U.S. aerospace and defense sector financial performance analysisDefense revenues and earnings continued to decrease; Commercial aerospace continued double digit revenue growth in 2012

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Summary

In 2012, the top 20 U.S. aerospace and defense (A&D) companies’ revenues increased 5.5 percent to $354.7 billion primarily driven by record setting commercial aircraft production which offset negative revenue growth within the defense subsector. Overall operating earnings decreased 2.2 percent to $36.0 billion due to the impact of slowing defense spending. Commensurately, overall operating margins decreased 79 basis points to 10.2 percent in 2012 from 10.9 percent in 2011.

Defense firms revenue decreased 1.5 percent and earnings fell 7.4 percent, while commercial aerospace revenue increased 18.3 percent and earnings increased by 13.2 percent.

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.

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Detailed report

This report details the financial performance of the top 20 publically listed aerospace and defense (A&D) companies headquartered in the U.S., based on sales revenue. The data to conduct the analysis was obtained from company filings as well as company press reports of fiscal year-end, unaudited financial performance. Figure 1 lists the companies included in this analysis:

Figure 1: Companies included in the analysis

Top 20 U.S. aerospace & defense companies/divisions

Boeing Raytheon SAIC Spirit Aerosystems

Lockheed Martin GE Aviation* Precision Castparts Rockwell Collins

General Dynamics L3 Communications Huntington Ingalls Industries

Alliant TechSystems

United Technologies* Textron Exelis URS Federal*

Northrop Grumman Honeywell Aerospace* Harris Oshkosh Defense*

*Partial company results based on business unit A&D activity. See methodology section.

The remainder of this report analyzes the performance of the commercial aircraft and the defense sectors separately, followed by a discussion of the industry performance, focused on the primary metrics of revenue growth, operating earnings and growth, and operating margins and growth.

Commercial aerospace demand factorsThis subsector maintained its growth in 2012, building upon its production momentum started in 2004. Globally, Boeing and Airbus delivered 1,189 aircraft in 2012, the highest production level achieved in commercial aircraft history.1 2 This increase in production is driving parallel production activity increases in the commercial aircraft supply chain, from engines, to avionics, to complex aerostructures, wiring harnesses, passenger seats, wheels and brakes for example. In 2012, new order growth decreased to 2,036 net orders down from 2,224 in 2011, as Boeing’s net orders jumped to 1,203 fueled by strong sales of its 737 MAX.3

Commercial aircraft production is expected to increase while order levels may exceed the long term average. Over the next 20 years, passenger travel demand is expected to continue to increase, especially in Asia and the Middle East markets. Growth is also being driven by airline operators as they retire obsolete, less fuel efficient airplanes.4 Boeing forecasts 34,000 new aircraft will be produced from 2012 through 2031.5

1 Boeing Orders & Deliveries, http://active.boeing.com/commercial/orders/index.cfm (accessed February 14, 2013)2 Airbus Orders & Delivers, http://www.airbus.com/no_cache/company/market/orders-deliveries/ (accessed February 14, 2013)3 http://www.reuters.com/article/2012/12/07/uk-airbus-orders-idUSLNE8B602X20121207 (accessed February 14, 2013)4 Boeing Current Market Outlook 2012-2031, http://www.boeing.com/commercial/cmo/pdf/Boeing_Current_Market_Outlook_2012.pdf (accessed February 14, 2013)5 Boeing Current Market Outlook 2012-2031, http://www.boeing.com/commercial/cmo/pdf/Boeing_Current_Market_Outlook_2012.pdf (accessed February 14, 2013)

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Defense demand factors The outlook for the subsector is being impacted by decreases in the U.S. defense budget. Budget reductions of $487 billion over 10 years were agreed to by the U.S. Congress as part of the Budget Control Act of 2011.6 This equates to an estimated reduction of $25 billion of addressable spend for defense contractors, or an estimated 12 percent of their 2012 estimated revenues.7 An additional budget reduction associated with the automatic “sequester” has taken place due to inaction on a new budget proposal as of March 1, 2013, which automatically kicked in $46 billion in annual defense cuts. Assuming that these sequester cuts will be proportional and that the entire amount stays cut in subsequent congressional actions, it is estimated that up to another 12 percent, or $25 billion, of defense and government contractor budgets are likely to be impacted for a combined total of approximately 24 percent, all else being equal.

