its d a ta fr o m s o ur c e s it c o ns id e r s r e lia b le ; ho w e ve r , it d o e s no t g ua r a nte e the a c c ur a c y o r c o m p le te ne s s o f the info r m a tio n p r o vid e d w ithin this p ub lic a tio n. The m a te r ial p r e s e nte d r e fle c ts info r m a tio n kno w n to the a utho r s a t the tim e this p r e s e nta tio n w a s w r itte n, a nd this info r m a tio n is s ub je c t to c ha ng e . H o uliha n L o ke y m ake s no w a r r a ntie s , e xp r e s s e d o r im p lie d , r e g a r d ing the a c c ur a c y o f this m ate r ia l. The vie w s e xp r e s s e d in this m a te r ia l a c c ur a te ly r e fle c t the p e r s o na l vie w s o f the a utho r r e g a r d ing the s ub je c t s e c ur itie s a nd is s ue r s . O ffic e r s , d ir e c to r s a nd p a r tne r s in the H o uliha n L o ke y g r o up o f c o m p a nie s m a y ha ve p o s itio ns in the s e c ur itie s o f the c o m p anie s d is c us s e d . This p r e s e nta tio n d o e s no t c o ns titute a r e c o m m e nd a tio n w ith r e s p e c t to the s e c ur itie s o f a ny c o m p any d is c us s e d he r e in, is no t inte nd e d to p r o vid e info r m a tio n up o n w hic h to b a s e a n inve s tm e nt d e c is io n, a nd s ho uld no t b e c o ns tr ue d a s s uc h. H o uliha n L o ke y o r its a ffilia te s m ay fr o m tim e to tim e p r o vid e inve s tm e nt b a nking o r r e la te d s e r vic e s to the s e c o m p a nie s . L ike a ll H o uliha n L o ke y e m p lo ye e s , the a utho r o f this pr e s e nta tio n r e c e ive s c o m p e ns a tio n tha t is a ffe c te d b y o ve r all fir m p r o fita b ility. A ny p ub lic c o m p a nie s inc lud e d in the H o uliha n L o ke y ind ic e s a r e c o m p a nie s c o m m o nly us e d fo r ind us tr y info r m a tio n to s ho w p e r fo r m a nc e w ithin a s e c to r . The y d o no t inc lud e a ll p ub lic c o m p a nie s tha t c o uld b e c a te g o r ize d w ithin the s e c to r a nd w e r e no t c r e a te d a s b e nc hm a r ks ; the y d o no t im p ly b e nc hm a r king a nd d o no t c o ns titute r e c o m m e nd a tio ns fo r a p a r tic ular s e c ur ity and / r s e c to r . The c ha r ts a nd g r a phs us e d o in this r e p o r t have b e e n c o m p ile d b y H o uliha n L o ke y s o le ly fo r p ur p o s e s o f illus tr a tio n. This p r e s e nta tio n m e ntio ns a num b e r o f c o m p a nie s ; ho w e ve r , no ne o f the s e c o m p a nie s is the s ub je c t o f this p r e s e nta tio n. The c o m p a nie s m e ntio ne d inc lud e H o uliha n L o ke y fina nc ia l r e s tr uc tur ing a nd o the r fina nc ia l a d vis o r y c lie nts , a s w e ll as c o m p anie s invo lve d in tr a ns a c tio ns w he r e H o uliha n L o ke y ha s p r o vid e d the s e s e r vic e s to o the r p a r tic ip a nts in the tr a ns a c tio ns . This m a te r ia l m a y no t b e r e p r o d uc e d in a ny fo r m a t b y a ny m e a ns o r r e d is tr ib ute d w itho ut the p r io r w r itte n c o ns e nt o f H o ulihan L o ke y. Ho u lih a n Lo k e y 3
Slide 4: I tro d u c tio n n
Slide 5: I tro d u c tio n n Ho u lih a n Lo k e y Ov e rv ie w AAII Washington DC Metro Chapter Premier Middle Market Investment Bank # 1 Advisor on Middle Market M&A Transactions # 1 Provider of Fairness Opinions # 1 Financial Restructuring Practice  7 0 0 + pe o ple , in 1 1 o ffic e s w o rld w ide , allo w Ho ulih an Lo k e y to pro v ide c lie nts in-d e pth g lo b al e xpo sure and e nd-to -e nd ad v iso ry so lutio ns  Se nio r o ffic e rs in th e U and Euro pe h av e stro ng Wall Stre e t c re d e ntials and S se rv e m o re th an 1 ,0 0 0 c lie nts annually, rang ing fro m c lo se ly-h e ld c o m panie s to Fo rtune 5 0 0 Co rpo ratio ns  Partne re d w ith OR Co rpo ratio n (NYSE: IX TSE: 8 5 9 1 ), a le ad ing IX , inte g rate d financ ial se rv ic e s g ro up h e ad q uarte re d in To k yo Ho u lih a n Lo k e y 5
Slide 6: I tro d u c tio n n Ba c k g ro u n d o f K v in P. De Sa n to e AAII Washington DC Metro Chapter M r. De Santo is a Vic e Pre side nt in th e Ae ro spac e •De fe nse •Go v e rnm e nt (“ ADG” ) inv e stm e nt b ank ing g ro up in th e Wash ing to n, DC o ffic e o f Ho ulih an Lo k e y. His re spo nsib ilitie s inc lude o v e rall e ng ag e m e nt m anag e m e nt and e xe c utio n fo r c o rpo rate financ e assig nm e nts, prim arily m e rg e rs and ac q uisitio ns. In additio n, M De Santo c o o rdinate s th e ADG r. Gro up’s de fe nse and g o v e rnm e nt se rv ic e s industry c o v e rag e e ffo rts and h as b e e n q uo te d in pub lic atio ns inc lud ing W a s hing to n Te c hno lo g y, G o v e r nm e nt C o r p o r a te Ne w s and F o r tune M a g a zine . pro v ide s c lie nts b o th se ll-sid e and b uy-sid e transac tio n suppo rt. Se le c t c lie nts h av e inc lude d b d Syste m s, L-3 Co m m unic atio ns, De v e lo pm e nt Alte rnativ e s, M anufac turing Te c h no lo g y, Im pac t Inno v atio ns Gro up, OAO Te c h no lo g y So lutio ns, Eag an, M Alliste r & Asso c iate s, Q c uality R se arc h and R ian. In e ad ad ditio n, h e partic ipate s in a v arie ty o f financ ial adv iso ry e ng ag e m e nts inc lud ing transac tio n fairne ss, so lv e nc y analysis and re c apitalizatio n strate g ie s. c o nc e ntratio n in financ e fro m Ge o rg e to w n U e rsity’s niv M Do no ug h Sc h o o l o f Busine ss. He is lic e nse d w ith th e NASD as c a Ge ne ral Se c uritie s R pre se ntativ e (Se rie s 7 , 6 3 ). e  R g ard ing m e rg e rs and ac q uisitio ns e xpe rie nc e , M De Santo e r. K evin P. DeSanto V ic e P r e s id e nt k de santo @ h lh z.c o m T: (7 0 3 ) 7 1 4 – 1 7 1 0 F: (7 0 3 ) 7 6 0 – 4 8 6 4 1 8 0 0 Tyso ns Bo ule v ard , Suite 3 0 0 M Le an, Virg inia 2 2 1 0 2 c Ho u lih a n Lo k e y  M De Santo e arne d a B.S. in b usine ss adm inistratio n w ith a r. 6
