is it time to play offense or defense with defense stocks? american association of

Is It Time To Play Offense or Defense with Defense Stocks?

American Association of Individual Investors (DC Chapter)

Los Angeles San FranciscoChicagoNew York Washington D.C.Minneapolis Dallas Atlanta London

Kevin P. DeSanto, Vice PresidentHoulihan Lokey Investment Banking Services Aerospace •Defense • Government Group1800 Tysons Blvd., 3rd FloorMcLean, Virginia 22102703.847.5225

Paris Frankfurt

September 16, 2006

Houlihan Lokey 2

AAII Washington DC Metro Chapter

Table of Contents

Houlihan Lokey 3


Disclaimer

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.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. 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.

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Introduction

Houlihan Lokey 5


Houlihan Lokey Overview

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# 1 Advisor on Middle Market M&A Transactions

# 1 Provider of Fairness Opinions

# 1 Financial Restructuring Practice

700+ people, in 11 offices worldwide, allow Houlihan Lokey to provide clients in-depth global exposure and end-to-end advisory solutions

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Partnered with ORIX Corporation (NYSE: IX, TSE: 8591), a leading integrated financial services group headquartered in Tokyo

Introduction

Houlihan Lokey 6


Background of Kevin P. DeSanto 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.

Regarding mergers and acquisitions experience, Mr. DeSanto provides clients both sell-side and buy-side transaction support. Select clients have included bd Systems, L-3 Communications, Development Alternatives, Manufacturing Technology, Impact Innovations Group, OAO Technology Solutions, Eagan, McAllister & Associates, Quality Research and Radian. In addition, he participates in a variety of financial advisory engagements including transaction fairness, solvency analysis and recapitalization strategies.

Mr. DeSanto earned a B.S. in business administration with a concentration in finance from Georgetown University’s McDonough School of Business. He is licensed with the NASD as a General Securities Representative (Series 7, 63).

Kevin P. DeSantoVice President

[email protected]: (703) 714 – 1710F: (703) 760 – 4864

1800 Tysons Boulevard, Suite 300

McLean, Virginia 22102

Introduction

Houlihan Lokey 7


Discussion Summary

Develop Framework for Analyzing the Publicly-traded Defense Companies

Perspectives on Key Trends in the DoD BudgetOverview of Critical Industry and Company-specific

FactorsAssess Current Pricing on a Relative Basis Identify the Multiple Avenues Available to Invest in

“Defense”Answer Your Questions (When I Know the Answer)

Introduction

Houlihan Lokey 8


Defense Industry Pyramid

$30 Billion

$1 Billion

$300 Million

Primes & major subs

Few remaining mid-tier Suppliers

Military technology industrial base remains fragmented among thousands of small suppliersDi

vers

ifica

tion

Pure-Play Niche

Diversification of customers and technology more common in >$50 million companies

$30 Billion

$1 Billion

$300 Million

Primes & major subs

Few remaining mid-tier Suppliers

Military technology industrial base remains fragmented among thousands of small suppliersDi

vers

ifica

tion

Dive

rsifi

catio

n

Pure-Play Niche

Diversification of customers and technology more common in >$50 million companies

$200 Million

Introduction

Houlihan Lokey 9


How to Play in Defense

AerospaceAerospace

HomelandHomeland SecuritySecurity

DefenseDefense

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?

GovernmentGovernmentServices Companies Supporting High Priority Initiatives Within the DoD – How Low Can They Go?

Introduction

Houlihan Lokey 10


Other Ways to Play in Defense

State and Local (e.g., Maximus, Affiliated Computer Services, Tyler Technologies)

Engineering & Construction (e.g., Jacobs Engineering, Fluor, Tetra Tech, URS)

Diversified IT (e.g., CSC, EDS, Perot, Unisys, Wireless Facilities)

Foreign (e.g., VT Group, Serco Group)SPACs (e.g, Good Harbor, Federal Services

Acquisition Corp.)

