Defense continues to shrink, as commercial aerospace is taking off

Mid-year 2012 top 20 global aerospace and defense company financial performance analysis

Summary
A continued slowdown in national security spending in major countries continues to affect defense contractors. Based on mid-year 2012 financial results, defense companies in the top 20 global aerospace and defense (A&D) companies, experienced a decline in their global revenues of $1.3 billion, or a 1 percent decrease, after a 3.3 percent decline in 2011. However, the overall commercial aerospace and defense industry posted an overall revenue increase of $7.2 billion, or 5.5 percent over the first half 2011, all and more driven by record setting production of commercial aircraft and its related supply chain, which accounted for $13.4 billion in revenue growth for the sector. Overall, the global industry posted increased operating earnings of 8.8 percent to $20.0 billion in 1H 2012, largely due to the beneficial impact of higher deliveries of commercial aircraft, company cost cutting and efficiency initiatives in advance of expected continued declines in defense budgets, and the virtual absence of one time charges. For the same reason, operating margins increased 3.0 percent in 1H 2012 to 8.4 percent. Commercial aerospace companies enjoyed a significant jump of 29.2 percent in earnings, while the defense segment stayed flat at a nominal increase of 1.5 percent in earnings. Similarly, commercial aerospace operating margins increased 12.4 percent, while defense companies increased 2.6 percent in this important financial metric. U.S. commercial aerospace firms continued to outperform European counterparts with commercial firms posting 18.0 percent and 14.2 percent revenue increases respectively. Similarly, U.S. and European commercial firms posted increases in operating earnings of 24.4 percent and 50.5 percent respectively, although the latter made more significant improvements over last year starting from a lower base. Operating margins continued to differ significantly with U.S. commercial firms posting 10.6 percent, while European commercial firms turned in 5.6 percent operating margins. The gap narrowed when comparing U.S. and European defense firms. U.S. defense firms eked out flat growth in revenues, operating earnings growth and margin growth. European defense firms revenue declined 4.5 percent, but managed to grow operating earnings and margins. U.S. defense firms continue to outperform their European counterparts in operating margins, at 10.1 percent and 7.5 percent respectively, in this key performance indicator. Due to continued instability in defense spending forecasts for major global economies, share price performance was mostly down, with aggregate market capitalization decreasing 0.6 percent in the first six months of 2012. While companies associated with the boom in commercial aircraft production saw stock valuations rise in 1H 2012, share prices of other companies fell principally due to lower revenues and the expectations for cuts to various defense programs. Further, global economic uncertainty pushed A&D stocks lower with only 8 firms of the top 20 firms posting a positive gain during the first half of the year. This follows a decline in A&D shares in 2011, where aggregate market capitalization fell 6.3 percent.1

2011 Global Aerospace & Defense Industry performance wrap-up, DTTL

This Financial Performance Analysis is provided for general informational purposes only and is not intended to be, nor should it be relied upon as, a recommendation to purchase or sell the securities of any company identified in this document. It does not provide information reasonably sufficient upon which to base any investment decision and must not be used for that purpose. This Financial Performance Analysis is not to be construed as legal, accounting, financial or investment advice. This Financial Performance Analysis is neither an offer to sell nor a solicitation of an offer to buy, any security. Deloitte may provide, or may seek to provide, services to one or more of the companies identified in this Financial Performance Analysis.

Detailed report
This report details the financial performance of the top 20 publically listed aerospace and defense (A&D) global companies, based on sales revenue. The top 20 global A&D firms represent approximately 71% of total global industry revenues according to our 2011 report, and thus represent a reasonable proxy for the performance of the entire industry. The data to conduct the analysis was obtained from company filings as well as company press reports of unaudited financial performance in the last two quarters. Figure 1 below shows the companies included in this analysis: Figure 1 Companies included in the analysis
Global Top 20 aerospace & defense companies/divisions in the analysis Boeing EADS Lockheed Martin General Dynamics BAE Systems Northrop Grumman United Technologies* Raytheon Finmeccanica GE Aviation* Rolls-Royce Safran Thales L-3 Communications Honeywell Aerospace* Textron Bombardier Aerospace* Huntington Ingalls Industries Harris Exelis**

Source: 2011 Global Aerospace & Defense Industry performance wrap-up, DTTL *Partial company results based on business unit A&D activity. See methodology section. ** Exelis became a separate company on October 31, 2011

Mid-year 2012 top 20 global aerospace and defense company financial performance analysis 3