Slide 7: I tro d u c tio n n Dis c u s s io n Su m m a ry AAII Washington DC Metro Chapter  De v e lo p Fram e w o rk fo r Analyzing th e Pub lic ly-trad e d De fe nse Co m panie s  Pe rspe c tiv e s o n K y Tre nds in th e Do D Budg e t e  Ov e rv ie w o f Critic al Industry and Co m pany-spe c ific Fac to rs  Asse ss Curre nt Pric ing o n a R lativ e Basis e  Ide ntify th e M ultiple Av e nue s Av ailab le to Inv e st in “ De fe nse ”  Answ e r Yo ur Q stio ns (Wh e n I K w th e Answ e r) ue no Ho u lih a n Lo k e y 7
Slide 8: I tro d u c tio n n De fe n s e I d u s try Pyra m id n AAII Washington DC Metro Chapter $30 Billion $1 Billion Primes & major subs Few remaining mid-tier Suppliers $200 Million $300 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 Diversification Ho u lih a n Lo k e y 8
Slide 9: I tro d u c tio n n Ho w to Pla y in De fe n s e AAII Washington DC Metro Chapter Aerospace Oppo rtunitie s to Be ne fit Fro m Div e rsifie d Busine ss M de ls in a R c o v e ring M e t th at h as o e ark M aning ful De fe nse Expo sure ? e A Be v y o f Optio ns fo r Capitalizing o n K y Do D e Th e m e s and Strate g ie s – Wh e re Will th e $ Flo w ? Defense Se rv ic e s Co m panie s Suppo rting Hig h Prio rity Government Initiativ e s With in th e Do D – Ho w Lo w Can Th e y Go ? Homeland Security Wh e re is th e Value - Sm alle r Pure -plays, Traditio nal De fe nse /Go v e rnm e nt Co ntrac to rs o r Div e rsifie d Industrials? 9 Ho u lih a n Lo k e y
Slide 10: I tro d u c tio n n Oth e r Wa ys to Pla y in De fe n s e AAII Washington DC Metro Chapter  State and Lo c al (e .g ., M axim us, Affiliate d Co m pute r Se rv ic e s, Tyle r Te c h no lo g ie s) Te c h , U S) R  Eng ine e ring & Co nstruc tio n (e .g ., J o b s Eng ine e ring , Fluo r, Te tra ac  Div e rsifie d IT (e .g ., CSC, EDS, Pe ro t, U nisys, Wire le ss Fac ilitie s)  Fo re ig n (e .g ., VT Gro up, Se rc o Gro up)  SPACs (e .g , Go o d Harb o r, Fe de ral Se rv ic e s Ac q uisitio n Co rp.) Ho u lih a n Lo k e y 10
Slide 11: I tro d u c tio n n Wh y I v e s to rs Pla y in De fe n s e n AAII Washington DC Metro Chapter (Revenue and EV) $500 Billion Market Strong Investment Returns Revenue & Margin Visibility $70 Billion Unused Debt Capacity Liquid Private Market ADG Supports National Priorities Identifiable Long-Term Growth Drivers (1,500 transactions since 2000) Leverageable Assets Ho u lih a n Lo k e y 11
Slide 12: I tro d u c tio n n Sig n s o f th e Tim e s AAII Washington DC Metro Chapter Industry Trends Public Markets Financing M&A Markets Ho u lih a n Lo k e y Co m panie s R m ain Enth usiastic Ab o ut Gro w th e Oppo rtunitie s…But Inv e sto rs are Be c o m ing M re o Cautio us Suppo rt o f IPOs, Se c o ndarie s and Ac q uisitio n Strate g ie s…But Inv e sto rs are Be c o m ing M re o Cautio us Wide ly Av ailab le So urc e s o f Capital at All Le v e ls o f th e Capital Struc ture …At Inc re ase d Co st Bro ade ne d Buye r U e rse , Stab le Ac tiv ity and niv Pric ing …But Inc re ase d R g ulato ry Sc rutiny e 12
Slide 13: Bu d g e t Pe rs p e c tiv e s
Slide 14: Bu d g e t Pe rs p e c tiv e s Ov e ra ll Do D Bu d g e t “Te m p e ra tu re ” AAII Washington DC Metro Chapter  On-g o ing Fe de ral Budg e t De fic its  Slo w e r Base line Budg e t Gro w th  Adm inistratio n – De m o c rat v s. R pub lic an e  Do D v s. Civ ilian v s. Ho m e land Se c urity  “ War Tax”  Q /BR DR AC  Inv e stm e nt Ac c o unts v s. O& MSpe nd ing Ho u lih a n Lo k e y 14
Slide 15: Bu d g e t Pe rs p e c tiv e s Do D Bu d g e t Re la tiv e to Fe d e ra l De fic it AAII Washington DC Metro Chapter DoD Spending and Federal Budget Scenario 8% CAGR $125 $75 ($ in billions) $25 -$25 -$75 -$125 -$175 -$225 1998 1999 2000 2001 2002 2003 2004 2005P 2006P 2007P 2008P 2009P Procurement RDT&E Surplus (Deficit) as a % of GDP 6% CAGR 3.0% 2.0% Surplus (Deficit) as a % of GDP 15 1.0% 0.0% (1.0% ) (2.0% ) (3.0% ) (4.0% ) (5.0% ) Ho u lih a n Lo k e y
Slide 16: Bu d g e t Pe rs p e c tiv e s He a lth y De fe n s e Bu d g e t AAII Washington DC Metro Chapter  “ Be tte r th an e xpe c te d…”  Pre side nt’s Ne arly $4 4 0 Billio n FY2 0 0 7 De fe nse Budg e t R q ue st e w as Appro xim ate ly 5 % Gre ate r Th an FY2 0 0 6  Inv e stm e nt Ac c o unts (To tal Pro c ure m e nt and R DT& E) Expe c te d to Gro w at 4 .6 % CAGR fro m FY2 0 0 7 to FY2 0 1 1  M atc h ism Be tw e e n Outlays and Ac tual Expe c te d Co sts o f Co nflic ts R aise Co nc e rns Ab o ut Viab ility o f M r Pro g ram s (e .g ., ajo J F-2 2 ) SF,  Supple m e ntal Budg e ts U nlik e ly to Co ntinue Ho u lih a n Lo k e y 16