Thus, with addressable U.S. defense budgets being cut, defense contractors are likely to experience continued revenue declines, and in some cases accelerated revenue declines. However, it is likely that U.S. defense contractors will aggressively address this revenue shortfall with foreign military sales, acquisitions, new product introductions and growth in adjacent markets. However, among the top companies, only 10 of the top 20 defense contractors doing business with the U.S. Department of Defense (DOD) experienced revenue growth in 2012. This downward trend is likely to continue in 2013.

Commercial vs. defense financial performanceIn reviewing the top 20 U.S. A&D companies, based on the methodology that is outlined at the end of this report, we estimate that the commercial aerospace subsector grew revenues 18.3 percent, while the defense segment revenues decreased 1.5 percent. Similarly, we estimate that commercial aerospace segment operating earnings increased 13.2 percent, while defense segment operating earnings fell 7.4 percent.

Figure 2: Top 20 A&D companies by commercial aerospace versus defense revenue, operating earnings and operating margin

Commercial aerospace Defense

2012 2011 Change 2012 2011 Change

Revenue ($B)* $141.3 $119.5 18.3% $204.8 $207.9 -1.5%

Operating earnings ($B) $13.1 $11.6 13.2% $21.5 $23.2 -7.4%

Operating margin (%) 9.3% 9.7% (42) 10.5% 11.2% -67 bps

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

Financial performanceThe following section describes and illustrates our analysis of the financial performance of the top 20 U.S. A&D companies. This report analyzes revenue growth, operating earnings, and operating margins.

6 Aerospace Industries Association, “The Real Defense Budget Challenges Lie Ahead,” 26 January 2012.7 Ibid; Deloitte United States (Deloitte Development LLP), The Aerospace and Defense Industry in the U.S. — A financial and economic impact study, 7 March 2012; and DTTL Global Manufacturing Industry group analysis, February 2013

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Figure 3: Average performance of U.S. top 20 A&D companies in 2012 compared to 2011

Metrics 2012 2011 Change (2012 vs. 2011)

Revenue* ($B) $354.7 $336.2 5.5%

Operating earnings* ($B) $36.0 $36.8 -2.2%

Operating margin* (%) 10.2% 10.9% -79 bps

*For the top 20 U.S. companies

Figure 4: Performance of the U.S. top 20 A&D companies in 2012 compared to 2011

Company Revenue growth percentage change

Operating profit growth percentage change

Operating margin basis point change

Boeing 18.9% 8.0% (78)

Lockheed Martin 1.5% 10.3% 75

General Dynamics -3.6% -78.2% (907)

United Technologies* 17.9% 11.6% (76)

Northrop Grumman -4.5% -4.5% 1

Raytheon -1.5% 5.6% 83

GE Aviation* 6.0% 6.7% 12

L3 Communication -0.1% -3.4% (36)

Textron 8.5% 36.4% 176

Honeywell Aerospace* 4.9% 12.7% 130

SAIC 1.9% -24.1% (150)

Precision Castparts 16.0% 20.9% 103

Huntington Ingalls Industries 2.0% 258.0% 382

Exelis -5.4% 4.9% 100

Harris 0.6% -5.4% (110)

Spirit Aerosystems 11.0% -74.1% (561)

Rockwell Collins -1.7% 1.5% 57

Alliant TechSystems -4.7% -5.7% (11)

URS Federal Sector* -4.4% 355.3% 859

Oshkosh Defense* -9.5% -56.4% (645)

Total 5.5% -2.2% (79)

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 2011 and 2012. Totals may not foot due to rounding. * Partial company results based on A&D activities ^ SAIC’s FY12 revenue and earnings were negatively impacted by a non-recurring $540 million charge related to a legal settlement. Source: Company Filings and Press Releases, Deloitte Services LP analysis for 2012

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Figure 5: Performance of the U.S. top 20 A&D companies in 2012 compared to 2011

