Aerospace & Defense, Mergers and Acquisitions Environment, and Company Valuation

December 11, 2008

NDIA Ground Robotics Division Quarterly Meeting

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Premier Middle Market Investment Bank

2006 M&A Advisory Rankings U.S. Deals Under $1 Billion Value Number of Advisor Deals 124 122 110 110 109 107 101 96 88 86 71 62 57 47 46 40 40 39 37 37 36 32 30 28 27

2008 Mid-Market 2008 Mid-Market Financial Advisor of the Year Financial Advisor of the Year (Financial Times) (Financial Times)
Ranked #1 Mid-Market M&A Advisor Ranked #1 Mid-Market M&A Advisor #1 Restructuring Investment Banking Firm #1 Restructuring Investment Banking Firm in the U.S. in the U.S. #1 Provider of Fairness Opinions #1 Provider of Fairness Opinions for Eight Consecutive Years for Eight Consecutive Years

Rank

1 Houlihan Lokey 2 UBS 3 * M&A Advisory Rankings 2007 Goldman Sachs & Co 3 JP Morgan U.S.*Deals Under $1.25 Billion 5 Jefferies & Co Inc Number of 6 Rank Advisor Credit Suisse Deals 7 Citigroup 1 Houlihan Lokey 125 8 Morgan Stanley 2 Credit Suisse 118 9 Merrill Lynch & Co Inc 3 110 2008 1st Half Citi10 Advisory Rankings M&A Lehman Brothers 4 Sachs 109 U.S. DealsGoldmanBanc of& Co Under $1.50 Billion 11 America Securities LLC 5 UBS 94 Number 12 Sandler ONeill Partnersof Jefferies & Co Inc 93 Rank Advisor6 13 Keefe Bruyette & Deals Inc Woods 7 Lehman Brothers 92 Houlihan Lokey 14 Wachovia Corp 1 63 8 JP Morgan 91 15 Lazard 2 Goldman Sachs & Co Stanley 62 9 Morgan BB&T Corp 79 16 * 60 3 JP Morgan 10 RBC Capital Markets 71 16 * Duff and Phelps 47 4 Credit Suisse 11 Merrill Lynch Equico Capital Markets LLC 68 18 RSM 5 UBS 12 43 Lazard * Deutsche Bank AG 66 19 6 * Lazard 13 41 Banc of*America Securities LLC 61 19 Piper Jaffray Cos 41 6 * Merrill 14 Lynch Sandler O'Neill Partners Co 56 21 William Blair & 8 * Citi 39 15 Stifel Financial Corp 51 22 Daniels & Associates Inc 8 * Jefferies16 Co Inc & 39 Duff and Bear Stearns & Co Inc Phelps 49 23 Stanley 33 10 Morgan17 Wachovia Corp W Baird & Co Inc 48 24 Robert 11 Lehman Brothers 28 18 William Blair & Edmiston Group 45 25 Jordan Co 26 12 * Duff and Phelps * denotes tie. 19 * Keefe Bruyette & Woods Inc 44 12 * Deutsche Bank AG 26 Source: 19 * IMAP Thomson Financial. 44 21 14 * GW Equity 21 RSM Equico Capital Markets LLC 43 14 * Banc of America Securities LLC 21 22 Lincoln International 42 21 14 * Wachovia Corp 23 Robert W Baird & Co Inc 41 20 17 RBC Capital Markets 24 Deutsche Bank AG 40 19 18 * RSM Equico Capital Markets LLC 25 BB&T Corp 39 18 * William Blair & Co 19 * denotes tie. 20 * Robert W Baird & Co Inc 18 Source: Thomson Financial 20 * Sandler O'Neill Partners 18 20 * Piper Jaffray Cos 18 Lincoln International 23 17 24 * BB&T Corp 15 24 * M&A International 15 * denotes tie. Source: Thomson Reuters

Houlihan Lokey is a leading pure advisory investment bank Houlihan Lokey is a leading pure advisory investment bank
Sources: Thomson Financial Securities Data, Mergers & Acquisitions Journal, The Deal.