Slide 17: Bu d g e t Pe rs p e c tiv e s Pro je c te d De c lin e s in Ov e ra ll Do D Bu d g e t AAII Washington DC Metro Chapter D oD S pending a s a % of G D P $ 6 0 0 ,0 0 0 $ 5 0 0 ,0 0 0 $ 4 0 0 ,0 0 0 $ MM $ 3 0 0 ,0 0 0 $ 2 0 0 ,0 0 0 $ 1 0 0 ,0 0 0 $0 2004 S ou r ce: D oD 2005 2006E 2007E 2008E 2009E 201 0E 201 1 E Su p p le m e n t a l Do D Sp e n d in g le ss Su p p le m e n t a l % o f GDP 4 .5 % 4 .0 % 3 .5 % 3 .0 % 2 .5 % 2 .0 % 1 .5 % 1 .0 % 0 .5 % 0 .0 % Ho u lih a n Lo k e y 17
Slide 18: Bu d g e t Pe rs p e c tiv e s FY2 0 0 7 Ap p ro p ria tio n s Bre a k d o w n AAII Washington DC Metro Chapter F Y 2 0 0 7 Appropria tions B rea kdown Ot h e r 4% RDT & E 1 7% Milit a ry Pe rso n n e l 25% F Y 2 0 0 7 B udget by S ervice De fe n se Wid e 1 6% Arm y 25% Pro c u re m e n t 1 9% O& M 35% USAF 30% USMC 4% Na v y 25% S our ce: D oD Ho u lih a n Lo k e y 18
Slide 19: Bu d g e t Pe rs p e c tiv e s Co n g re s s io n a l I p a c t o n Pro c u re m e n t m AAII Washington DC Metro Chapter $ 9 0 ,0 0 0 $ 8 0 ,0 0 0 $ 7 0 ,0 0 0 $ 6 0 ,0 0 0 $ MM $ 5 0 ,0 0 0 $ 4 0 ,0 0 0 $ 3 0 ,0 0 0 $ 2 0 ,0 0 0 $ 1 0 ,0 0 0 $0 1 996 S ou r ce: D oD 1 997 1 998 1 999 2000 2001 Ac t u a l 2002 2003 2004 2005 1 5 .0 % 1 3 .0 % 1 1 .0 % 9 .0 % 7 .0 % 5 .0 % 3 .0 % 1 .0 % -1 .0 % Pre sid e n t ia l Re q u e st Ne t Ch a n g e Ho u lih a n Lo k e y 19
Slide 20: Bu d g e t Pe rs p e c tiv e s QDR Pe rs p e c tiv e s AAII Washington DC Metro Chapter Q DR Link e d to FY2 0 0 7 De fe nse Bud g e t R q ue st as Th e y We re e Sub m itte d to Co ng re ss Sim ultane o usly  De fe nding th e Ho m e land  De fe ating Te rro rist Extre m ism  Ev o lutio nary Q DR Fo c us Are as  He lping Sh ape th e Ch o ic e s o f Co untrie s at Strate g ic Cro ssro ads  Co unte ring We apo ns o f M De struc tio n (“ WM ) ass D” Ho u lih a n Lo k e y 20
Slide 21: Bu d g e t Pe rs p e c tiv e s QDR Pe rs p e c tiv e s (Co n t.) AAII Washington DC Metro Chapter  Transfo rm atio nal Co m m unic atio ns Arc h ite c ture Enh anc e s Land- b ase d Ne tw o rk and Sate llite Co m m unic atio n and Hig h -b andw idth , Surv iv ab le Inte rne t pro to c o l  Lo ng -te rm Pro g ram s M aintaine d – FCS, F-2 2 and J SF  Do ub ling o f U AV Capac ity and De v e lo pm e nt o f Ne w Lo ng R e ang Bo m b e r b y FY2 0 1 8 R c o nnaissanc e e  Inv e stm e nt in J int M b ility, Inte llig e nc e , Surv e illanc e and o o  Inc re ase in Spe c ial Ope ratio ns Fo rc e s  Ac q uisitio n R fo rm e Ho u lih a n Lo k e y 21
Slide 22: Bu d g e t Pe rs p e c tiv e s QDR Pe rs p e c tiv e s (Co n t.) AAII Washington DC Metro Chapter  Ac c e le rate Arm y’s M v e m e nt to M dular/De plo yab le U o o nits and He adq uarte rs  Orie nting J int Air Capab ilitie s – Larg e r Paylo ads, Lo ng e r R e o ang and Pe ne tratio n o f De nie d Are as  Build J int M o aritim e Fo rc e s fo r “ Clo se r-to -Co nflic t” Suppo rt  “ K w le dg e -Base d Fo rc e s” Partially Sh ifts Traditio nal Fo c us o n no Guns/Sh ips/Plane s to C4 ISR Syste m s Info rm atio n  De v e lo pm e nt o f To o ls fo r Asse ssing , Analyzing and De liv e ring  Co m m itm e nt to Spe nd fo r “ Lo ng War” Ho u lih a n Lo k e y 22
Slide 23: Bu d g e t Pe rs p e c tiv e s 2 0 0 5 BRAC I p a c t m AAII Washington DC Metro Chapter 2 0 0 5 BR Lo se rs AC Ho u lih a n Lo k e y 2 0 0 5 BR Winne rs AC 23
Slide 24: Bu d g e t Pe rs p e c tiv e s 2 0 0 5 BRAC I p a c t (Co n t.) m AAII Washington DC Metro Chapter  $1 .3 Billio n in Expe c te d Sav ing s Ov e r Ne xt 2 0 Ye ars  Cre ate s M any Oppo rtunitie s, M stly IT and Co m m unic atio ns o R late d e  Se c ure Syste m s Transitio n U ninte rrupte d IT Infrastruc ture  Ne tw o rk Sto rag e  Busine ss Pro c e ss R -Eng ine e ring e  Busine ss Syste m M de rnizatio n o  Co m m itm e nt to Outso urc e No n-c o re Do D Func tio ns Ho u lih a n Lo k e y 24
Slide 25: Bu d g e t Pe rs p e c tiv e s Pro g ra m Fu n d in g I s u e s /Co s t Es tim a te s s AAII Washington DC Metro Chapter  Pro g ram Co st Gro w th M re Se rio us Issue as Bud g e ts Slo w o  GAO  3 0 % o f FY2 0 0 6 R DT& E Bud g e t Spe nt o n “ R w o rk ” e  Planne d Future Inv e stm e nts in Ne w We apo ns Syste m s up 1 0 0 % Billio n to $1 .4 Trillio n) De spite Flaw e d Pro c e ss ($7 0 0  Future Co m b at Syste m s (Bo e ing /SAIC)  $8 2 .7 Billio n < $1 2 7 .2 Billio n (5 4 % Exc e ss)  J int Strik e Fig h te r (Lo c k h e e d M o artin)  $6 2 M illio n/Plane < $8 2 M n/Plane (3 3 % Exc e ss) illio  Ano th e r Co m anc h e ? Ho u lih a n Lo k e y 25
Slide 26: Bu d g e t Pe rs p e c tiv e s I p a c t o f Ne w s Ev e n ts o n De fe n s e Sto c k s m AAII Washington DC Metro Chapter Ho u lih a n Lo k e y 26
Slide 27: I d u s try Pe rs p e c tiv e s n
Slide 28: I d u s try n Pe rs p e c tiv e s M jo r Th e m e s Th a t I p a c t Pu b lic M rk e ts a m a AAII Washington DC Metro Chapter  Financ ial Pe rfo rm anc e  Ac h ie v ing Gro w th and Earning s Targ e ts  Budg e t Ch atte r - Pe rc e ptio n v s. R ality e  Larg e Cap v s. Sm all Cap  R c e ptiv ity to IPOs, Se c o nd ary Offe ring s and SPACs e  Se c to r R tatio n o  Sh are h o lde rs v s. Custo m e rs  M A – Buy v s. Div e stiture &  Sh are Buyb ac k s  Co ntrac t Aw ard s  Cre d it M e ts ark Ho u lih a n Lo k e y 28