Introduction

Houlihan Lokey 11


ADGADG

Why Investors Play in Defense

$500 Billion$500 BillionMarketMarket

(Revenue and EV)(Revenue and EV)Strong InvestmentStrong Investment

ReturnsReturns

Revenue & MarginRevenue & MarginVisibilityVisibility

LeverageableLeverageableAssetsAssets

IdentifiableIdentifiableLong-TermLong-Term

Growth DriversGrowth Drivers

SupportsSupportsNationalNationalPrioritiesPriorities

$70 Billion Unused$70 Billion UnusedDebt CapacityDebt Capacity

Liquid Liquid Private MarketPrivate Market

(1,500 transactions (1,500 transactions since 2000)since 2000)

Introduction

Houlihan Lokey 12


Signs of the Times

IndustryIndustry TrendsTrends

M&A M&A Markets Markets

Public Public Markets 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

FinancingFinancing Widely Available Sources of Capital at All Levels of the Capital Structure…At Increased Cost

Introduction

Budget Perspectives

Houlihan Lokey 14


Overall DoD Budget “Temperature”

On-going Federal Budget DeficitsSlower Baseline Budget GrowthAdministration – Democrat vs. RepublicanDoD vs. Civilian vs. Homeland Security“War Tax”QDR/BRAC Investment Accounts vs. O&M Spending

BudgetPerspectives

Houlihan Lokey 15


DoD Budget Relative to Federal Deficit

8% CAGR 6% CAGR

BudgetPerspectives

DoD Spending and Federal Budget Scenario

-$225

-$175

-$125

-$75

-$25

$25

$75

$125

1998 1999 2000 2001 2002 2003 2004 2005P 2006P 2007P 2008P 2009P

($ in

billi

ons)

(5.0% )

(4.0% )

(3.0% )

(2.0% )

(1.0% )

0.0%

1.0%

2.0%

3.0%

Surplus (Deficit) as a %

of GD

P

Procurement RDT&E Surplus (Deficit) as a % of GDP

Houlihan Lokey 16


Healthy Defense Budget

“Better than expected…”President’s Nearly $440 Billion FY2007 Defense

Budget Request was Approximately 5% Greater Than FY2006

Investment Accounts (Total Procurement and RDT&E) Expected to Grow at 4.6% CAGR from FY2007 to FY2011

Mismatch Between Outlays and Actual Expected Costs of Conflicts Raise Concerns About Viability of Major Programs (e.g., JSF, F-22)

Supplemental Budgets Unlikely to Continue

BudgetPerspectives

Houlihan Lokey 17


Projected Declines in Overall DoD BudgetBudgetPerspectives

DoD Spending as a % of GDP

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

2004 2005 2006E 2007E 2008E 2009E 2010E 2011E

$MM

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%

SupplementalDoD Spending less Supplemental% of GDPSource: DoD

Houlihan Lokey 18


FY2007 Appropriations BreakdownBudgetPerspectives

FY 2007 Budget by Service

Defense W ide16%

USMC4%

Army25%

Navy25%

USAF30%

FY 2007 Appropriations BreakdownOther4%

RDT&E17%

O&M35%

Military Personnel

25%

Procurement19%

Source: DoD

Houlihan Lokey 19


Congressional Impact on Procurement

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

$MM

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

Presidential Request Actual Net ChangeSource: DoD

BudgetPerspectives

Houlihan Lokey 20


QDR Perspectives

QDR Linked to FY2007 Defense Budget Request as They Were Submitted to Congress Simultaneously

Evolutionary QDR Focus Areas Defending the Homeland Defeating Terrorist Extremism Helping Shape the Choices of Countries at Strategic

Crossroads Countering Weapons of Mass Destruction (“WMD”)

BudgetPerspectives

Houlihan Lokey 21


QDR Perspectives (Cont.)

Transformational Communications Architecture Enhances Land-based Network and Satellite Communication and High-bandwidth, Survivable Internet protocol

Long-term Programs Maintained – FCS, F-22 and JSF Doubling of UAV Capacity and Development of New

Long Range Bomber by FY2018 Investment in Joint Mobility, Intelligence, Surveillance

and Reconnaissance Increase in Special Operations Forces Acquisition Reform

BudgetPerspectives

Houlihan Lokey 22


QDR Perspectives (Cont.)