The remainder of this report assesses the performance of the commercial and the defense sectors, followed by a discussion of the industry performance, focused on the primary metrics of revenue growth, operating earnings and margin, free cash flow, free cash margin, and performance of U.S. and European A&D companies. This is followed by a discussion of share price performance. Commercial demand factors: The sector continued to trend higher in 1H 2012, building upon its cyclical production momentum that began in 2004. Boeing and Airbus delivered 6582 aircraft in 1H 2012, compared to 5583 aircraft delivered in the first half of 2011, on pace to surpass the record production rates in all of 2011. This increase in production is driving parallel production activity increases in the commercial aircraft supply chain, from engines and avionics to wiring harnesses, passenger seats and wheels and brakes. Sales orders for Boeing Commercial Aircraft and Airbus for the first half of 2012 rose to 9714 aircraft, second highest in history behind 2007. This rise in sales orders is predominately for single-aisle aircraft newly introduced by Boeing and Airbus that will deliver various product improvements, including new engine technology, with promises of significant fuel efficiency.5 Through 2012, commercial aircraft production is expected to increase while order levels will likely moderate. Over the next 20 years, demand is expected to continue from emerging markets in Asia and the Middle East, and as airline operators retire obsolete, less fuel efficient airplanes. Fluctuating oil prices are expected to push demand for fuel-efficient planes and engine technologies. Boeing forecasts demand for 34,000 new aircraft during the next 20 years.6

Defense demand factors: The defense sector continues to remain flat due to decreasing military budgets along with the return of armed forces from the Middle East. Some defense contractors experienced flat or nominal revenue growth compared to peers, but remained profitable due to favorable government contracts and cost cutting. Few new programs of record were started in the 1H 2012, but since programs are of long duration, many companies may not experience the impacts of recent and potential additional budget reductions for a few more years. The outlook for the sector remains cautionary, in light of the recent announcement of defense budget cuts. In early 2012, the Pentagon released a 2013 budget plan that would cut $487 billion in spending over the next decade including the reduction of 100,000 troops, with recommendations for additional base closures and selected reductions in unit deliveries of conventional warfare programs. U.S. government debt reduction measures and the Presidential and Congressional elections in November will likely delay approval of the 2013 DoD budget, thus disrupting awards of new defense contracts. Adding to the uncertainty is the risk of additional reductions in U.S. defense, including $492 billion in defense cuts called for as a result of the budget sequester, with the potential to additionally cut defense spending starting in January 2013. The U.S. defense strategy review calls for a shift in strategic focus to smaller, more agile armed forces and a pivot to airsea power, with additional focus on the Asia Pacific region. The reduction in programs, less total defense spending along with the strategic military shift should bring new challenges and increased competition for top U.S. defense contractors.

Boeing Current Year Deliveries Detail, http://active.boeing.com/commercial/orders/index.cfm?content=displaystandardreport.cfm&Request Timeout=20000&optReportType=CurYrDelv&pageid=m15520 (accessed August 16, 2012). Airbus Orders and Deliveries, http://www.airbus.com/fileadmin/backstage/orders_deliveries_table/July_2012_Airbus_ODs.xls (accessed August 16, 2012). 3 Boeing Orders and Deliveries Detail, http://active.boeing.com/commercial/orders/index.cfm?content=displaystandardreport.cfm&pageid= m25062&RequestTimeout=100000 (accessed August 23, 2012). Airbus Orders and Deliveries, http://www.airbus.com/company/market/orders-deliveries/ (accessed August 23, 2012). 4 Boeing Recent Annual Orders, http://active.boeing.com/commercial/orders/index.cfm (accessed August 16, 2012). Airbus Orders and Deliveries, http://www.airbus.com/fileadmin/backstage/orders_deliveries_table/July_2012_Airbus_ODs.xls (accessed August 16, 2012). 5 Airbus press release, http://www.airbus.com/tools/airbusfor/analysts/ (accessed August 23, 2012). 6 Boeing Current Market Outlook 2012 2031, http://www.boeing.com/commercial/cmo/index.html (accessed August 16, 2012).
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As U.S. and European military budgets decline over the next several years, there is revenue growth pressure on major defense contractors as competition over major programs intensifies. Companies with heavier exposure to the defense sector will compete for a smaller share of total market and thus be challenged to fill the revenue gap. Thus, acquisitions are expected to increase in order to access new technical capabilities, to access new customers as well as to build scale economies of production. Additionally, defense budgets in Asia and the Middle East are expected to grow which represents an opportunity for defense companies to drive growth with foreign military sales. Commercial vs. Defense and U.S vs. Europe financial performance: In reviewing the top 20 global A&D companies, we estimate that the commercial aerospace segment grew revenues 14.9 percent, while the defense segment revenues decreased 1.0 percent.7 In addition, we estimate that commercial aerospace segment operating earnings jumped 29.2 percent, while defense segment operating earnings eked out a 1.5 percent increase.