Slide 29: I d u s try n Pe rs p e c tiv e s Co m p a n y Attrib u te s Th a t Driv e Va lu e AAII Washington DC Metro Chapter Business / Qualitative Priority Market Involvement Business / Capability Focus Defensible Budget Access Long-Term Customer Relationships Prime Contract Positions Market Share Gains Employee Base/Security Clearances Management Team Deep Technical Expertise Proprietary Technology Financial / Quantitative Performance Track Record Controlled Balance Sheet Backlog and Long-term Contracts Ho u lih a n Lo k e y Meet or Beat Estimates No Historical Mishaps Contract Types/Profitability 29
Slide 30: I d u s try n Pe rs p e c tiv e s Co m p a n y-Sp e c ific Stra te g y Fo c u s AAII Washington DC Metro Chapter  Custo m e r Prio ritie s  Co ng re ssio nal Se ntim e nts  Te c h no lo g y Ac c e le ratio n  Do D Transfo rm atio n  Gro w ing Im po rtanc e o f So ftw are and Se rv ic e s  Prio rity M e ts ark  C4 ISR  Ho m e land Se c urity  Inte llig e nc e  Training and Sim ulatio n Ho u lih a n Lo k e y  Ne tw o rk ing and Co m m unic atio ns  Ob so le sc e nc e M anag e m e nt  Big -tic k e t Pro g ram s 30
Slide 31: I d u s try n Pe rs p e c tiv e s Cu s to m e r De m a n d Co n tin u in g To Gro w AAII Washington DC Metro Chapter  Outso urc ing  Glo b al War o n Te rro rism  Supple m e ntal Budg e ts  Transfo rm atio n  Te c h no lo g y U rade s pg  Ho m e land Se c urity  Ag ing Infrastruc ture (Pe o ple and Te c h no lo g y) Ho u lih a n Lo k e y 31
Slide 32: I d u s try n Pe rs p e c tiv e s Ch a n g in g Na tu re o f Cu s to m e r Re la tio n s h ip s AAII Washington DC Metro Chapter  GWACs, Sc h e d ule s and Ente rprise M ACs  Co ntrac t Bundling  So le -So urc e v s. Co m pe titiv e  Se t-Aside Pro g ram s  Co ntrac t Te rm s  Arc ane Infrastruc ture  Expe dite d Pro c e ss?  Prim e v s. Sub v s. Te am ing v s. J V  Earm ark s/Plus-U ps Ho u lih a n Lo k e y 32
Slide 33: I d u s try n Pe rs p e c tiv e s Co m p e titio n I c re a s in g n AAII Washington DC Metro Chapter  Hig h ly Frag m e nte d Ind ustry  Larg e r Co ntrac ts = Do o r Die  K w le dg e Transfe r no  Partne r o r Co m pe tito r?  Ne w Entrants  “K atrina Effe c t”  B& P Co sts  Se c urity Cle aranc e s Ho u lih a n Lo k e y 33
Slide 34: I d u s try n Pe rs p e c tiv e s Co n s o lid a tio n a n d Div e s titu re s AAII Washington DC Metro Chapter  Ac tiv e M A M e t & ark  Po rtfo lio M anag e m e nt  Ene rg ize s Gro w th  De plo ym e nt o f Capital  Diffe re ntiatio n and Div e rsific atio n  Co m m e rc ial?  Ne w M e t Entrants ark  Ac c re tio n/Dilutio n Ho u lih a n Lo k e y 34
Slide 35: I d u s try n Pe rs p e c tiv e s Ca s h Flo w AAII Washington DC Metro Chapter  Stro ng , Pre dic tab le M ins arg  M in Expansio n Oppo rtunitie s arg  Lim ite d Capital Expe nditure s  R al Bac k lo g /Bo o k ing s v s. Oppo rtunitie s e  Earning s Visib ility  Cle an Balanc e Sh e e ts  Av ailab ility/Co st o f Capital fo r Financ ing Ho u lih a n Lo k e y 35
Slide 36: I d u s try n Pe rs p e c tiv e s Fa c to rs Th a t Co u ld Re s h a p e M rk e t a AAII Washington DC Metro Chapter  Ch ang e s in Se c urity Th re ats and Prio ritie s  Old/On-g o ing - Iraq /Afg h anistan  Ne w - Iran/Ch ina  Ch ang e s in Co ng re ss/Adm inistratio n  End o f Supple m e ntal Spe nding  M re No n-De fe nse Disc re tio nary Spe nding o  He alth c are and R tire m e nt Co sts e  Tale nt Po o l  Tax Paye r R v o lt e  Exc ite m e nt in Bro ade r M e ts ark Ho u lih a n Lo k e y 36
Slide 37: M rk e t Dyn a m ic s a Ae ro spac e
Slide 38: Ae ro s p a c e Ca p a b ilitie s o f Co m p a n ie s AAII Washington DC Metro Chapter  Airc raft R plac e m e nt Parts e  Ante nnas  Av io nic s & Surv e illanc e  Ele c tro nic s and Po w e r Syste m s  Life Suppo rt Syste m s  Lig h ting Pro duc ts  M de ling , Sim ulatio n and Training o  M to rs, Ac tuato rs, Sw itc h e s and Cab le s o  Pro c e ss, Analytic al and Te st Instrum e nts  Se nso rs Ho u lih a n Lo k e y 38
Slide 39: Ae ro s p a c e Pric in g a t Hig h e s t Le v e ls in Pa s t 1 0 Ye a rs AAII Washington DC Metro Chapter  Inv e sto rs are Optim istic Ab o ut Co m m e rc ial Ae ro spac e  Ord e rs are Le ading Ind ic ato r fo r Valuatio ns  2 0 0 5 Saw a Ve ry Stro ng Spik e in Airc raft Ord e rs Th at Will Pro v ide th e Bac k lo g fo r Stro ng Future De liv e rie s  2 0 0 5 Expe c te d to b e Pe ak in Ord e r Cyc le , b ut Stro ng Bac k lo g Exists  R in Valuatio ns Typic ally Pre c e de s a R c o v e ry ise e  Valuatio ns are Typic ally Hig h e st in th e Early Ph ase s o f a M e t ark R c o v e ry e M any “ Ae ro spac e ” Co m panie s Hav e M aning ful Po rtio ns o f Busine ss e De riv e d Fro m th e De fe nse and Go v e rnm e nt M e ts ark Ho u lih a n Lo k e y 39
Slide 40: Ae ro s p a c e Pu b lic Co m p a n y Pric in g – EV/Re v e n u e AAII Washington DC Metro Chapter 1 .2 0 x 1 .0 0 x 0 .8 0 x 0 .6 0 x 0 .4 0 x 0 .2 0 x 0 .0 0 x 97 Av e r a g e = 1 .0 6 x ` 00 04 99 98 96 02 05 20 Ae ro sp a c e 03 01 19 19 19 19 20 20 20 20 20 *L T M a s of S ep t em ber 1 3 , 2 0 0 6 S ou rces : F a ct S et, H ou lih a n L okey x 20 06 * Ho u lih a n Lo k e y 40
Slide 41: Ae ro s p a c e Pu b lic Co m p a n y Pric in g – EV/EBI TDA AAII Washington DC Metro Chapter 1 2 .0 x 1 0 .0 x 8 .0 x 6 .0 x 4 .0 x 2 .0 x 0 .0 x 97 98 04 99 96 03 02 05 20 Ae ro spa c e ` Av e r a g e = 8 .6 x 00 01 19 19 19 19 20 20 20 20 20 *L T M a s of S ep t em ber 1 3 , 2 0 0 6 S ou rces : F a ctS et , H ou lih a n L okey x 20 06 * Ho u lih a n Lo k e y 41