Accelerate Army’s Movement to Modular/Deployable Units and Headquarters

Orienting Joint Air Capabilities – Larger Payloads, Longer Range and Penetration of Denied Areas

Build Joint Maritime Forces for “Closer-to-Conflict” Support

“Knowledge-Based Forces” Partially Shifts Traditional Focus on Guns/Ships/Planes to C4ISR Systems

Development of Tools for Assessing, Analyzing and Delivering Information

Commitment to Spend for “Long War”

BudgetPerspectives

Houlihan Lokey 23


2005 BRAC Impact

2005 BRAC Losers

2005 BRAC Winners

BudgetPerspectives

Houlihan Lokey 24


2005 BRAC Impact (Cont.)

$1.3 Billion in Expected Savings Over Next 20 YearsCreates Many Opportunities, Mostly IT and

Communications Related Secure Systems Transition Uninterrupted IT Infrastructure Network Storage Business Process Re-Engineering Business System Modernization

Commitment to Outsource Non-core DoD Functions

BudgetPerspectives

Houlihan Lokey 25


Program Funding Issues/Cost Estimates

Program Cost Growth More Serious Issue as Budgets Slow GAO

30% of FY2006 RDT&E Budget Spent on “Rework” Planned Future Investments in New Weapons Systems up

100% ($700 Billion to $1.4 Trillion) Despite Flawed Process Future Combat Systems (Boeing/SAIC)

$82.7 Billion < $127.2 Billion (54% Excess) Joint Strike Fighter (Lockheed Martin)

$62 Million/Plane < $82 Million/Plane (33% Excess) Another Comanche?

BudgetPerspectives

Houlihan Lokey 26


Impact of News Events on Defense StocksBudgetPerspectives

Industry Perspectives

Houlihan Lokey 28


Major Themes That Impact Public Markets

Financial Performance Achieving Growth and Earnings Targets Budget Chatter - Perception vs. Reality Large Cap vs. Small Cap Receptivity to IPOs, Secondary Offerings and SPACs Sector Rotation Shareholders vs. Customers M&A – Buy vs. Divestiture Share Buybacks Contract Awards Credit Markets

IndustryPerspectives

Houlihan Lokey 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 / QualitativeBusiness / Qualitative

Financial / QuantitativeFinancial / Quantitative

Proprietary Technology

Backlog and Long-term Contracts Contract Types/Profitability


Houlihan Lokey 30


Company-Specific Strategy Focus

Customer Priorities Congressional Sentiments Technology Acceleration DoD Transformation Growing Importance of Software and Services Priority Markets

C4ISR Homeland Security Intelligence Training and Simulation

Networking and Communications

Obsolescence Management

Big-ticket Programs


Houlihan Lokey 31


Customer Demand Continuing To Grow

OutsourcingGlobal War on TerrorismSupplemental BudgetsTransformationTechnology UpgradesHomeland SecurityAging Infrastructure (People and Technology)


Houlihan Lokey 32


Changing Nature of Customer Relationships

GWACs, Schedules and Enterprise MACsContract BundlingSole-Source vs. CompetitiveSet-Aside ProgramsContract TermsArcane InfrastructureExpedited Process?Prime vs. Sub vs. Teaming vs. JVEarmarks/Plus-Ups


Houlihan Lokey 33


Competition Increasing

Highly Fragmented IndustryLarger Contracts = Do or DieKnowledge TransferPartner or Competitor?New Entrants“Katrina Effect”B&P CostsSecurity Clearances


Houlihan Lokey 34


Consolidation and Divestitures

Active M&A MarketPortfolio ManagementEnergizes GrowthDeployment of CapitalDifferentiation and DiversificationCommercial?New Market EntrantsAccretion/Dilution


Houlihan Lokey 35


Cash Flow

Strong, Predictable MarginsMargin Expansion OpportunitiesLimited Capital ExpendituresReal Backlog/Bookings vs. OpportunitiesEarnings VisibilityClean Balance SheetsAvailability/Cost of Capital for Financing


Houlihan Lokey 36


Factors That Could Reshape Market

Changes in Security Threats and Priorities Old/On-going - Iraq/Afghanistan New - Iran/China

Changes in Congress/Administration End of Supplemental Spending More Non-Defense Discretionary Spending Healthcare and Retirement Costs Talent Pool Tax Payer Revolt Excitement in Broader Markets


Market DynamicsAerospace

Houlihan Lokey 38


Capabilities of Companies

Aircraft Replacement Parts Antennas Avionics & Surveillance Electronics and Power Systems Life Support Systems Lighting Products Modeling, Simulation and Training Motors, Actuators, Switches and Cables Process, Analytical and Test Instruments Sensors

Aerospace

Houlihan Lokey 39


Pricing at Highest Levels in Past 10 Years

Investors are Optimistic About Commercial Aerospace Orders are Leading Indicator for Valuations

2005 Saw a Very Strong Spike in Aircraft Orders That Will Provide the Backlog for Strong Future Deliveries

2005 Expected to be Peak in Order Cycle, but Strong Backlog Exists

Rise in Valuations Typically Precedes a Recovery Valuations are Typically Highest in the Early Phases of a