On a regional basis, the top 20 U.S. based companys commercial aerospace 1H 2012 sales increased at a faster pace than the group at 18.0 percent driven in part by Boeings rising airplane deliveries,8 while operating earnings growth of 24.4 percent trailed the combined operating earnings of 29.2 percent. Comparatively, European commercial aerospace revenue grew at a slightly slower pace of 14.2 percent, while operating earnings rose 50.5 percent, largely driven by EADS strong first half profitability and the absence of large non-recurring charges by European companies. Defense sector revenues continue to remain flat to negative for both the U.S. and European companies as defense budget cuts create an uncertain outlook. U.S. based A&D companies defense revenues increased 0.3 percent, compared to European based firms which saw defense related revenues drop 4.5 percent in 1H 2012. BAE Systems defense revenue decreased 9.7 percent due to lower volumes in the Land & Armaments business primarily reflecting the completed Family of Medium Tactical Vehicles (F-MTV) program.9

Figure 2 Top 20 A&D companies by commercial aerospace versus defense revenue, operating earnings and operating margin
Commercial aerospace 1H 2012 1H 2011 Change (1H12 versus 1H11) 14.9% 29.2% 12.4% 1H 2012 Defense 1H 2011 Change (1H12 versus 1H11) -1.0% 1.5% 2.6%

Revenue ($ Billion)* Operating earnings ($ Billion) Operating margin

$103.2 $8.6 8.3%

$89.8 $6.6 7.4%

$127.5 $12.0 9.4%

$128.8 $11.8 9.2%

Top U.S. based companies Revenue ($ Billion)* Operating earnings ($ Billion) Operating margin $55.4 $5.9 10.6% $46.9 $4.7 10.1% 18.0% 24.4% 5.5% $93.7 $9.5 10.1% $93.5 $9.4 10.1% 0.3% 0.6% 0.3%

Top European based companies Revenue ($ Billion)* Operating earnings ($ Billion) Operating margin $44.1 $2.5 5.6% $38.6 $1.6 4.3% 14.2% 50.5% 31.8% $33.7 $2.5 7.5% $35.3 $2.4 6.8% -4.5% 5.3% 10.2%

*Extrapolation of the Commercial Aerospace versus Defense performance of the Top 20 A & D companies. See methodology section for further information and definitions of financial metric

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Based on extrapolation of the commercial aerospace and defense business performance of the Top 20 companies. See methodology section for further information and definitions of financial metrics. Boeing Co., 2Q12 10-Q, July 25 2012. BAE Systems, Half-Yearly Report and Presentation 2012

Mid-year 2012 top 20 global aerospace and defense company financial performance analysis 5

Detailed Financial Performance Analysis: The following section describes and illustrates our analysis of the financial performance of the top 20 global A&D companies. We assess revenue growth, operating earnings, and operating margins as well as share price performance.

Figure 3 Average performance of the top 20 Global A&D companies in 1H 2012 compared to 1H 2011
Metrics Revenue ($B) Operating earnings ($B)* Operating margin% Free cash flow ($B) Free cash margin % 1H 2012 $236.6 $20.0 8.4% $2.8 1.1% 1H 2011 $224.2 $18.4 8.2% $2.9 1.2% Change (1H12 vs. 1H11) 5.5% 8.8% 3.0% (25 bps) -3.5% -7.5% (-9 bps)

* United Technologies does not disclose the portion of its operating earnings related to A&D and is not included in the calculation of Industry earnings.

Figure 4 Performance of the top 20 Global A&D companies in 1H 2012 compared to 1H 2011
Company Boeing EADS Lockheed Martin General Dynamics BAE Systems Northrop Grumman United Technologies*(a) Raytheon Finmeccanica GE Aviation*(b) Rolls-Royce Safran Thales L-3 Communications Honeywell Aerospace* Textron Bombardier Aerospace* Huntington Ingalls Industries Harris Exelis(c) Total Revenue growth 25.2% 13.7% 4.7% -1.1% -9.7% -6.2% -3.4% -2.6% -4.8% 7.1% 6.6% 14.1% 7.4% -3.0% 8.6% 12.8% -11.9% 1.3% -0.7% -1.0% 5.5% Operating profit growth 23.0% 105.3% 19.1% -2.6% 3.8% -5.0% NA 15.0% 16.8% -0.9% -19.0% 22.6% 11.4% -8.8% 19.4% 138.7% -21.5% 5.7% -87.1% 20.4% 8.8% Operating margin rate growth -1.7% 80.6% 13.8% -1.4% 15.0% 1.3% NA 18.1% 22.7% -7.5% -24.0% 7.5% 3.7% -6.0% 10.0% 111.5% -10.9% 4.3% -87.0% 21.7% 3.0% (25 bps) Free cash flow growth 1,081.0% -851.6% -56.4% 10.8% 412.1% 559.7% 14.2% -78.5% -2.0% NA -123.3% -33.8% 58.6% -24.7% 100.0% -360.0% 8.3% 10.0% 104.0% -174.2% -3.5% Free cash margin rate growth 883.4% -737.2% -58.3% 12.0% 445.6% 590.0% 18.2% -83.4% -7.2% NA -121.9% -41.9% 61.5% -22.3% 89.5% -330.4% -12.4% 11.1% 105.5% -175.0% -7.5% (-9 bps)