Slide 42: Ae ro s p a c e Co m p a ra tiv e Ae ro s p a c e Su b s e c to r Pu b lic M ltip le s u AAII Washington DC Metro Chapter Comparative Aerospace Subsector Public Company Multiples 18.0 x 16.2 x 16.0 x 14.5 x 14.0 x 12.0 x 10.0 x 8.0 x 6.0 x 4.0 x 2.0 x 0.0 x Aerostructures Airframe Manufacturers Aviation & Airport Services Aviation Controls Space 12.0 x 9.6 x 12.7 x 13.4 x 13.2 x 10.1 x 9.9 x 10.1 x LTM Median EBIT Multiple LTM Median EBITDA Multiple Ho u lih a n Lo k e y 42
Slide 43: Ae ro s p a c e Cu rre n t Pe rfo rm a n c e M tric s e AAII Washington DC Metro Chapter Revenue G rowth LFY AM ETEKInc . CAE Inc . Co b h am plc Duc o m m un Inc . Este rline Te c h no lo g ie s Co rp. Go o dric h Co rp. HEICO Co rp. M o g Inc . o R c k w e ll Co llins Inc . o Te le dyne Te c h no lo g ie s Inc Median (1) E V calculated as of September 13, 2006 NF Y 1 2 .1 % 8 .8 % 9 .7 % 1 9 .8 % 1 5 .6 % 8 .5 % 4 1 .6 % 2 2 .7 % 1 2 .6 % 1 4 .9 % 1 5 .2 % L T M E BIT DA E V /E BIT DA (1) Net C ash (Debt) ($mm) ($mm) $3 2 0 .9 $1 8 4 .7 $3 7 0 .5 $2 7 .7 $1 2 5 .0 $8 4 6 .9 $7 2 .1 $1 8 3 .4 $7 7 2 .0 $1 3 9 .6 $1 8 4 .0 1 1 .6 x 1 2 .2 x 1 1 .1 x 8 .0 x 9 .1 x 7 .6 x 1 2 .9 x 9 .7 x 1 2 .1 x 1 0 .1 x 1 0 .6 x ($6 4 7 .3 ) ($1 9 8 .3 ) ($1 7 6 .7 ) ($3 9 .6 ) ($2 5 1 .4 ) ($1 ,5 43 .6 ) ($5 3 .7 ) ($3 5 2 .1 ) ($1 2 0 .1 ) ($3 7 .0 ) ($1 8 7 .5 ) 1 6 .4 % 1 2 .3 % 1 6 .6 % 1 1 .0 % 3 6 .1 % 1 4 .8 % 2 5 .0 % 1 2 .0 % 1 7 .6 % 1 8 .7 % 1 6 .5 % Ho u lih a n Lo k e y 43
Slide 44: Ae ro s p a c e Ae ro s p a c e v s . S&P 5 0 0 AAII Washington DC Metro Chapter Aerospace Pricing Index 2001 - September 2006 300 250 200 Index Value 150 100 50 0 6 l-0 Ju 6 -0 pr A6 0 nJa 5 -0 ct O 5 l-0 Ju 5 -0 pr A5 0 nJa 4 -0 ct O 4 l-0 Ju 4 -0 pr A4 0 nJa 3 -0 ct O 3 l-0 Ju 3 -0 pr A3 0 nJa 2 -0 ct O 2 l-0 Ju 2 -0 pr A2 0 nJa 1 -0 ct O 1 l-0 Ju 1 -0 pr A1 0 nJa Aerospace Sector Aerospace with Defense Exposure S&P 500 Source: Factset Pricing as of 9/13/2006 Ho u lih a n Lo k e y 44
Slide 45: Ae ro s p a c e Re c e n t Pric in g Ch a n g e s AAII Washington DC Metro Chapter Stock Price C hange ∆ C Y 2004 AM ETEKInc . CAE Inc . Co b h am plc Duc o m m un Inc . Este rline Te c h no lo g ie s Co rp. Go o d ric h Co rp. HEICO Co rp. M o g Inc . o Ro c k w e ll Co llins Inc . Te le dyne Te c h no lo g ie s Inc . Median (1) YTD Pric ing as o f Sto c k Pric e Clo se s Se pte m b e r 1 3 , 2 0 0 6 ∆ C Y 2005 1 9 .3 % 6 8 .7 % 3 7 .0 % 2 .4 % 1 3 .9 % 2 5 .9 % 1 4 .6 % (6 .1 % ) 1 7 .8 % (1 .1 % ) 16.2% ∆ 1Q2006 5 .7 % 7 .7 % 1 0 .9 % 3 .9 % 1 5 .0 % 6 .1 % 2 2 .4 % 2 5 .1 % 2 1 .3 % 2 2 .3 % 12.9% ∆ 2Q2006 5 .4 % (7 .4 % ) (1 1 .2 % ) (1 6 .6 % ) (2 .7 % ) (7 .6 % ) (1 0 .5 % ) (3 .6 % ) (0 .9 % ) (8 .0 % ) (7.5% ) ∆ Y T D (1) 3 .3 % 8 .9 % 5 .6 % (1 6 .9 % ) (6 .7 % ) (4 .3 % ) 2 4 .4 % 1 9 .9 % 1 5 .9 % 3 7 .7 % 7.3% 4 7 .8 % (1 3 .8 % ) 5 .9 % (6 .7 % ) 2 2 .4 % 9 .9 % 3 6 .5 % 3 7 .7 % 3 1 .3 % 5 6 .1 % 26.9% Ho u lih a n Lo k e y 45
Slide 46: Ae ro s p a c e Su b s e c to rs De fin e d AAII Washington DC Metro Chapter Airframe Manufacturers Bo e ing Co . Bo m b ardie r Inc . Dassault Av iatio n EADS Em b rae r-Em pre sa Bras Finm e c c anic a Spa K an Co rp. am Te xtro n Inc . U d Te c h no lo g ie s Co rp. nite Aerostructures Alc o a Astro nic s Av c o rp Industrie s Inc . CPI Ae ro struc ture s Inc . Duc o m m un Inc . GK plc N He ro ux-De v te k Inc . He xc e l Co rp. K F Industrie s & Lad ish Co . Inc . Late c o e re LM Ae ro spac e Inc . I M e llan Ae ro spac e ag No rthstar Ae ro spac e Inc . Pre c isio n Castparts Co rp. Aviation C ontrols Ae ro so nic Co rp. Am e te k CAE Inc . Co b ham Crane Co . Curtiss-Wrig ht Co rp. Este rline Te c h no lo g ie s Garm in Go o dric h Co rp. He ic o Co rp. Ho ne yw e ll Inte rnatio nal Inc . Inno v ativ e So lutio ns & Supp. Inc . L-3 Co m m unic atio ns Aviation & Airport S ervices AAR Co rp. BBA Gro up Fairc hild Co rp. He ic o Co rp. M nzie s e No rthstar Ae ro spac e Pe nauille Po lyse rv Se nio r Trium ph Gro up Inc . U eco m Ve c to r Ae ro spac e Co rp. Bo e ing Gilat S pace Inte g ral Syste m s Inc . Lo c k he e d M artin Lo ral Spac e Co m m unic atio ns & M do nald De ttw ile r & ac Asso c iate s Orb ital Sc ie nc e s Co rp Spac e hab Inc Ho u lih a n Lo k e y 46
Slide 47: M rk e t Dyn a m ic s a De fe nse
Slide 48: De fe n s e Ca p a b ilitie s o f Co m p a n ie s AAII Washington DC Metro Chapter  Co m b at Syste m s De v e lo pm e nt, Pro duc tio n and Suppo rt  Ele c tro nic Warfare Syste m s  Info rm atio n Syste m s & Te c h no lo g y M anne d and U anne d Airb o rne Syste m s nm M arine Syste m s M issile De fe nse  Ord nanc e and Tac tic al Syste m s  R ar and Air De fe nse Syste m s ad  Sate llite and Spac e Syste m s  Te c h nic al Se rv ic e s Ho u lih a n Lo k e y 48
Slide 49: De fe n s e Va lu a tio n s Ste a d y Re c e n tly AAII Washington DC Metro Chapter  Valuatio ns R m ain Ab o v e 1 0 -ye ar Av e rag e s e  Gro w th Fro m “ R ple nish m e nt” e On-g o ing “ Ope ratio ns” and Sub se q ue nt  Big -tic k e t Pro g ram s Hav e Stab ilize d Fro m a Bud g e t Stand-po int, Alth o ug h No t Out o f th e We e ds Ye t  Budg e t Pre ssure s Hav e Be e n Offse t b y Stro ng R c e nt Earning s e  Hig h e st Valuatio ns in Sub se c to rs – C4 ISR Fo rc e Pro te c tio n ,  “ Prim e s” are Co nsiste nt Ho u lih a n Lo k e y 49