Market Recovery Many “Aerospace” Companies Have Meaningful Portions of

Business Derived From the Defense and Government Markets

Aerospace

Houlihan Lokey 40


Aerospace Public Company Pricing – EV/Revenue

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

Aerospace

Average = 1.06x

*LTM as of September 13, 2006Sources: FactSet, H oulihan Lokey

`

x

Houlihan Lokey 41


Aerospace Public Company Pricing – EV/EBITDA

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

Aerospace

Average = 8.6x


`

x

Houlihan Lokey 42


Comparative Aerospace Subsector Public Multiples

Aerospace

Comparative Aerospace Subsector Public Company Multiples

12.0 x12.7 x

14.5 x13.4 x

16.2 x

9.6 x10.1 x 9.9 x 10.1 x

13.2 x

0.0 x

2.0 x

4.0 x

6.0 x

8.0 x

10.0 x

12.0 x

14.0 x

16.0 x

18.0 x

Aerostructures AirframeManufacturers

Aviation & AirportServices

Aviation Controls Space

LTM Median EBIT Multiple LTM Median EBITDA Multiple

Houlihan Lokey 43


Current Performance Metrics

Revenue GrowthRevenue GrowthLTM LTM

EBITDA EBITDA ($mm)($mm)

EV/ EV/ EBITDAEBITDA(1)(1)

Net Cash Net Cash (Debt) (Debt) ($mm)($mm)LFYLFY NFYNFY

AMETEK Inc. 16.4% 12.1% $320.9 11.6x ($647.3)CAE Inc. 12.3% 8.8% $184.7 12.2x ($198.3)Cobham plc 16.6% 9.7% $370.5 11.1x ($176.7)Ducommun Inc. 11.0% 19.8% $27.7 8.0x ($39.6)Esterline Technologies Corp. 36.1% 15.6% $125.0 9.1x ($251.4)Goodrich Corp. 14.8% 8.5% $846.9 7.6x ($1,543.6)HEICO Corp. 25.0% 41.6% $72.1 12.9x ($53.7)Moog Inc. 12.0% 22.7% $183.4 9.7x ($352.1)Rockwell Collins Inc. 17.6% 12.6% $772.0 12.1x ($120.1)Teledyne Technologies Inc 18.7% 14.9% $139.6 10.1x ($37.0)Median 16.5% 15.2% $184.0 10.6x ($187.5)

(1) EV calculated as of September 13, 2006

Aerospace

Houlihan Lokey 44


Aerospace vs. S&P 500Aerospace

Aerospace Pricing Index 2001 - September 2006

0

50

100

150

200

250

300

Inde

x Va

lue

Aerospace Sector Aerospace with Defense Exposure S&P 500

Source: FactsetPricing as of 9/13/2006

Houlihan Lokey 45


Recent Pricing Changes

Stock Price ChangeStock Price Change

CY2004CY2004

CY2005CY2005

1Q20061Q2006

2Q20062Q2006

YTD YTD (1)(1)

AMETEK Inc. 47.8% 19.3% 5.7% 5.4% 3.3%CAE Inc. (13.8%) 68.7% 7.7% (7.4%) 8.9%Cobham plc 5.9% 37.0% 10.9% (11.2%) 5.6%Ducommun Inc. (6.7%) 2.4% 3.9% (16.6%) (16.9%)Esterline Technologies Corp. 22.4% 13.9% 15.0% (2.7%) (6.7%)Goodrich Corp. 9.9% 25.9% 6.1% (7.6%) (4.3%)HEICO Corp. 36.5% 14.6% 22.4% (10.5%) 24.4%Moog Inc. 37.7% (6.1%) 25.1% (3.6%) 19.9%Rockwell Collins Inc. 31.3% 17.8% 21.3% (0.9%) 15.9%Teledyne Technologies Inc. 56.1% (1.1%) 22.3% (8.0%) 37.7%Median 26.9% 16.2% 12.9% (7.5%) 7.3%

(1) YTD Pricing as of Stock Price Closes September 13, 2006

Aerospace

Houlihan Lokey 46


Subsectors DefinedAerospace

AerostructuresAerostructuresAirframe Airframe

ManufacturersManufacturers Aviation ControlsAviation ControlsAviation & Aviation &