Company Revenue ($MM) Operating profit ($MM) Operating margin

2012 2011 2012 2011 2012 2011

Boeing $81,698 $68,735 $6,311 $5,844 7.7% 8.5%

Lockheed Martin $47,182 $46,499 $4,434 $4,020 9.4% 8.6%

General Dynamics $31,513 $32,677 $833 $3,826 2.6% 11.7%

United Technologies* $28,277 $23,974 $3,765 $3,374 13.3% 14.1%

Northrop Grumman $25,218 $26,412 $3,130 $3,276 12.4% 12.4%

Raytheon $24,414 $24,791 $2,989 $2,830 12.2% 11.4%

GE Aviation* $19,994 $18,859 $3,747 $3,512 18.7% 18.6%

L3 Communication $13,146 $13,158 $1,351 $1,399 10.3% 10.6%

Textron $12,237 $11,275 $1,053 $772 8.6% 6.8%

Honeywell Aerospace* $12,040 $11,475 $2,279 $2,023 18.9% 17.6%

SAIC $10,954 $10,750 $478 $630 4.4% 5.9%

Precision Castparts $7,215 $6,220 $1,817 $1,503 25.2% 24.2%

Huntington Ingalls Industries $6,708 $6,575 $358 $100 5.3% 1.5%

Exelis $5,522 $5,839 $561 $535 10.2% 9.2%

Harris $5,451 $5,418 $941 $995 17.3% 18.4%

Spirit Aerosystems $5,398 $4,864 $92 $356 1.7% 7.3%

Rockwell Collins $4,726 $4,806 $859 $846 18.2% 17.6%

Alliant TechSystems $4,613 $4,842 $496 $526 10.7% 10.9%

URS Federal Sector* $4,435 $4,640 $277 -$109 6.3% -2.3%

Oshkosh Defense* $3,951 $4,365 $237 $543 6.0% 12.4%

Total $354,691 $336,175 $36,008 $36,801 10.2% 10.9%

* Partial company results based on A&D activities ^ SAIC’s FY12 revenue and earnings were negatively impacted by a non-recurring $540 million charge related to a legal settlement. Source: Financial metrics sourced from companies’ audited or unaudited 2012 results

RevenueThe top 20 U.S. A&D companies’ revenues grew 5.5 percent to $354.7 billion in 2012, with Boeing contributing the highest incremental revenues among the peer group for the year. Only Boeing, United Technologies and GE Aviation generated incremental revenues in excess of $1 billion in 2012.

Boeing’s revenue grew by 18.9 percent in 2012 to $81.7 billion, primarily driven by its commercial airplane group. Boeing Commercial Airplanes (BCA) revenue increased 35.8 percent to $49.1 billion as higher airplane deliveries across all programs helped the company deliver 601 aircraft for the year.8 9 However revenue growth within Boeing’s Defense, Space & Security (BDS) segment experienced a modest 2.0 percent growth supported by higher revenues in the Boeing Military Aircraft and Global Service & Support segments partially offset by lower Network & Space Systems segment sales. Backlog in the BCA segment was $318.8 billion, keeping the backlog at more than six times the unit’s 2012 revenue.10

8 The Boeing Company 2012 10-K9 http://active.boeing.com/commercial/orders/index.cfm?content=timeperiodselection.cfm&pageid=m1552310 The Boeing Company 2012 10-K

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Operating earningsThe top 20 U.S. A&D companies’ operating earnings decreased 2.2 percent to $36.0 billion in 2012, as slowing defense contracting and margin compression offset strong commercial aircraft performance. General Dynamic’s $2 billion write-down of goodwill due to slowing defense contracting revenues in its Information Systems and Technology business was a primary factor in the operating earnings decline.11 Excluding the impact of General Dynamics performance, operating earnings increased by 6.7 percent to $35.2 billion in 2012. Many defense contractors continued in 2012 to reduce overhead costs and personnel in anticipation of the automatic sequestration cuts.

Boeing’s 2012 operating earnings increased 8.0 percent to $6.3 billion from $5.8 billion in 2011. Boeing credited its earnings increase primarily to 124 additional commercial airplane deliveries and lower research and development expenses in its BCA division.12

Operating marginThe Top 20 U.S. companies’ operating margin decreased 79 basis points to 10.2 percent in 2012. Eleven of the top 20 companies generated double digit operating margins exceeding the overall groups’ performance in aggregate.

Precision Castparts posted the highest operating margin rate among the peer set at 25.2 percent in 2012 compared to 2011. In its annual filing, the company attributed its operating margin expansion to higher commercial aircraft build rates and solid leverage from increased aerospace and industrial gas and turbine volume.

Market performance2012 compared better to 2011 with annual growth rates of both the DJ A&D and S&P 500 indexes improving compared to 2011. However, the DJ A&D index underperformed the S&P 500 index by 216 bps as there was improvement and optimism in the general economic environment in 2012 while the A&D industry continued to face concerns over a slowdown in contracting as well as the impact of defense budget reductions.