Slide 50: De fe n s e Pu b lic Co m p a n y Pric in g – EV/Re v e n u e AAII Washington DC Metro Chapter 1 .4 0 x 1 .2 0 x 1 .0 0 x 0 .8 0 x 0 .6 0 x 0 .4 0 x 0 .2 0 x 0 .0 0 x 97 98 99 04 96 00 03 01 05 20 De fe n se Av e ra ge = 1 .1 8 x ` 02 19 19 19 19 20 20 20 20 20 *L T M a s of S ep t em ber 1 3 , 2 0 0 6 S ou rces : F a ct S et , H ou lih a n x okey L 20 06 * Ho u lih a n Lo k e y 50
Slide 51: De fe n s e Pu b lic Co m p a n y Pric in g – EV/EBI TDA AAII Washington DC Metro Chapter 1 2 .0 x 1 0 .0 x 8 .0 x 6 .0 x 4 .0 x 2 .0 x 0 .0 x 04 97 98 99 96 00 05 20 De fe n se Av e r a g e = 9 .3 x ` 02 03 01 19 19 19 19 20 20 20 20 20 *L T M a s of S ep t em ber 1 3 , 2 0 0 6 S ou rces : F a ct S et , H ou lih a n L okey x 20 06 * Ho u lih a n Lo k e y 51
Slide 52: De fe n s e Co m p a ra tiv e De fe n s e Su b s e c to r Pu b lic M ltip le s u AAII Washington DC Metro Chapter Comparative Defense Subsector Public Company Multiples 14.0 x 12.8 x 12.0 x 10.5 x 10.0 x 11.9 x 10.1 x 11.9 x 10.1 x 11.8 x 10.4 x 10.4 x 13.1 x 8.0 x 6.0 x 4.0 x 2.0 x 0.0 x Communications Land Vehicles Propulsion Missiles & Ordnance Sensors LTM Median EBIT Multiple LTM Median EBITDA Multiple Ho u lih a n Lo k e y 52
Slide 53: De fe n s e Cu rre n t Pe rfo rm a n c e M tric s e AAII Washington DC Metro Chapter Revenue G rowth LFY Alliant Te c h syste m s Inc . BAE Syste m s plc Ge ne ral Dynam ic s Co rp. L-3 Co m m unic atio ns Lo c k h e e d M artin Co rp. No rth ro p Grum m an Co rp. Rayth e o n Co . Median (1) E V calculated as of September 13, 2006 NF Y 7 .0 % 2 4 .9 % 1 5 .2 % 2 9 .4 % 6 .4 % (0 .6 % ) 6 .6 % 7 .0 % L T M E BIT DA E V /E BIT DA (1) Net C ash (Debt) ($mm) ($mm) $4 2 4 .9 $2 ,0 9 2 .7 $2 ,8 3 8 .0 $1 ,3 4 6 .4 $3 ,8 3 8 .0 $3 ,0 0 7 .0 $2 ,3 2 5 .0 $2 ,3 2 5 .0 9 .5 x 1 2 .3 x 1 0 .6 x 1 0 .4 x 9 .4 x 9 .2 x 1 0 .5 x 1 0 .4 x ($1 ,1 9 2 .6 ) ($1 ,9 8 4 .0 ) ($2 ,2 5 0 .0 ) ($4 ,5 1 8 .0 ) ($1 ,8 3 1 .0 ) ($3 ,8 8 4 .0 ) ($3 ,1 1 1 .0 ) ($2 ,2 5 0 .0 ) 1 4 .8 % 2 5 .0 % 1 1 .1 % 3 6 .9 % 4 .7 % 2 .9 % 8 .1 % 1 1 .1 % Ho u lih a n Lo k e y 53
Slide 54: AAII Washington DC Metro Chapter De fe n s e Ho u lih a n Lo k e y 350 300 250 200 150 100 50 0 Index Value 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/ /2 0 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/ Defense Sector S&P 500 De fe n s e v s . S&P 5 0 0 Defense Pricing Index 2001 - September 2006 Source: Factset Pricing as of 9/13/2006 54
Slide 55: De fe n s e Re c e n t Pric in g Ch a n g e s AAII Washington DC Metro Chapter Stock Price C hange ∆ C Y 2004 Alliant Te c h syste m s Inc . BAE Syste m s plc Ge ne ral Dynam ic s Co rp. L-3 Co m m unic atio ns Ho ld ing s Inc . Lo c k h e e d M artin Co rp. No rth ro p Grum m an Co rp. Rayth e o n Co . Median 1 3 .2 % 3 7 .2 % 1 5 .7 % 4 2 .6 % 8 .1 % 1 3 .7 % 2 9 .3 % 15.7% ∆ C Y 2005 1 6 .5 % 6 5 .6 % 9 .0 % 1 .5 % 1 4 .5 % 1 0 .6 % 3 .4 % 10.6% ∆ 1Q2006 1 .3 % 1 0 .2 % 1 2 .2 % 1 5 .4 % 1 8 .1 % 1 3 .6 % 1 4 .2 % 13.6% ∆ 2Q2006 (1 .1 % ) (1 2 .1 % ) 2 .3 % (1 2 .1 % ) (4 .5 % ) (6 .2 % ) (2 .8 % ) (4.5% ) ∆ Y T D (1) 7 .4 % 0 .3 % 2 1 .3 % 2 .1 % 2 9 .2 % 1 2 .9 % 1 7 .6 % 12.9% (1) YTD Pric ing as o f Sto c k Pric e Clo se s Se pte m b e r 1 3 , 2 0 0 6 Ho u lih a n Lo k e y 55
Slide 56: De fe n s e Su b s e c to rs De fin e d AAII Washington DC Metro Chapter Propulsion Alliant Te c h syste m s Inc . Ge nc o rp Inc . Ge ne ral Ele c tric Co . Ho ne yw e ll Inte rnatio nal Inc . R lls R yc e o o Te xtro n U d Te c h no lo g ie s nite L and V ehicles Arm o r Ho ld ing s BAE Syste m s Ge ne ral Dynam ic s Osh k o sh Truc k Co rp. Sing apo re Te c h no lo g ie s U d Te c h no lo g ie s Co rp. nite Missiles & Ordnance Alliant Te c h syste m s Inc . Bo e ing Ch e m ring Gro up EADS Ge ne ral Dynam ic s L-3 Co m m unic atio ns Lo c k h e e d M artin Sensors Arg o n ST Inc . Axsys Te c h no lo g ie s Inc . BAE Syste m s Bo e ing DR Te c h no lo g ie s Inc . S EDO Co rp. Elb it Syste m s C ommunications Ae ro fle x Inc . Am e te k Anare n Inc . BAE Syste m s Bo e ing Co . Cub ic Co rp. DR Te c h no lo g ie s Inc . S R ayth e o n Flir Syste m s Inc . EDO Co rp. ITT Ind ustrie s Filtro nic L-3 Co m m unic atio ns Finm e c c anic a Spa No rth ro p Grum m an Fre q ue nc y Ele c tro nic s Inc . R ayth e o n Ge ne ral Dynam ic s Th ale s Harris Co rp. U Ele c tro nic s ltra Ho u lih a n Lo k e y 56
Slide 57: M rk e t Dyn a m ic s a Go v e rnm e nt
Slide 58: Go v e rn m e n t Ca p a b ilitie s o f Co m p a n ie s AAII Washington DC Metro Chapter  Ac q uisitio n and Lo g istic s Suppo rt  Info rm atio n Assuranc e and Se c urity  Info rm atio n Te c h no lo g y Se rv ic e s  K w le dg e M no anag e m e nt  Outso urc e d Suppo rt Se rv ic e s  Syste m s/So ftw are Eng ine e ring and Inte g ratio n  Te c h nic al Se rv ic e s  Training Syste m s and Se rv ic e s Ho u lih a n Lo k e y 58
Slide 59: Go v e rn m e n t M ltip le s a re Co n tra c tin g u AAII Washington DC Metro Chapter  Valuatio ns in th e Go v e rnm e nt Se rv ic e s Se g m e nt are Slig h tly Be lo w 1 0 -ye ar Av e rag e s  2 0 0 1 – 2 0 0 5 Pric ing Driv e n b y Org anic Gro w th Expe c tatio ns  2 0 0 6 is a Diffe re nt Sto ry as M e t R ac ts to Slo w e r R alizatio n ark e e o f Gro w th  Lim ite d U e rse o f Pub lic Co m panie s, Espe c ially Larg e Cap niv Co m panie s Ho u lih a n Lo k e y 59