Airport ServicesAirport Services SpaceSpaceAlcoa Boeing Co. Aerosonic Corp. AAR Corp. BoeingAstronics Bombardier Inc. Ametek BBA Group GilatAvcorp Industries Inc. Dassault Aviation CAE Inc. Fairchild Corp. Integral Systems

Inc.CPI Aerostructures Inc. EADS Cobham Heico Corp. Lockheed MartinDucommun Inc. Embraer-Empresa Bras Crane Co. Menzies Loral Space &

CommunicationsGKN plc Finmeccanica Spa Curtiss-Wright Corp. Northstar

AerospaceMacdonald Dettwiler & Associates

Heroux-Devtek Inc. Kaman Corp. Esterline Technologies Penauille Polyserv Orbital Sciences Corp

Hexcel Corp. Textron Inc. Garmin Senior Spacehab IncK&F Industries United Technologies

Corp.Goodrich Corp. Triumph Group Inc.

Ladish Co. Inc. Heico Corp. UmecoLatecoere Honeywell International

Inc.Vector Aerospace Corp.

LMI Aerospace Inc. Innovative Solutions & Supp. Inc.

Magellan Aerospace L-3 CommunicationsNorthstar Aerospace Inc.Precision Castparts Corp.Reinhold IndustriesSenior plc

Market DynamicsDefense

Houlihan Lokey 48



Combat Systems Development, Production and Support Electronic Warfare Systems Information Systems & Technology Manned and Unmanned Airborne Systems Marine Systems Missile Defense Ordnance and Tactical Systems Radar and Air Defense Systems Satellite and Space Systems Technical Services

Defense

Houlihan Lokey 49


Valuations Steady Recently

Valuations Remain Above 10-year AveragesGrowth From On-going “Operations” and Subsequent

“Replenishment”Big-ticket Programs Have Stabilized From a Budget

Stand-point, Although Not Out of the Weeds YetBudget Pressures Have Been Offset by Strong Recent

EarningsHighest Valuations in Subsectors – C4ISR, Force

Protection“Primes” are Consistent

Defense

Houlihan Lokey 50


Public Company Pricing – EV/RevenueDefense

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

Defense


Average =1.18x

`

x

Houlihan Lokey 51


Public Company Pricing – EV/EBITDADefense

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

Defense


Average =9.3x

`

x

Houlihan Lokey 52


Comparative Defense Subsector Public Multiples

Defense

Comparative Defense Subsector Public Company Multiples

12.8 x

11.9 x 11.9 x 11.8 x

13.1 x

10.5 x10.1 x 10.1 x 10.4 x 10.4 x

0.0 x

2.0 x

4.0 x

6.0 x

8.0 x

10.0 x

12.0 x

14.0 x

Communications Land Vehicles Propulsion Missiles & Ordnance Sensors


Houlihan Lokey 53



Revenue GrowthRevenue GrowthLTM LTM

EBITDA EBITDA ($mm)($mm)

EV/ EV/ EBITDAEBITDA(1)(1)

Net Cash Net Cash (Debt) (Debt) ($mm)($mm)LFYLFY NFYNFY

Alliant Techsystems Inc. 14.8% 7.0% $424.9 9.5x ($1,192.6)

BAE Systems plc 25.0% 24.9% $2,092.7 12.3x ($1,984.0)

General Dynamics Corp. 11.1% 15.2% $2,838.0 10.6x ($2,250.0)

L-3 Communications 36.9% 29.4% $1,346.4 10.4x ($4,518.0)Lockheed Martin Corp. 4.7% 6.4% $3,838.0 9.4x ($1,831.0)

Northrop Grumman Corp. 2.9% (0.6%) $3,007.0 9.2x ($3,884.0)

Raytheon Co. 8.1% 6.6% $2,325.0 10.5x ($3,111.0)

Median 11.1% 7.0% $2,325.0 10.4x ($2,250.0)


Defense

Houlihan Lokey 54


Defense vs. S&P 500Defense

Defense Pricing Index 2001 - September 2006

0

50

100

150

200

250

300

350

1/12/2001

4/12/2001

7/12/2001

10/12/2001

1/12/2002

4/12/2002

7/12/2002

10/12/2002

1/12/2003

4/12/2003

7/12/2003

10/12/2003

1/12/2004

4/12/2004

7/12/2004

10/12/2004

1/12/2005

4/12/2005

7/12/2005

10/12/2005

1/12/2006

4/12/2006

7/12/2006

Inde

x Va

lue

Defense Sector S&P 500


Houlihan Lokey 55



Stock Price ChangeStock Price Change

CY2004CY2004

CY2005CY2005

1Q20061Q2006

2Q20062Q2006

YTD YTD (1)(1)

Alliant Techsystems Inc. 13.2% 16.5% 1.3% (1.1%) 7.4%BAE Systems plc 37.2% 65.6% 10.2% (12.1%) 0.3%General Dynamics Corp. 15.7% 9.0% 12.2% 2.3% 21.3%L-3 Communications Holdings Inc.