* Partial company results based on A&D activities. (a) United Technologies does not disclose the portion of its operating earnings related to A&D and is not included in the calculation of Industry earnings. (b) GEs FCF and FCM are not included in the calculation of Industry FCF and FCM. Refer to the methodology section for additional detail. (c) Exelis was spun out of ITT Corporation and listed on October 31, 2011; hence its share price growth cannot be calculated. Source: Deloitte Services LP analysis for 1H 2012 data for U.S. and non-U.S. companies filings as well as company press reports of unaudited financial performance in the last two quarters Note: The above companies represent the largest A&D companies (based on 2011 annual data) for which performance financials are available. Percentage change year over year (YOY) between 1H 2011 and 1H 2012 6

Figure 5 Performance of the top 20 Global A&D companies in 1H 2012 compared to 1H 2011
Revenue ($M) Company Boeing EADS Lockheed Martin General Dynamics BAE Systems Northrop Grumman United Technologies*(d) Raytheon Finmeccanica GE Aviation*(e) Rolls-Royce(g) Safran Thales L-3 Communications Honeywell Aerospace* Textron Bombardier Aerospace* Huntington Ingalls Industries Harris Exelis(f) Total 1H 2012 $39,388.0 $32,365.6 $23,214.0 $15,501.0 $13,144.9 $12,472.0 $11,013.7 $11,930.0 $10,419.4 $9,746.0 $9,021.9 $8,324.4 $8,324.0 $7,146.0 $5,977.0 $5,875.0 $3,764.0 $3,289.0 $2,912.2 $2,800.0 $236,628.1 1H 2011 $31,453.0 $28,474.0 $22,169.0 $15,677.0 $14,556.5 $13,294.0 $11,399.6 $12,253.0 $10,945.2 $9,100.0 $8,460.4 $7,297.6 $7,746.9 $7,367.0 $5,506.0 $5,207.0 $4,273.0 $3,247.0 $2,933.8 $2,829.0 $224,189.0 Operating profit ($M) 1H 2012 $3,118.0 $1,100.7 $2,212.0 $1,830.0 $1,239.7 $1,570.0 NA $1,448.0 $486.8 $1,784.0 $914.8 $859.3 $438.5 $724.0 $1,096.0 $432.0 $193.0 $186.0 $59.9 $283.0 $19,975.7 1H 2011 $2,534.0 $536.1 $1,857.0 $1,878.0 $1,194.0 $1,652.0 NA $1,259.0 $416.7 $1,800.0 $1,129.3 $700.9 $393.6 $794.0 $918.0 $181.0 $246.0 $176.0 $465.6 $235.0 $18,366.2 Operating margin 1H 2012 7.9% 3.4% 9.5% 11.8% 9.4% 12.6% NA 12.1% 4.7% 18.3% 10.1% 10.3% 5.3% 10.1% 18.3% 7.4% 5.1% 5.7% 2.1% 10.1% 8.4% 1H 2011 8.1% 1.9% 8.4% 12.0% 8.2% 12.4% NA 10.3% 3.8% 19.8% 13.3% 9.6% 5.1% 10.8% 16.7% 3.5% 5.8% 5.4% 15.9% 8.3% 8.2% Free cash flow ($M) 1H 2012 $981.0 -$2,272.9 $997.0 $1,027.0 $974.7 $639.0 $2,595.0 -$241.0 -$1,568.0 NA -$99.4 $135.0 -$142.8 $333.0 $818.0 -$130.0 -$1,354.0 -$235.0 $476.3 -$141.0 $2,792.0 1H 2011 -$100.0 -$238.8 $2,285.0 $927.0 -$312.3 -$139.0 $2,272.0 -$135.0 -$1,536.9 NA $425.9 $203.8 -$345.3 $442.0 $409.0 $50.0 -$1,476.0 -$261.0 $233.5 $190.0 $2,893.8 Free cash margin 1H 2012 2.5% -7.0% 4.3% 6.6% 7.4% 5.1% 9.9% -2.0% -15.0% NA -1.1% 1.6% -1.7% 4.7% 4.4% -2.2% -17.6% -7.1% 16.4% -5.0% 1.1% 1H 2011 -0.3% -0.8% 10.3% 5.9% -2.1% -1.0% 8.4% -1.1% -14.0% NA 5.0% 2.8% -4.5% 6.0% 2.3% 1.0% -15.7% -8.0% 8.0% 6.7% 1.2%