Slide 60: Go v e rn m e n t Fo rw a rd P/E v s Pro je c te d EPS Gro w th AAII Washington DC Metro Chapter Historical Price Earnings Growth 1.60 1.30 OPTIMISM GAP 1.30 1.00 0.70 0.70 0.40 2000 2001 0.70 1.20 1.10 1.20 1.10 CONFIDENCE GAP ? 2002 2003 PEG Ratio 2004 2005 2006 * As of September 13, 2006 Source: FACTSET, Houlihanx Lokey Ho u lih a n Lo k e y 60
Slide 61: Go v e rn m e n t Pu b lic Co m p a n y Pric in g – EV/Re v e n u e AAII Washington DC Metro Chapter 1.80x 1.60x 1.40x 1.20x 1.00x 0.80x 0.60x 0.40x 0.20x 0.00x 19 95 19 96 19 97 19 99 20 00 20 01 20 02 20 03 20 04 19 98 20 05 20 06 * EV/Revenue Av e ra ge = 1 .0 9 x * Y T D a s of S ep t em ber 1 3 , 2 0 0 6 . S ou rces : F a ct S et , H ou lih ax L okey n Ho u lih a n Lo k e y 61
Slide 62: Go v e rn m e n t Pu b lic Co m p a n y Pric in g – EV/EBI TDA AAII Washington DC Metro Chapter 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 19 96 19 95 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 05 20 04 20 06 * Av e ra ge = 1 1 .3 x * Y T D a s of S ep t em ber 1 3 , 2 0 0 6 S ou rces : F a ct S et , H ou lih a x L okey n EV/EBITDA Ho u lih a n Lo k e y 62
Slide 63: Go v e rn m e n t Co m p a ra tiv e Go v e rn m e n t Su b s e c to r Pu b lic M ltip le s u AAII Washington DC Metro Chapter Comparative Government Services Subsector Public Company Multiples 16.0 x 14.0 x 12.0 x 10.0 x 8.0 x 6.0 x 4.0 x 2.0 x 0.0 x Federal IT Diversified IT LTM Median EBIT Multiple LTM Median EBITDA Multiple 15.2 x 13.0 x 11.5 x 9.9 x 9.8 x 9.9 x Technical Services Ho u lih a n Lo k e y 63
Slide 64: Go v e rn m e n t Cu rre n t Pe rfo rm a n c e M tric s e AAII Washington DC Metro Chapter Revenue G rowth L FY NF Y 7 .9 % 1 0 .3 % (1 1 .5 % ) 1 9 .4 % 1 8 .5 % 1 7 .3 % 5 .4 % 1 3 .8 % 1 9 .1 % 1 0 .7 % NA 12.2% L T M E BIT DA ($mm) $1 3 .1 $1 9 4 .3 $2 2 .0 $1 6 8 .2 $1 0 1 .8 $4 6 .6 $1 4 .1 $2 0 0 .7 $4 3 .1 $1 2 8 .3 $1 1 .8 $46.6 E V /E BIT DA (1) Net C ash (Debt) ($mm) ($2 5 .9 ) ($3 4 3 .2 ) ($2 3 .1 ) ($6 1 6 .6 ) ($2 4 .4 ) ($8 5 .4 ) $1 7 .0 ($2 5 7 .6 ) ($8 2 .7 ) $1 7 3 .6 $5 .1 ($25.9) Anale x Co rp. CACI Inte rnatio nal Inc . Dynam ic s R se arc h Co rp. e DynCo rp Inte rnatio nal Inc . M anTe c h Inte rnatio nal Co rp. M Te c hno lo g ie s Inc . TC NCI Inc . Q tiQ Gro up plc ine SI Inte rnatio nal Inc . SR Inte rnatio nal Inc . A VSE Co rp. Median 4 9 .5 % 8 .1 % 9 .0 % 2 .4 % 1 8 .5 % 3 6 .7 % 1 1 .7 % 2 2 .9 % 5 1 .7 % 3 3 .7 % 2 9 .7 % 22.9% 7 .1 x 1 0 .0 x 5 .2 x 7 .6 x 1 0 .7 x 9 .1 x 9 .4 x 2 1 .3 x 1 0 .9 x 1 2 .0 x 5 .8 x 9.4x (1) E V calculated as of September 13, 2006 Ho u lih a n Lo k e y 64
Slide 65: Go v e rn m e n t Pu b lic Co m p a n y Co m p o s ite Sto c k Pe rfo rm a n c e AAII Washington DC Metro Chapter Government Services Price Index 2001 - September 2006 800 700 600 500 Index Value 400 300 200 100 0 6 00 /2 12 6 7/ 200 / 12 6 4/ 200 / 5 12 0 1/ /20 2 /1 5 10 00 /2 12 5 7/ 200 / 12 5 4/ 200 / 4 12 0 1 / /2 0 2 /1 4 10 00 /2 12 4 7/ 200 / 12 4 4/ 200 / 3 12 0 1 / /2 0 2 /1 3 10 200 / 12 3 7/ 200 / 12 3 4/ 200 / 2 12 0 1/ /20 2 /1 2 10 00 /2 12 2 7/ 200 / 12 2 4/ 200 / 1 12 0 1 / /2 0 2 /1 1 10 00 /2 12 1 7/ 200 / 12 1 4/ 200 / 12 1/ Government Services S&P 500 Source: Factset Pricing as of 9/13/2006 Ho u lih a n Lo k e y 65
Slide 66: Go v e rn m e n t Re c e n t Pric in g Ch a n g e s AAII Washington DC Metro Chapter Stock Price C hange ∆ C Y 2004 Anale x Co rp. CACI Inte rnatio nal Inc . Dynam ic s Re se arc h Co rp. DynCo rp Inte rnatio nal Inc . M anTe c h Inte rnatio nal Co rp. M Te c h no lo g ie s Inc . TC NCI Inc . Q tiQGro up plc ine SI Inte rnatio nal Inc . SRA Inte rnatio nal Inc . VSE Co rp. Median (1) YTD Pric ing as o f Sto c k (2) Pric e Ch ang e Calc ulate d (3) Pric e Ch ang e Calc ulate d (4) Pric e Ch ang e Calc ulate d Pric e Clo se s Se pte m b e r 1 3 , 2 0 0 6 fro m IPO o n 0 5 /0 3 /2 0 0 6 fro m IPO o n 1 0 /2 4 /2 0 0 5 – 1 2 /3 1 /2 0 0 5 fro m IPO o n 0 2 /1 0 /2 0 0 6 ∆ C Y 2005 (3 3 .9 % ) (1 5 .8 % ) (1 3 .3 % ) NA 1 7 .4 % (1 8 .4 % ) (5 9 .9 % )(3 ) NA (0 .6 % ) (4.9 % ) 6 7 .2 % (13.3% ) ∆ 1Q2006 (6 .5 % ) 1 4 .6 % (3 .6 % ) NA 1 9 .2 % 2 .2 % 2 .0 % (9 3 .2 % )(4 ) 1 5 .0 % 2 3 .5 % (1 .4 % ) 2.1% ∆ 2Q2006 (1 1 .8 % ) (1 1 .3 % ) (8 .9 % ) (3 0 .8 % )(2 ) (7 .1 % ) (1 5 .6 % ) (6 .4 % ) (9 .5 % ) (1 2 .8 % ) (2 9 .4 % ) (2 8 .3 % ) (11.8% ) ∆ Y T D(1) (2 4 .4 % ) (5 .7 % ) (3 6 .4 % ) (2 1 .7 % )(2 ) 1 4 .4 % (1 9 .5 % ) (2 0 .9 % ) (9 3 .8 % )(4 ) (0 .3 % ) (4 .7 % ) (2 5 .7 % ) (20.9% ) 2 0 .5 % 4 0 .1 % 1 0 .5 % NA (4 .8 % ) 4 .2 % NA NA 5 7 .2 % 4 9 .0 % 9 0 .0 % 30.3% Ho u lih a n Lo k e y 66
Slide 67: Go v e rn m e n t Su b s e c to rs De fin e d AAII Washington DC Metro Chapter F ederal IT NCI Inc . Anale x CACI Inte rnatio nal Inc . Dynam ic s Re se arc h Co rp. M anTe c h Inte rnatio nal M Te c h no lo g ie s TC SI Inte rnatio nal Inc . SRA Inte rnatio nal, Inc . CIBER Diversified IT Affiliate d Co m p Sv c s Co m pute r Ho rizo ns Co m pute r Sc ie nc e s Co rp. Co v ansys Ele c tro nic Data Syste m s K ane Inc . e M axim us Inc . Pe ro t Syste m s Co rp. Tyle r Te c h no lo g ie s U nisys Wire le ss Fac ilitie s T echnical Services Atk ins WS Fluo r Gro up Dync o rp Inte rnatio nal J o b s Eng ine e ring Gro up Inc . ac Se rc o Gro up Te tra Te c h Inc . U Co rp. RS VT Gro up VSE Co rp. Ho u lih a n Lo k e y 67