42.6% 1.5% 15.4% (12.1%) 2.1%

Lockheed Martin Corp. 8.1% 14.5% 18.1% (4.5%) 29.2%Northrop Grumman Corp. 13.7% 10.6% 13.6% (6.2%) 12.9%Raytheon Co. 29.3% 3.4% 14.2% (2.8%) 17.6%Median 15.7% 10.6% 13.6% (4.5%) 12.9%


Defense

Houlihan Lokey 56


Subsectors DefinedDefense

Land VehiclesLand Vehicles PropulsionPropulsion Missiles & OrdnanceMissiles & Ordnance SensorsSensors CommunicationsCommunicationsArmor Holdings Alliant Techsystems Inc. Alliant Techsystems Inc. Argon ST Inc. Aeroflex Inc.BAE Systems Gencorp Inc. Boeing Axsys Technologies

Inc.Ametek

General Dynamics General Electric Co. Chemring Group BAE Systems Anaren Inc.Oshkosh Truck Corp. Honeywell International

Inc.EADS Boeing BAE Systems

Singapore Technologies Rolls Royce General Dynamics DRS Technologies Inc. Boeing Co.United Technologies Corp. Textron L-3 Communications EDO Corp. Cubic Corp.

United Technologies Lockheed Martin Elbit Systems DRS Technologies Inc.Raytheon Flir Systems Inc. EDO Corp.

ITT Industries FiltronicL-3 Communications Finmeccanica SpaNorthrop Grumman Frequency Electronics

Inc.Raytheon General DynamicsThales Harris Corp.Ultra ElectronicsUnited Industrial Corp.

Market DynamicsGovernment

Houlihan Lokey 58



Acquisition and Logistics Support Information Assurance and Security Information Technology ServicesKnowledge ManagementOutsourced Support ServicesSystems/Software Engineering and IntegrationTechnical ServicesTraining Systems and Services

Government

Houlihan Lokey 59


Multiples are Contracting

Valuations in the Government Services Segment are Slightly Below 10-year Averages

2001 – 2005 Pricing Driven by Organic Growth Expectations

2006 is a Different Story as Market Reacts to Slower Realization of Growth

Limited Universe of Public Companies, Especially Large Cap Companies

Government

Houlihan Lokey 60


Historical Price Earnings Growth

0.70

1.20

1.101.201.30

0.701.10

0.40

0.70

1.00

1.30

1.60

2000 2001 2002 2003 2004 2005 2006

PEG Ratio

Forward P/E vs Projected EPS Growth

OPTIMISM GAP

CONFIDENCE GAP

As of September 13, 2006Source: FACTSET, Houlihan Lokey

*

Government

?

x

Houlihan Lokey 61


Public Company Pricing – EV/RevenueGovernment

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

1.60x

1.80x

EV

/Rev

enue Average =1.09x

* YTD as of September 13, 2006. Sources: FactSet, H oulihan Lokeyx

Houlihan Lokey 62


Public Company Pricing – EV/EBITDAGovernment

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

EV

/EB

ITD

A

* YTD as of September 13, 2006 Sources: FactSet, H oulihan Lokey

Average =11.3x

x

Houlihan Lokey 63


Comparative Government Subsector Public Multiples Government

Comparative Government Services Subsector Public Company Multiples

11.5 x

15.2 x

13.0 x

9.9 x 9.8 x 9.9 x

0.0 x

2.0 x

4.0 x

6.0 x

8.0 x

10.0 x

12.0 x

14.0 x

16.0 x

Federal IT Diversified IT Technical Services


Houlihan Lokey 64



Revenue GrowthRevenue GrowthLTM EBITDA LTM EBITDA

($mm)($mm) EV/ EBITDAEV/ EBITDA(1)(1)Net Cash Net Cash

(Debt) ($mm)(Debt) ($mm)LFYLFY NFYNFYAnalex Corp. 49.5% 7.9% $13.1 7.1x ($25.9)