* Partial company results based on A&D activities. (d) United Technologies does not disclose the portion of its operating earnings related to A&D and is not included in the calculation of Industry earnings. (e) GEs FCF and FCM are not included in the calculation of Industry FCF and FCM. Refer to methodology section for details. (f) Exelis was spun out of ITT Corporation and listed on October 31, 2011; hence its share price growth cannot be calculated. Note: Financial metrics sourced from companies audited or unaudited 1H 2012 results; stock performance sourced from Capital IQ. (g) Rolls-Royce operating profit taken before the disposal of the IAE business

Sales revenue: The global top 20 companies revenues grew 5.5 percent, to $236.6 billion in 1H 2012, with Boeing contributing the highest incremental revenues among the peer group for the six month period. Four companies: Boeing, EADS, Lockheed Martin, and Safran each generated incremental revenues in excess of $1 billion in 1H 2012. Boeings revenue increased 25.2 percent in 1H 2012 to $39.4 billion helped by rising airplane deliveries and defense sales. Boeing Commercial Airplanes unit reported

a 42.7 percent increase in 1H 2012 sales compared to 1H 2011 sales, with 1H 2012 sales amounting to $22.8 billion. Through 2Q12, Boeing delivered 287 commercial airplanes and reiterated its forecast to deliver a record 585 to 600 commercial planes putting the company on pace to win the annual order race for the first time since 2006. Additionally, despite a weakening defense spending environment, the companys defense unit sales rose 7.3 percent to $16.4 billion for the first half of 2012.10

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Boeing Co., 2Q12 Press release, http://boeing.mediaroom.com/index.php?s=43&item=2361 (accessed August 16, 2012)

Mid-year 2012 top 20 global aerospace and defense company financial performance analysis 7

Safran also started off 1H 2012 with a 14.1 percent increase in revenue growth to $8.3 billion, helped by record production rates in aerospace original equipment. FM56 engine deliveries reached 723 units up 87 units from 1H11. Revenue was also boosted by an improvement in improving aftermarket trends and momentum in the security business unit.11 Operating earnings: The global top 20 companies operating earnings increased 8.8 percent to $20.0 billion in 1H 2012, driven by favorable contract mix and cost reduction initiatives. Many defense contractors have started to reduce overhead costs and personnel in anticipation of expected defense budget cuts in 2013. Textrons operating earnings increased 138.7 percent to $432 million, benefiting from strong demand for helicopters, and sales of its Cessna corporate aircraft which picked up after languishing helping the unit leverage higher sales volume over fixed operating costs.12 EADS operating earnings jumped 105.3 percent to $1.1 billion in 1H 2012, driven by improved volume and cost performance within Airbus Commercial, as well as strong commercial and support demand from its Eurocopter business.13 Operating margin: The top 20 global companies operating margin grew 3.0 percent to 8.4 percent in 1H 2012. Only GE Aviation and Honeywell Aerospace posted operating margins in excess of 15 percent in 1H 2012. Honeywell Aerospaces operating margin increased 10.0 percent to 18.3 percent in 1H 2012, benefiting from higher commercial demand, an 8 percent positive impact from OEM payments, and growth from acquisitions.14 Although GE Aviations operating margin decreased 7.5 percent in 1H 2012, the company still posted the second highest operating margin among the peer set at 18.3 percent in 1H 2012, as higher equipment revenues more than offset lower service revenues.