Select 2008 ADG Transactions

Transaction Pending
Transaction Pending

Transaction Pending

a portfolio company of Veritas Capital

Global Microwave Systems a subsidiary of has been acquired by

has been acquired by

has been acquired by

Project Star

has agreed to be acquired by

has been acquired by has been acquired by

Sellside Advisor

Sellside Advisor

Sellside Advisor

Sellside Advisor

Sellside Advisor

Sellside Advisor

Sellside Advisor & Fairness Opinion

a division of a subsidiary of has sold a majority stake in its has been acquired by has been acquired by has been acquired by U.S. Government Business to R.H. Book, LLC and 1848 Capital Partners LLC has been acquired by has been recapitalized in partnership with founders and management by has been acquired by

Sellside Advisor

Sellside Advisor

Sellside Advisor

Fairness Opinion

Sellside Advisor

Sellside Advisor

Sellside Advisor

a portfolio company of Strategic Business Systems, Incorporated has been acquired by has been acquired by has been acquired by has been acquired by has been acquired by

a subsidiary of

a company of

has acquired a majority stake of has been acquired by

a division of

Sellside Advisor

Sellside Advisor

Sellside Advisor

Sellside Advisor

Sellside Advisor

DRAFT

Sellside Advisor

Buyside Advisor

Houlihan Lokey is the most active investment bank in Aerospace-Defense-Government Services Houlihan Lokey is the most active investment bank in Aerospace-Defense-Government Services
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Strategy Formulation in a Perfect Storm

_______________ _______________

Political Political Transition Transition

Traumatized Traumatized Equity Markets Equity Markets

Bailouts Bailouts

New Priorities New Priorities

CORPORATE STRATEGY ??????

Massive Federal Massive Federal Deficits Deficits ~$450 billion ~$450 billion Recession Recession
*Includes federal bailouts, equity buys into banks, liquidity infusion by Federal Reserve, loan guarantees and stimulus checks; Source: Sunnucks, Mike. Bailouts, rescues, cash injections in U.S. economy total $8.5 trillion. Baltimore Business Journal. 26 Nov. 2008.

Financial Financial Auto Auto State & Local State & Local Consumers Consumers ~~$8 trillion* $8 trillion*

Frozen Credit Frozen Credit Markets Markets

Drivers of M&A Activity

Strategic buyers are looking to: Improve positioning
Expand capabilities Diversify risk (program, technology, competitive) Declining Revenue Growth Will Spur Acquisitions
16.0% Industry Average CAGR 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2001-2004 2005-LTM LTM-2010

Attract greater investor interest

Augment organic growth Leverage strong balance sheets

Companies seeking exits

Owners timing Barriers to reaching next level

Private Equity looking to: Deploy capital in safe industries

Sources: Capital IQ * Compounded Annual Growth Rates, As of October 14, 2008

ADG M&A Strategic Premise

Tier 1 Themes
Mega-merger wave ended, turning focus to smaller targets to fill in capabilities and secure positions on major program awards

Tier 2
Evolution of merchant supplier model and consolidation of mid-tier suppliers

Tier 3
Few large diversified industrials and enormous base of small targets

Characteristics

Massive consolidation completed by late 1990s with few potential or viable deals remaining Capabilities-based approach to acquisitions, following evolution of lead systems integrator (LSI) role Characterized today by high interest in smaller targets (<$250 million)

Consolidation needed to address alreadyconsolidated Tier 1 customer base Certain Tier 2 suppliers are acquiring systems engineering capability to preserve competitiveness as prime contractors in an increasingly systems-oriented procurement environment Extensive Wall Street support for consolidation to build critical mass Highest organic growth potential in defense electronics segments

Need to rationalize shrinking customer base Consolidation to provide higher level subsystems to address customer drivers Still highly fragmented significant consolidation is expected to continue