CACI International Inc. 8.1% 10.3% $194.3 10.0x ($343.2)

Dynamics Research Corp. 9.0% (11.5%) $22.0 5.2x ($23.1)

DynCorp International Inc. 2.4% 19.4% $168.2 7.6x ($616.6)

ManTech International Corp. 18.5% 18.5% $101.8 10.7x ($24.4)

MTC Technologies Inc. 36.7% 17.3% $46.6 9.1x ($85.4)

NCI Inc. 11.7% 5.4% $14.1 9.4x $17.0

QinetiQ Group plc 22.9% 13.8% $200.7 21.3x ($257.6)

SI International Inc. 51.7% 19.1% $43.1 10.9x ($82.7)

SRA International Inc. 33.7% 10.7% $128.3 12.0x $173.6

VSE Corp. 29.7% NA $11.8 5.8x $5.1

Median 22.9% 12.2% $46.6 9.4x ($25.9)


Government

Houlihan Lokey 65


Public Company Composite Stock PerformanceGovernment

Government Services Price Index 2001 - September 2006

0

100

200

300

400

500

600

700

800

Inde

x Va

lue

Government Services S&P 500


Houlihan Lokey 66



Stock Price ChangeStock Price Change CY2004CY2004

CY2005CY2005

1Q20061Q2006 2Q20062Q2006 YTDYTD(1)(1)

Analex Corp. 20.5% (33.9%) (6.5%) (11.8%) (24.4%)CACI International Inc. 40.1% (15.8%) 14.6% (11.3%) (5.7%)Dynamics Research Corp. 10.5% (13.3%) (3.6%) (8.9%) (36.4%)DynCorp International Inc. NA NA NA (30.8%)(2) (21.7%)(2)

ManTech International Corp. (4.8%) 17.4% 19.2% (7.1%) 14.4%MTC Technologies Inc. 4.2% (18.4%) 2.2% (15.6%) (19.5%)NCI Inc. NA (59.9%)(3) 2.0% (6.4%) (20.9%)QinetiQ Group plc NA NA (93.2%)(4) (9.5%) (93.8%)(4)

SI International Inc. 57.2% (0.6%) 15.0% (12.8%) (0.3%)SRA International Inc. 49.0% (4.9%) 23.5% (29.4%) (4.7%)VSE Corp. 90.0% 67.2% (1.4%) (28.3%) (25.7%)Median 30.3% (13.3%) 2.1% (11.8%) (20.9%)

(1) YTD Pricing as of Stock Price Closes September 13, 2006(2) Price Change Calculated from IPO on 05/03/2006(3) Price Change Calculated from IPO on 10/24/2005 – 12/31/2005(4) Price Change Calculated from IPO on 02/10/2006

Government

Houlihan Lokey 67


Subsectors DefinedGovernment

Federal ITFederal IT Diversified ITDiversified IT Technical ServicesTechnical ServicesNCI Inc. Affiliated Comp Svcs Atkins WSAnalex CIBER Fluor GroupCACI International Inc. Computer Horizons Dyncorp InternationalDynamics Research Corp. Computer Sciences Corp. Jacobs Engineering Group

Inc.ManTech International Covansys Serco GroupMTC Technologies Electronic Data Systems Tetra Tech Inc.SI International Inc. Keane Inc. URS Corp.SRA International, Inc. Maximus Inc. VT Group

Perot Systems Corp. VSE Corp.Tyler TechnologiesUnisysWireless Facilities

Market DynamicsHomeland Security

Houlihan Lokey 69


Market Overview

30,000 Companies Currently Supporting the Federal Government (<20 in the Late 1990s)

$130 Billion in Funding Since 9/11$65 Billion to 10 Largest ContractorsDHS Budget Growing From $28 Billion in 2002 to $42

Billion in 2007 (8.4% CAGR)HLS Industry Expected to Reach $170 Billion Per Year

in FY2015

HomelandSecurity

Sources: Forbes Magazine, Office of Management and Budget, Homeland Security Research

Houlihan Lokey 70



Alarm, Security and Surveillance SystemsBiometricsData-processing ServicesFirst RespondersGuard Services Inspection SystemsNatural DisastersNon-Lethal Defense ProductsSafety and Survival Gear

HomelandSecurity

Houlihan Lokey 71


Volatile Valuations

“Buzzword” – What Does it Really Mean to the Investor?