Free cash flow (FCF): The top 20 companies FCF decreased 3.5 percent to $2.8 billion in the first half of 2012, largely due to slowing government defense spending, and companies deploying cash towards acquisitions and non-operating areas, such as higher pension contributions, that exceeded the revenue and cash flow growth from commercial aerospace. Boeing and Northrop Grumman achieved the fastest FCF growth in 1H 2012, up from negative cash flows in 1H 2011. Boeings FCF improved from -$100.0 million in 1H 2011 to $981.0 million in 1H 2012, largely due to higher net earnings and lower inventory growth.15 Northrop Grummans FCF improved to $639.0 million in 1H 2012 from -$139.0 million in 1H 2011, owing to lower retiree benefit funding, better working capital management, and lower capital expenditures in the first half of 2012 compared to the same period in 2011.16 EADS posted FCF of -$2.3 billion in 1H 2012, due to unfavorable changes in working capital and higher capital expenditures. Eight other companies also posted negative FCF in 1H 2012, primarily due to lower cash flows from operations, unfavorable working capital changes, and higher capital expenditures. Free cash margin (FCM): The top 20 companies FCM fell slightly by 9 bps to 1.1 percent in 1H 2012, due to lower FCF as described above. Harris FCM more than doubled to 16.4 percent in 1H 2012, thanks to higher cash flow from operations and lower capital expenditures during the first half of 2012 compared to the corresponding period in 2011.17 United Technologies FCM grew 18.2 percent or 153 bps to 9.9 percent, as its FCF increased 14.2 percent to $2.6 billion largely owing to higher net earnings while revenues dropped by 3.4 percent to $26.2 billion in 1H 2012.18 Nine companies recorded negative FCM ratios due to negative FCF in 1H 2012, due to lower cash flows, working capital changes, and higher capital expenditures.

Safran, First-half 2012 earnings, July 31 2012 Textron Inc., 2Q12 10-Q, July 26, 2012 13 EADS, H1 Results 2012, July 27, 2012 14 Honeywell Inc., 2Q12 10-Q, July 18, 2012 15 Boeing Co., 2Q12 10-Q, July 25, 2012 16 Northrop Grumman Corp., 2Q12 Press release, http://investor.northropgrumman.com/phoenix.zhtml?c=112386&p=irolnewsArticle&ID= 1718109&highlight= (accessed August 31, 2012) 17 Harris Corporation, 4Q12 Financial tables, http://harris.com/pdf/investors/2012Q4.pdf (accessed August 31, 2012) 18 United Technologies Corp., 2Q12 Financial tables, http://www.utc.com/StaticFiles/UTC/StaticFiles/2012-q2_financial_tables.pdf (accessed August 31, 2012)
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U.S. vs. European companies: U.S. based A&D companies, accounting for 64 percent of the global Top 20 companies $236.6 billion revenue, generated $151.3 billion in 1H 2012 revenues up 6.2 percent from the first half of 2011. European companies, accounting for 34.5 percent of the top 20 revenue, increased 5.3 percent to $81.6 billion. U.S. companies reported operating earnings rose 7.2 percent, and reported operating margin remained flat at 9.7 percent. However, European companies recorded a higher increase in reported operating earnings and operating margin than their U.S. counterparts in the first half of 2012. The reported operating earnings of the European companies rose 15.3 percent to $5.0 billion and the reported operating margin improved by 54 bps to 6.2 percent in 1H 2012. U.S. companies FCF increased 15.3 percent to $7.1 billion in 1H 2012, thanks to higher FCF posted by companies such as Boeing, and Northrop Grumman, among others. While FCF for European peers decreased to -$3.0 billion in 1H 2012 from -$1.8 billion in 1H 2011, due to negative cash flows posted by EADS, and Finmeccanica, and Thales. The FCM of U.S. companies rose 9.8 percent or 37 bps to 4.2 percent, while that of European companies remained in the negative territory at -3.6 percent and -2.3 percent during 1H 2012 and 1H 2011 respectively. Share price performance: The rise and fall and rebound of the S&P 500 through the first six months, reflects

ongoing equity and credit market concerns over Europes sovereign debt crisis and the potential slowdown in the global economic recovery. During the first half of 2012, both the S&P 500 and DJ A&D index were in positive territory. The DJ A&D index underperformed the S&P 500 by 401 bps during amid the looming U.S. defense budget cuts. In 2011, the DJ A&D index outperformed the S&P 500 index by 322 bps growth, following three consecutive years of underperformance. The DJ A&D index outperformance against the S&P 500 in 2011 took place primarily in the first half of 2011. In contrast the European A&D equity markets outperformed the U.S. equity markets, with the STOXX Europe TMI A&D index improving in 1H 2012 compared to 1H 2011. The STOXX Europe TMI A&D index outperformed the STOXX Europe 600 index for the second consecutive year by 1,970 basis points in 1H 2012 and 446 basis points in 1H 2011. However, the overall European equity performance remained negative given the challenging macroeconomic conditions, with the STOXX Europe 600 index falling 7.9 percent in 1H 2012 compared to a 1.1 percent decline in 1H 2011. Companies displayed mixed share price performance in 1H12 compared to 1H11. Stock valuations of a few companies improved thanks to the recovery in the commercial aircraft and aftermarket business. However, share prices of other companies fell amid uncertainty regarding various defense programs.