Aerospace Defense & Government Services Transaction Activity

Transaction Activity
400
356 368 313

350
Number of Transactions

300 250
203 242

282

297

91

99

87 93 92 139 96 101 132 120

200 150 100 50 0

186 155 67 47 42 77 58 39 69 81 64

79

76

87

88

109

126

137

106

2000

2001

2002

2003 Aerospace

2004 Defense

2005 Government

2006

2007

LTM*

*LTM as of 12/5/2008

Transaction Commentary Historically, transformational acquisitions have generally been larger transactions acting as a catalyst for the buyer to enter into a new market segment
BAE acquired United Defense Industries and Armor Holdings (ground vehicles) Finmeccanica acquired DRS (U.S. DoD) Serco acquired SI (integrated solutions) Textron acquired AAI Corp (unmanned aerial systems)

Recently, many smaller, more niche transactions, can also be viewed as transformational
Honeywell acquired Dimensions International (logistics support services) Lockheed Martin acquired Savi Technology (RFID) Boeing acquired Insitu (UAS) Boeing acquired RavenWing (intelligence)

Drivers of Transactional Value

Company and Deal Valuations are a Factor of:

Number and diversity of buyers Perception of overall market health and opportunity Buyers valuation Financial capability of buyers Company-specific attributes

Buyers: Diverse Interest in Acquisitions

Transactions by Buyer Type

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2003 2004 2005 2006 2007 2008 YTD 43.5% 47.7% 40.3% 47.4% 35.0% 41.5% 28.7% 22.4% 5.5% 24.6% 9.3% 18.5% 24.3% 11.7% 23.7% 25.3% 9.6% 17.6% 25.0% 17.1% 27.0% 27.4%

13.0%

14.1%

Domestic Public Buyer

Domestic Private Buyer

Domestic Private Equity

Foreign Buyer

Sources: Capital IQ and Press Releases.

Buyers: Active Acquirers A More Global Feel

2000-2002 Top 10 Acquirers

1 2 3 4 5 6 7 8 9 10 L-3 Communications General Dynamics United Technologies MAXIMUS, Inc. Boeing Co. Northrop Grumman DRS Technologies Triumph Group Goodrich Corp. CACI International 1 2 3 4 5 6 7 8 9 10

2003-2005 Top 10 Acquirers

L-3 Communications Cobham SAIC Curtiss-Wright General Dynamics BAE Systems Lockheed Martin Smiths Group Teledyne CACI International 1 2 3 4 5 6 7 8 9 10

2006-2008 Top 10 Acquirers

L-3 Communications Ametek, Inc. Lockheed Martin Teledyne Cobham Chemring QinetiQ Group plc Ultra Electronics BAE Systems General Dynamics

Sources: Capital IQ and Press Releases.

Buyers: Defense Primes M&A Activity at a Glance

Si Pl em Au ess ens s t ey A Tr rali Bus G, S a i ac i or ) ness eme ,I (U n s nc K, 1 .
e nc efe etica p D ou Gr c pl

Marconi Electronics Systems

plc vis Al

D nix Te

Hughes Space and Communications McDonnell Douglas Corp. Jeppesen Sanderson, Inc. g. te In s a x ol tem e or s im . ot S y Pr ech M fo. T n I
al er s en r G oto nse M efe D

ia Av

c. In ll

Gulfstream Aerospace
G C ene Bu o., ral sin Ae Ele es ros ctr s pa ic ce

t ov G s D G stem Sy

Martin Marietta Corp.

Loral Corp.

T SA M ra l O C e ne . G o rp C

T rp S A Co M l O era II C en e G has P

V Co erid r p i an .

on r p te Co An tl n I

al er ed , F IT S C t s A ov nes G usi B

ex yt

ro

up

g Lo

Newport News

TRW, Inc.

Hughes Defense Comm.

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2002

2003

2004

2005

2006

E Co ssex rp .

on ic

n ies tto str Li du In

2007

2008

Source: Capital IQ and Houlihan Lokey Proprietary Information (1) Acquisition by Marconi Electronics Systems prior to deal with British Aerospace

Je M tA gm vi t A atio G n

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Market Health and Opportunity

Identifiable Identifiable Long-Term Long-Term Growth Drivers Growth Drivers

$750 Billion $750 Billion Market Market (Revenue) (Revenue)

Strong Returns Strong Returns on on Deployed Deployed Capital Capital Revenue & Revenue & Margin Margin Visibility Visibility

(2,533 transactions (2,533 transactions since 2000) since 2000)