Major Ramp-up in This Sector Post-9/11Current Premium Compared to Balance of ADG Inconsistent Pricing/Valuations Tied to Inconsistent

Funding “Perceptions”“Niche Plays” vs. “Real Players”

HomelandSecurity

Houlihan Lokey 72


Public Company Pricing – EV/RevenueHomelandSecurity

0.00x

0.50x

1.00x

1.50x

2.00x

2.50x

3.00x

3.50x

H omeland Security

Average = 2.35x

`

*LTM as of September 13, 2006Sources: FactSet, Houlihan Lokeyx

Houlihan Lokey 73


Public Company Pricing – EV/EBITDAHomelandSecurity

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

H omeland Security


Average = 11.2x

`

x

Houlihan Lokey 74



Revenue GrowthRevenue GrowthLTM EBITDA LTM EBITDA

($mm)($mm) EV/ EBITDAEV/ EBITDA(1)(1)Net Cash Net Cash

(Debt) ($mm)(Debt) ($mm)LFYLFY NFYNFYAmerican Science & Engineering 85.3% (7.9%) $50.7 7.0x $41.3Armor Holdings Inc. 67.1% 50.5% $290.4 9.2x ($809.1)Cogent Inc. 82.3% (29.5%) $60.2 15.9x $27.9FLIR Systems Inc. 5.4% 12.5% $149.1 13.1x ($63.3)Ionatron Inc. 72.7% (6.2%) NA NA ($0.0)Lakeland Industries Inc. 3.6% 5.6% $10.1 7.4x ($4.7)OSI Systems, Inc. 55.8% 32.9% $16.1 19.1x $2.8RAE Systems Inc. 32.4% 8.5% $1.2 NMF $11.8TASER International Inc. (29.5%) 40.6% $7.0 NMF $15.3TVI Corp. (13.3%) 13.3% $7.3 9.1x $1.9Verint Systems Inc. 29.6% 26.3% $43.5 18.0x $58.0Median 32.4% 12.5% $29.8 11.1x $2.8


HomelandSecurity

Houlihan Lokey 75


Homeland Security vs. S&P 500HomelandSecurity

Homeland Security Price Index 2001 - September 2006

0

500

1000

1500

2000

2500

3000

1/12/01

4/12/01

7/12/01

10/12/01

1/12/02

4/12/02

7/12/02

10/12/02

1/12/03

4/12/03

7/12/03

10/12/03

1/12/04

4/12/04

7/12/04

10/12/04

1/12/05

4/12/05

7/12/05

10/12/05

1/12/06

4/12/06

7/12/06

Inde

x Va

lue

Homeland Security S&P 500


Houlihan Lokey 76



Stock Price ChangeStock Price Change CY2004CY2004

CY2005CY2005

1Q20061Q2006 2Q20062Q2006 YTDYTD(1)(1)

American Science & Engineering 242.0% 51.3% 49.8% (38.0%) (23.3%)Armor Holdings Inc. 78.7% (9.3%) 36.7% (5.9%) 22.3%Cogent Inc. NA (31.3%) (19.1%) (17.8%) (38.2%)FLIR Systems Inc. 74.8% (30.0%) 27.2% (19.4%) 23.6%Ionatron Inc. NA (10.8%) 33.6% (53.0%) (43.6%)Lakeland Industries Inc. 12.2% 1.4% 9.5% (27.0%) (25.7%)OSI Systems, Inc. 18.2% (19.0%) 14.9% (15.9%) (1.0%)RAE Systems Inc. 114.7% (51.9%) 1.7% 12.0% (15.7%)TASER International Inc. 361.1% (78.0%) 52.2% (25.3%) 9.3%TVI Corp. 53.4% (10.1%) -1.3% (10.6%) (45.5%)Verint Systems Inc. 61.0% (5.1%) 2.6% (17.5%) (5.6%)Median 74.8% (10.8%) 14.9% (17.8%) (15.7%)


HomelandSecurity

Houlihan Lokey 77


Who Are The Real Players?

An Incomplete List… GE Honeywell IBM L-3 Lockheed Martin

HomelandSecurity

ManTech International

Northrop Grumman Raytheon SAIC Smiths Group

Summary

Houlihan Lokey 79


Closing Remarks

Lots of Questions…Lots of Opportunities…

Thank You For Your Valuable Time and the Opportunity to Present to Your Organization

Summary

is it time to play offense or defense with defense stocks? american association of

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