Slide 68: M rk e t Dyn a m ic s a Ho m e land Se c urity
Slide 69: Ho m e la n d Se c u rity M rk e t Ov e rv ie w a AAII Washington DC Metro Chapter  3 0 ,0 0 0 Co m panie s Curre ntly Suppo rting th e Fe de ral Go v e rnm e nt (< 2 0 in th e Late 1 9 9 0 s)  $1 3 0 Billio n in Funding Sinc e 9 /1 1  $6 5 Billio n to 1 0 Larg e st Co ntrac to rs  DHS Budg e t Gro w ing Fro m $2 8 Billio n in 2 0 0 2 to $4 2 Billio n in 2 0 0 7 (8 .4 % CAGR )  HLS Industry Expe c te d to R ac h $1 7 0 Billio n Pe r Ye ar in FY2 0 1 5 e Sources: Forbes Magazine, Office of Management and Budget, Homeland Security Research Ho u lih a n Lo k e y 69
Slide 70: Ho m e la n d Se c u rity Ca p a b ilitie s o f Co m p a n ie s AAII Washington DC Metro Chapter  Alarm , Se c urity and Surv e illanc e Syste m s  Bio m e tric s  Data-pro c e ssing Se rv ic e s  First R spo nde rs e  Guard Se rv ic e s  Inspe c tio n Syste m s  Natural Disaste rs  No n-Le th al De fe nse Pro duc ts  Safe ty and Surv iv al Ge ar Ho u lih a n Lo k e y 70
Slide 71: Ho m e la n d Se c u rity Vo la tile Va lu a tio n s AAII Washington DC Metro Chapter  “ Buzzw o rd” – Wh at Do e s it R ally M an to th e Inv e sto r? e e  M r R p-up in Th is Se c to r Po st-9 /1 1 ajo am  Curre nt Pre m ium Co m pare d to Balanc e o f ADG  Inc o nsiste nt Pric ing /Valuatio ns “ Pe rc e ptio ns” Tie d to Inc o nsiste nt Funding  “ Nic h e Plays” v s. “ R al Playe rs” e Ho u lih a n Lo k e y 71
Slide 72: Ho m e la n d Se c u rity Pu b lic Co m p a n y Pric in g – EV/Re v e n u e AAII Washington DC Metro Chapter 3 .5 0 x 3 .0 0 x 2 .5 0 x 2 .0 0 x 1 .5 0 x 1 .0 0 x 0 .5 0 x 0 .0 0 x 04 20 20 20 20 Ho m e la n d Se c urity Av e r a g e = 2 .3 5 x ` 20 *L T M a s of S ep t em ber 1 3 , 2 0 0 6 S ou rces : F a ct S et, H ou lih a nx L okey 20 06 05 03 01 02 Ho u lih a n Lo k e y 72
Slide 73: Ho m e la n d Se c u rity Pu b lic Co m p a n y Pric in g – EV/EBI TDA AAII Washington DC Metro Chapter 1 6 .0 x 1 4 .0 x 1 2 .0 x 1 0 .0 x 8 .0 x 6 .0 x 4 .0 x 2 .0 x 0 .0 x 04 20 03 20 20 20 20 20 Ho m e la n d Se c urity ` Av e r a g e = 1 1 .2 x *L T M a s of S ep t em ber 1 3 , 2 0 0 6 S ou rces : F a ct S et , H ou lih a n L okey x 06 05 02 01 Ho u lih a n Lo k e y 73
Slide 74: Ho m e la n d Se c u rity Cu rre n t Pe rfo rm a n c e M tric s e AAII Washington DC Metro Chapter Revenue G rowth L FY NF Y (7 .9 % ) 5 0 .5 % (2 9 .5 % ) 1 2 .5 % (6 .2 % ) 5 .6 % 3 2 .9 % 8 .5 % 4 0 .6 % 1 3 .3 % 2 6 .3 % 12.5% L T M E BIT DA ($mm) $5 0 .7 $2 9 0 .4 $6 0 .2 $1 4 9 .1 NA $1 0 .1 $1 6 .1 $1 .2 $7 .0 $7 .3 $4 3 .5 $29.8 E V /E BIT DA (1) Net C ash (Debt) ($mm) $4 1 .3 ($8 0 9 .1 ) $2 7 .9 ($6 3 .3 ) ($0 .0 ) ($4 .7 ) $2 .8 $1 1 .8 $1 5 .3 $1 .9 $5 8 .0 $2.8 Am e ric an Sc ie nc e & Eng ine e ring Arm o r Ho ld ing s Inc . Co g e nt Inc . FLIR Syste m s Inc . Io natro n Inc . Lak e land Industrie s Inc . OSI Syste m s, Inc . R Syste m s Inc . AE TASER Inte rnatio nal Inc . TVI Co rp. Ve rint Syste m s Inc . Median 8 5 .3 % 6 7 .1 % 8 2 .3 % 5 .4 % 7 2 .7 % 3 .6 % 5 5 .8 % 3 2 .4 % (2 9 .5 % ) (1 3 .3 % ) 2 9 .6 % 32.4% 7 .0 x 9 .2 x 1 5 .9 x 1 3 .1 x NA 7 .4 x 1 9 .1 x NM F NM F 9 .1 x 1 8 .0 x 11.1x (1) E V calculated as of September 13, 2006 Ho u lih a n Lo k e y 74
Slide 75: Ho m e la n d Se c u rity Ho m e la n d Se c u rity v s . S&P 5 0 0 AAII Washington DC Metro Chapter Homeland Security Price Index 2001 - September 2006 3000 2500 2000 Index Value 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 / /0 3 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 Ho u lih a n Lo k e y 75
Slide 76: Ho m e la n d Se c u rity Re c e n t Pric in g Ch a n g e s AAII Washington DC Metro Chapter Stock Price C hange ∆ C Y 2004 Am e ric an Sc ie nc e & Eng ine e ring Arm o r Ho lding s Inc . Co g e nt Inc . FLIR Syste m s Inc . Io natro n Inc . Lak e land Industrie s Inc . OSI Syste m s, Inc . R Syste m s Inc . AE TASER Inte rnatio nal Inc . TVI Co rp. Ve rint Syste m s Inc . Median 2 4 2 .0 % 7 8 .7 % NA 7 4 .8 % NA 1 2 .2 % 1 8 .2 % 1 1 4 .7 % 3 6 1 .1 % 5 3 .4 % 6 1 .0 % 74.8% ∆ C Y 2005 5 1 .3 % (9 .3 % ) (3 1 .3 % ) (3 0 .0 % ) (1 0 .8 % ) 1 .4 % (1 9 .0 % ) (5 1 .9 % ) (7 8 .0 % ) (1 0 .1 % ) (5 .1 % ) (10.8% ) ∆ 1Q2006 4 9 .8 % 3 6 .7 % (1 9 .1 % ) 2 7 .2 % 3 3 .6 % 9 .5 % 1 4 .9 % 1 .7 % 5 2 .2 % -1 .3 % 2 .6 % 14.9% ∆ 2Q2006 (3 8 .0 % ) (5 .9 % ) (1 7 .8 % ) (1 9 .4 % ) (5 3 .0 % ) (2 7 .0 % ) (1 5 .9 % ) 1 2 .0 % (2 5 .3 % ) (1 0 .6 % ) (1 7 .5 % ) (17.8% ) ∆ Y T D(1) (2 3 .3 % ) 2 2 .3 % (3 8 .2 % ) 2 3 .6 % (4 3 .6 % ) (2 5 .7 % ) (1 .0 % ) (1 5 .7 % ) 9 .3 % (4 5 .5 % ) (5 .6 % ) (15.7% ) (1) YTD Pric ing as o f Sto c k Pric e Clo se s Se pte m b e r 1 3 , 2 0 0 6 Ho u lih a n Lo k e y 76
Slide 77: Ho m e la n d Se c u rity Wh o Are Th e Re a l Pla ye rs ? AAII Washington DC Metro Chapter  An Inc o m ple te List…  GE  Ho ne yw e ll  IBM  L-3  Lo c k h e e d M artin M anTe c h Inte rnatio nal  No rth ro p Grum m an R ayth e o n  SAIC  Sm ith s Gro up Ho u lih a n Lo k e y 77
Slide 78: Su m m a ry
Slide 79: Su m m a ry Clo s in g Re m a rk s AAII Washington DC Metro Chapter  Lo ts o f Q stio ns… ue  Lo ts o f Oppo rtunitie s… Thank You F or Your Valuable Time and the Opportunity to Present to Your Organization Ho u lih a n Lo k e y 79