Liquid Private Liquid Private Market Market

ADG ADG

Supports Supports National National Priorities Priorities Global Industry Global Industry

Assets with Assets with Leverage Leverage Potential Potential

ADG Is More Attractive Than Ever (Relatively) ADG Is More Attractive Than Ever (Relatively)
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Market Health and Opportunity: Defense Spending Compared to GDP and Industry Valuation
$900.0 $800.0 $700.0 $600.0
$ Billions End of 1st Gulf War 9/11 and beginning of 2nd Gulf War Includes No Supplementals

7.0% 6.0% 5.0%

% of GDP

$500.0 $400.0 $300.0

4.0% 3.0% 2.0%

$200.0 $100.0 $0.0 $

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

1.0% 0.0%
National Defense Outlays in constant FY2009 dollars

National Defense Outlays in current dollars (does not include supplementals)

Supplementals & Bridge Funding

% of GDP

S&P 500 - Equal Weighting Index

Administration: Reagan Bush Bill Clinton George W. Bush

Primes Stock Price Equal Weighting Index

Obama

Current Defense Spending Trends

One frame of reference for defense budget levels might be the green line: % of GDP* Current Industry Valuation clearly expect this level to drop
* Adm. Michael Mullen, Chairman of the U.S. Joint Chiefs of Staff, has estimated % to grow to at least 4 % due to modernization and the swelling personnel costs of a growing Army and Marine Corps

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Valuation: ADG M&A Pricing vs. Public Pricing

10 .9 x

12.0x 10.0x

12.0x

10 .0 x

10 .5 x

8. 3x

EV/EBITDA

7. 5x

6.0x 10.1x 4.0x 2.0x 0.0x 2000 2001 2002 2003 2004 2005 2006 7.6x 7.7x 7.8x 8.4x 10.3x 10.2x

10.8x 7.7x

6.0x 4.0x 2.0x 0.0x

2007

2008

Median EV/EBITDA (Public Pricing)

Median EV/EBITDA (M&A)

Source: Capital IQ, Public Company Information, Houlihan Lokey Estimates * Current public pricing as of 12/5/2008

Will public buyers continue to support multiple reversal? Will public buyers continue to support multiple reversal?
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EV/EBITDA

8.0x

8. 0x

8. 4x

8. 5x

10 .3 x

10.0x 8.0x

Financial Capability: Acquisition Financing Capacity

$120 $106.9 $100 $87.5 $80 $ in Billions $65.3 $60.6 $60 $72.1 $89.5 $98.9

$111.7

$111.4

$114.2

$113.1

2.50x

$92.4

2.00x

Total Leverage

1.50x

1.00x $40 0.50x

$25.7 $28.7 $26.7 $32.8 $28.3 $33.8 $34.3 $34.4 $29.6 $27.9 $26.5 $26.5

$20

$0 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

0.00x

Cash

Financing Capacity

Total Debt / EBITDA

Source: Capital IQ; *Additional financing assumes a 3x leverage multiple of EBITDA less debt, Dec-08 as of 12/5/08 and represents 2.6x leverage multiple of EBITDA less debt Note: Includes Government Services, Defense Primes, Other Defense and Diversified companies

Buyers continue to have access to capital to support M&A strategies Buyers continue to have access to capital to support M&A strategies
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Financial Capability: Capital Cost and Availability

Cost of Capital
Equity 25% +

Equity 7.0 10.0x Equity 22% + Equity 5.0 8.0x

Leveragability 4.0 7.5x

Mezzanine 4.0 7.5x

Mezzanine 13 18%

Mezzanine 15 20%
Leveragability 3.0 5.0x

Mezzanine 2.5 4.0x

Senior L + 225 - 350

Senior L + 500 - 700

Capital Availability

Senior 3.0 5.0x

Senior 2.0 3.0x

Source: Houlihan Lokey

2007

2008

2007

2008

Increased cost of capital and lower borrowing availability have put pressure on pricing and Increased cost of capital and lower borrowing availability have put pressure on pricing and investor returns investor returns
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Company-Specific Attributes: What Drives Value