Figure 6 Share price performance of the industry composite index relative to the broader S&P 500 index over the last few years
1H 2012 DJ A&D Index S&P 500 Index Basis point difference 4.3% 8.3% -401 1H 2012 STOXX Europe TMI A&D STOXX Europe 600 Basis point difference 11.8% -7.9% 1,970 2H 2011 -7.8% -4.8% -304 2H 2011 -2.5% -10.4% 786 1H 2011 12.0% 5.0% 696 1H 2011 3.4% -1.1% 446 2011 3.2% 0.0% 322 2011 0.8% -11.3% 322 2010 10.6% 12.8% -221 2010 15.2% 8.6% 1,213 2009 21.6% 23.5% -182 2009 24.8% 28.0% -316 2008 -38.7% -38.5% -17 2008 -43.2% -45.6% 239

Source: Yahoo! Finance and Bloomberg accessed in August 2012. Figures include historical prices of the respective indexes over the identified time periods.

Mid-year 2012 top 20 global aerospace and defense company financial performance analysis 9

Methodology

2012 top 20 Global A&D mid-year company performance

This analysis is based on key metrics for top 20 global A&D public companies chosen on the basis of A&D revenue size (based on 2011 annual data). The top 20 global A&D public companies represent approximately 71 percent of total global industry revenues according to our 2011 report,19 and provides a reasonable proxy for the performance of the entire industry with U.S. companies representing 44% of the top 20 revenues (60% in our 2011 report) and European companies representing 25.4% (34% in our 2011 report). The report uses the latest audited and unaudited results through 6/30/12 for each company. Goodrich and SAIC were not included in the top 20 as United Technologies completed the acquisition of Goodrich in July 2012 and SAICs fiscal year ends in January and the 2Q12 release occurred following our 6/30/12 cut-off date. By using the data from respective companies audited and unaudited results into the calculation framework, we analyzed the Industrys performance in first half of 2012 and highlighted specific companies that had an impact on the Industrys performance. The analysis of U.S. compared to non-U.S. companies uses the constant conversion approach to eliminate the effect of any foreign currency fluctuations from year to year. In the commercial versus defense segment analysis, the study compares and contrasts the performance of the top 20 global A&D companies on the metrics of revenue, operating earnings and operating margins. The aggregate revenue of the top 20 companies from commercial aerospace and defense is not equal to the total revenue as total revenue includes a certain portion of non-A&D revenue of companies that are majority A&D. The commercial/defense split of all the Top 20 companies was only available for a select group of companies on a quarterly basis. These companies are: Boeing, EADS, Thales, Rolls-Royce, Honeywell Aerospace, Bombardier Aerospace, Huntington Ingalls Industries, and Harris. For the remaining companies, the study used the commercial and defense percentage of revenue published in the companys 10-K or annual report. Additionally, only a few companies provided a breakout of commercial and defense operating earnings (Boeing, EADS, Thales, Rolls-Royce, Bombardier Aerospace, and Huntington Ingalls Industries); for the remaining companies, the study used the commercial and defense percentage of revenue as a proxy to estimate the respective operating earnings. A few companies do not give detailed break up of their commercial aerospace and defense revenues. We have taken the following approach for these companies: BAE Systems: The Electronic Systems and Cyber & Intelligence segments provide the commercial vs. defense split, and we estimate the Platforms & Services segments revenue are solely defense due to lack of information. Harris: Segment revenue is separated into U.S. Government revenues and foreign military sales (FMS). For the lack of information, all U.S. Government revenues are assumed to be defense related. The remaining sales of the RF Communications and Government Communications Systems segments are taken as commercial aerospace revenues, while the remaining revenues for the Integrated Network Solutions segment are not considered as commercial aerospace, given its other end markets (e.g. healthcare, energy). Northrop Grumman: The company breaks its revenue between the U.S. Government and other customers. Since there is no detailed breakup of U.S. Government revenues, the study assumes it as all defense-related sales. Raytheon: Company filings break U.S. Government revenues (from DoD and from non-DoD customers); however there is no detailed breakup of international sales between commercial aerospace and defense. This study assumes that all international sales including FMS are defense related sales. Exelis: For lack of information, the study assumes all international sales to be defense related. Further, as Safran and Finmeccanica do not break out the mix of commercial and defense sales, the study has taken the following approach: Safran: Defense News20 in its annual ranking of Top 100 defense contractors in 2011 (latest available) states that Safran has 20.0 percent defense revenues in 2011. The study assumes the remaining company revenues are related to commercial aerospace. Finmeccanica: Defense News21 in its annual ranking of Top 100 defense contractors in 2011 states that Finmeccanica has 60.5 percent defense revenues in 2011. The remaining company revenues are adjusted for non A&D businesses (e.g., Energy, Transportation, and Other activities) to arrive at commercial aerospace revenues.