Figure 6: Market performance of the industry composite index relative to the broader S&P 500 index over the last few years

Indices 2012 2011 2010 2009 08 to 12 08 to 11

DJ A&D Index 11.2% 3.2% 10.6% 21.6% 54.4% 38.8%

S&P 500 Index 13.4% (0.0%) 12.8% 23.5% 57.9% 39.2%

Basis point difference -216 322 -221 -182 -346 -41

Source: Yahoo Finance

11 http://www.generaldynamics.com/news/press-releases/detail.cfm?customel_dataPageID_1811=18263 (accessed February 20, 2013)12 The Boeing Company 2012 10-K

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This analysis is based on key metrics for the top 20 global A&D public companies chosen on the basis of A&D revenue size (based on 2011 annual data). The report uses the latest audited and unaudited results through December 31, 2012 for each company. In the case of SAIC, a rolling twelve month (four quarter: 4Q11-3Q12) calculation was used as this company did not release annual 2012 results by the cut-off date. SAIC’s full year results will be included in our 2012 Global A&D Company Performance Wrap-up report. By using the data from respective companies’ audited and unaudited results into the calculation framework, we analyzed the Industry’s performance in 2012 and highlighted specific companies that had an impact on the Industry’s performance.

In the commercial versus defense segment analysis, the study compares and contrasts the performance of the top 20 U.S. A&D companies on the metrics of revenue, operating earnings, and operating margins. The aggregate revenue of the top 20 companies from commercial A&D 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. Companies disclosing the commercial/defense performance breakout or disclosing its overall business as one or the other, are: Boeing, General Dynamics, Rockwell Collins, Oshkosh, Honeywell Aerospace, Textron, and Huntington Ingalls Industries. For the remaining companies, the study used the commercial and defense percentage of revenue published in the company’s 10-K or annual report. Additionally, only a few companies provided a breakout of commercial and defense operating earnings as one or the other (Boeing, Rockwell Collins, Oshkosh Defense and Huntington Ingalls Industries); for the remaining companies, the study used the commercial and A&D 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:

• Harris: Segment revenue is separated into U.S. government revenues and foreign military sales (FMS). For our purposes, 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 aircraft, given its other end markets (e.g. healthcare, energy).

• Northrop Grumman: The company discloses its revenue as either U.S. government or other customers. Since there is no disaggregation of U.S. government revenues, the study assumes it as all defense-related sales.

• Raytheon: Company filings disclose U.S. government revenues as either DOD or non-DOD customers, and international revenues are aggregated as a total. For our purposes, we have assumed all international sales including FMS are defense related sales.

• Exelis: Sales to DoD, U.S. intelligence agencies and international customers are considered to be those associated with Defense. Sales to NASA, FAA, other U.S. government customers and U.S. commercial customers are considered as commercial sales.

Methodology

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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, DTTL’s Global Manufacturing Industry group first ascertained whether the company explicitly stated an A&D revenue figure in its latest filing (2012 or 2011). In such instances, DTTL used that explicitly stated percentage directly. If such percentage was not explicitly stated, DTTL analyzed the company’s 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 2012 release, DTTL use the 2011 revenue percentage to arrive at its A&D revenues.

• b) Once DTTL assigned A&D percentages to all of the companies, DTTL 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, DTTL 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, DTTL used total revenue for the company.

• c) In determining industry A&D revenue, DTTL calculated a summation of the A&D revenue of all constituent 20 companies.

Operating earnings and margin percentage• a) In calculating A&D operating earnings, DTTL took a two pronged approach (consistent with the revenue approach

described above), which states that if a company derives less than 60 percent of its revenue from A&D, DTTL took only the operating earnings clearly associated with the A&D part. However, if the company derives equal to or more than 60 percent of its revenue from A&D, DTTL took the total operating earnings for the company.

• b) In the case of United Technologies (company with less than 60% of their revenues from A&D), it was not possible to objectively assign operating earnings to the A&D part. In this case, we derived A&D operating earnings by multiplying total operating earnings by the company’s respective total operating margins.

• c) Textron Systems operating profit has been taken as sum of segment profits as the reporting methods have changed.

• d) The companies’ A&D operating margins were calculated by dividing their respective A&D operating earnings by their respective A&D revenues.

• e) Operating earnings for the industry is the summation of operating earnings of all constituent 20 companies.

• f) Operating margin for the industry was calculated as: total industry operating earnings as a percentage of total industry revenue.

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.

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Contact information

Tom Captain Principal & Vice Chairman, Global & U.S. A&D Sector Leader Deloitte LLP +1 206 716 6452 tcaptain@deloitte.com