Organizational
Skilled Employee Base with High Level Security Clearances Strength of Management Team LLC or S-Corporation Ownership Structure Company Certifications Infrastructure Culture, Utilization & Turnover

Operational
Deep Technical Expertise and Propriety Tech. Full & Open v. Set-Aside Work Backlog and Long-term Contract Horizons Prime / Sub Positions Solutions Provider v. Staff Augmenter Government Trusted Partner v. Services Provider Contract Mix

Key Attributes Drive Valuation

Financial
Track Record of High Growth Strong, Sustainable Profitability Controlled Balance Sheet Rate Structure Contract Waterfall

Strategic
Priority Market Involvement Business/Capability Focus Long-term Customer Relationships No Historical Mishaps

Key discriminators coupled with the Companys degree of leveragability, growth Key discriminators coupled with the Companys degree of leveragability, growth and risk can result in significant valuation premiums and risk can result in significant valuation premiums
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Company-Specific Attributes: What Drives Value

EBITDA Multiple*

Valuation Dynamics
Exceptional growth prospects Proprietary technology and sole source programs Deals involve larger and more highly-valued strategic buyers Larger targets (revenue > $100 million) Targets offered access to systems credentials and specific programs/customers Highly leveragable: not tied to spending cycles Proprietary IP Distinguished customer relationships Involved in priority, well funded programs/platforms/electronics content Solid growth prospects and financial performance Moderate growth prospects Partial surge revenue Less involvement in priority DoD/intel/DHS markets More diversified product/customer base Low technology differentiation Significant surge related revenue Mediocre financial performance Small targets Preference program dependence (e.g. 8(A))

14.3x

10.7x 9.5x 8.5x

5.8x

*Quartile based on 180 Defense & Aerospace transactions from 1/2002 10/2008 that disclosed pricing information Source: Houlihan Lokey

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Unmanned Systems Public Pricing

18.0x 16.0x Median EV/EBITDA 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 12/31/07 3/31/08 6/30/08 9/30/08 12/4/08

Unmanned Systems

Primes/Diversified

Public pricing has remained relatively stable for unmanned systems and continue to command Public pricing has remained relatively stable for unmanned systems and continue to command premiums over larger diversified defense companies premiums over larger diversified defense companies
Source: Capital IQ; Unmanned Systems includes AeroVironment, Inc., QinetiQ Group Plc, and iRobot Corporation

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Unmanned Systems Transactions

2007 Transactions
Close Date 12/18/07 10/22/07 6/5/07 Target United Industrial Corp. SEA Group Ltd. Applied Perception Inc. Acquirer Textron, Inc. Cohort plc Foster-Miller, Inc. Median EV1 $1,048.7 $56.3 $9.2 $56.3 EV/Revenue 1.63x 1.51x NA 1.57x 9/16/08 9/12/08 7/7/08 Hydroid, LLC Nekton Research, LLC Webb Research Corporation Close Date Pending 9/9/08 2008 Target Non-Intrusive Inspection Technology, Inc. Insitu, Inc. Athena Technologies, Inc.

2008 Transactions
Acquirer Chemring Group plc Boeing Co. Rockwell Collins Inc. Kongsberg Maritime AS iRobot Corp. Teledyne Technologies Inc Median EV1 EV/Revenue

$40.0 ND2 $107.0 $80.0 $10.0 $24.2 $60.0

ND2 ND2 ND2 4.00x 1.67x 2.00x 2.86x

Greater unmanned systems deal activity in 2007 and 2008 then all recent years combined, Greater unmanned systems deal activity in 2007 and 2008 then all recent years combined, reflecting traditional defense suppliers recognition of maturing programs and market opportunity reflecting traditional defense suppliers recognition of maturing programs and market opportunity
1 2

($ in millions) Not Disclosed; Based on Houlihan Lokey proprietary data

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What to Expect Next

Continued strong industry performance

Delay in contracting until the new administration sorts through priorities

M&A accelerates as a tool for growth

Premium valuations for technology, proprietary ideas, growth

Greater range of values

Acquirers will pay up for strong differentiators All boats no longer rising together

Continued, gradual reopening of financial markets

Strategics continue to enjoy preferred position

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