Calculation based on Top 20 companies 2011 full year performance from the 2011 Global Aerospace & Defense Industry performance wrap-up, DTTL 20 Defense News Top 100 for 2011, http://special.defensenews.com/top-100/charts/rank_2011.php 21 IBID
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1. A&D revenue: a) To calculate A&D Revenue for an individual company, it was necessary to determine the percentage of revenue associated with A&D activities. In calculating such percentage, we first checked to see whether the company explicitly stated an A&D revenue figure in its 1H 2012 filings. In such a case, we used that explicitly stated percentage directly. If such percentage was not explicitly stated, we analyzed the companys various business segments or end-markets and considered those which are related to A&D in estimating the A&D revenue percentage. In the case of United Technologies, since the A&D revenue percentage is not explicitly stated by the company in its 2Q12 release, we use the 2011 revenue percentage to arrive at its A&D revenues. b) Once we assigned A&D percentages to all of the companies, we put them into two categories: those companies with less than 60 percent of their respective revenue from A&D and those companies with equal to or more than 60 percent of their respective revenue from A&D. If a company derives less than 60 percent of its revenue from A&D, we took only the revenue generated by the A&D part. However, if the company derives equal to or more than 60 percent of its revenue from A&D, we used total revenue for company. c) In determining Industry A&D revenue, we calculated a summation of the A&D revenue of all constituent 20 companies. 2. Operating earnings and margin%: a) In calculating A&D operating earnings, we took a two pronged approach (same as above), which states that if a company derives less than 60% of its revenue from A&D, we took only the operating earnings clearly associated with the A&D part. However, if the company derives equal to or more than 60% of its revenue from A&D, we took the total operating earnings for the company. b) In the case of United Technologies (less than 60% A&D), it was not possible to assign operating earnings to the A&D business. So, the companys earnings were not included in calculation of the industry earnings. c) The companies A&D operating margins were calculated by dividing their respective A&D operating earnings by their respective A&D revenues. d) Operating earnings for the Industry is summation of operating earnings of all constituent 20 companies. e) Operating margin for the Industry was calculated as: Total Industry operating earnings as a percentage of total Industry revenue.

3. FCF/ FCM: a) FCF was calculated for the entire company, as it is impractical to allocate cash flows to a companys A&D and non-A&D segments. b) Bombardier reports FCF on a segment basis. However, for the sake of consistency, we consider the entire companys FCF in the study. c) If the FCF value was published by the company, the study used it directly as in the cases of EADS, General Dynamics, BAE Systems, Northrop Grumman, United Technologies, Finmeccanica, Safran, L-3 Communications, Thales, Bombardier, Huntington Ingalls Industries, and Exelis. d) If the FCF value was not published by the company, it was calculated as: FCF = Operating cash flow net capital expenditures. e) Net capital expenditures are calculated as: Net capital expenditure = purchases of plant, property, and equipment proceeds from the sale of plant, property, and equipment. f) The study calculated the industry FCF as a summation of the FCFs of all constituent companies. g) FCM is calculated for the entire company, analogous to FCF. FCM for a company was calculated as: Company FCM = Company FCF/Company revenue. h) FCM for the Industry is a revenue-weighted average. It was calculated as: Industry FCM = (Company FCM*Company A&D revenue)/total Industry A&D revenue. i) The FCF and FCM of GE were excluded as their inclusion would have had a distorting effect on the calculation of Industry FCF and FCM, respectively. 4. Share price performance: a) Growth in share prices of companies, and index values, are calculated as the change on the last trading day, i.e. June 29, 2012 compared to June 30, 2011.

The information provided in this Financial Performance Analysis was obtained from sources believed to be reliable, but has not been independently verified and its accuracy cannot be assured. Information contained herein is as of the date of such information or the date of this publication, as applicable. Deloitte undertakes no obligation to notify any recipient of this Financial Performance Analysis of any such change.

Mid-year 2012 top 20 global aerospace and defense company financial performance analysis 11

Contact Tom Captain Global A&D Sector Leader Deloitte Touche Tohmatsu Limited (DTTL) +1 206 716 6452 tcaptain@deloitte.com

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