diversification strategies

A Strategic Roadmap:fTransition and Position for

Aerospace & Defense

OAKLAND COUNTY 26200 American Drive Suite 500 P.O. Box 5004 Southfield, MI 48086-5004 (248) 355-1040 Fax (248) 355-1084 MACOMB COUNTY 12900 Hall Rd., Suite 500 Sterling Heights, MI 48313-1153 (586) 254-1040 Fax (586) 254-1805

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Diversification

[di-vur-suh-fi-key-shuh ] – “the act or practice of manufacturing a variety of products, investing in a variety of securities, selling a variety of merchandise, etc., so that a failure in or an economic slump affecting one of them will not be disastrous”. Diversification is not an easy task; the timeline to a successful effort is typically one to two years of planning, research, and preparation. Likewise, the process requires resources and a commitment to achieve success. UHY Advisors, Inc. has been actively and aggressively involved in assisting our clients in their diversification efforts. Recent projects include: • A Tooling/Fixture Design and Build company located in Romeo, Michigan. Provided Aerospace

OEM standards and AS9100 implementation assistance.

• A Design and Build Automotive Tooling Company located in Sterling Heights, Michigan. Provided guidance and implementation assistance in ITAR compliance, AS9100, Process Mapping and Supplier Qualification / Evaluation.

• A Global Distribution company with 500+ employees located in Lawrence, Pennsylvania. Providing transition guidance and implementation assistance in the areas of Strategic Planning, AS9100, Aerospace/Defense contract analysis and First Article Inspection.

• A CNC / Screw Machine Metal Fabrication company located in South Lyon, Michigan. Providing

aerospace diversification planning and AS9100 implementation guidance. • A Metal Forming Design/Build Machinery company with operations in Ohio, China and Germany.

Providing aerospace and defense market analysis and diversification strategy planning, Profitability / Cost Management modeling, Tool Design Optimization and AS9100 implementation assistance.

• An FAA Repair Station located in Saline, Michigan. Provided training and guidance in the

implementation of AS9110, Lean Enterprise, Problem Solving and Process Mapping. In addition to the deliverables highlighted in the above client projects, UHY Advisors has the expertise to provide assistance in the areas of: • Diversification strategic plan development

• Industry teaming partnerships/collaboration

• Implementation of aerospace OEM standards, such as Boeing’s DPD Procedures

• Awareness and preparation for defense-related requirements such as Federal Acquisition

Regulations, DCAA Audit Preparation / Accounting requirements, Risk Management, etc. UHY has established a core set of industry partnerships to better serve our client base as they explore diversification and implement strategic plans. We use the expertise in these partnerships to deliver focused recommendations and project actions. Our partnerships include entities such as:


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o The TMLytle Group:

The TMLytle Group is headed by Col. Tom Lytle (Ret). Tom has 28 years of defense expertise and is working with UHY and our clients to assist identifying and developing a strategic market penetration plan. Tom provides tactical marketing guidance and has a well established DoD buyer network of influencers and decision makers.

o JRG Associated, LTD: JRG Associates is comprised of a team of specialists with multiple years of hands-on experience working in the aviation industry. JRG Associates has a working relationship with aviation OEMs such as Pratt & Whitney, Rolls-Royce, Hamilton Sundstrand and GE.

o Industrial Visions Company: Industrial Visions Company is a market and business development resource that services small to medium-sized, business-to-business manufacturers and service providers. UHY and IVC have joined to assist companies in market planning and diversification business development initiatives.

o Dusek Network:

The Dusek Network is headed by Rich Dusek. Rich has extensive experience in aerospace, automotive and military land vehicle industries. Rich is the former director of an aerospace and defense division of a large German-owned company.

o OEM Teaming:

Working relationships with OEM such as Raytheon, Boeing and Honeywell along with direct links to organizations such as TARDEC and TACOM.

The attached chart details the typical actions and timeline associated with a diversification effort. UHY’s assistance program begins with a preliminary review of your business operations. The next step is a Diversification Assessment completed by a combined team of experts. If a mutual decision is made to proceed, the UHY Diversification Team works with you and your management staff to develop a Diversification Strategic Plan. To support your diversification initiatives, UHY has worked to establish potential sources for matching grants of $25,000 and $75,000. Please call me at (248) 204-9447 to discuss how we can assist you and your organization in your diversification efforts. Very truly yours, UHY Advisors MI, Inc.

Alan K. Lund Consulting Principal

Industry Status - Aerospace

• 2009 Projections - Aerospace Profits . . . $20.9 billion

• 2008 Purchases:– Civil Aircraft Sales . . . . . . . . . . . . . . . . . $80.8 billion– Military Aircraft Sales . . . . . . . . . . . . . . $54.7 billion– US Defense Spending . . . . . . . . . . . . . . $146.0 billion– Missile Sales . . . . . . . . . . . . . . . . . . . . . . $13.2 billion– Space Sales . . . . . . . . . . . . . . . . . . . . . . . $33.4 billionSpace Sales . . . . . . . . . . . . . . . . . . . . . . . $33.4 billion

• Backlog . . . . . Boeing and Airbus:– 7,000+ Airliners– 1,300+ Next Generation Aircraft $404.5 billion

• Example – Northrop Grumman:– US Air Force . . . 179 Tanker Aircraft

Industry Status - Defense

– Creates 48,000 Direct and Indirect jobs– Involves 230 US suppliers in 49 states

• Example – Oshkosh Corporation – August 27, 2009:– Awarded a $280.9 million contract by the U.S. Army Tank-

automotive and Armaments Command Life Cycle Management Command (TACOM LCMC) for the U.S. A ' F il f M di T ti l V hi lArmy's Family of Medium Tactical Vehicles.

• Example – Winona, Minnesota, September 10, 2009:– Peerless Chain awarded two U.S. Department of Defense

contracts, together worth about $10 million to supply cargo tie-down chains for military uses

Diversification Strategy• Diversification . . . “the act or practice of manufacturing a

variety of products, investing in a variety of securities, selling y p , g y , ga variety of merchandise, etc., so that a failure in or an economic slump affecting one of them will not be disastrous”

• Option “A” . . . Go Vertical:- Target a new market or industry, i.e., Defense- Expand existing capabilities, skills, equipment, etc- Position as far up the chain as possible

Issues:- Time to enter the market and crack the market- Increased risk due to lack of understanding- New, unique, and stringent requirements

• Option “B” . . . Go Horizontal:- Understand and expand those processes that are your

Client Diversification Strategy

Understand and expand those processes that are your “Economic Engine” . . . .Know where and how you make money . . .Cost Center / Product Line / Business Unit

- Develop Near-Term and Long-Term strategies to address your strategic direction

- Identify multiple new markets or industries that fit your strategy and complement existing skills processesstrategy and complement existing skills, processes, capabilities, etc.

Issues:- Resources (time and dollars) needed to understand, upgrade and/or implement new market requirements

• Build on your Core Competencies . . .Remember:

Diversification Strategy

• Explore the market and determine the price of entry:

– Existing Financial System . . . . .OK? YES NO

Define your company by what you do . . .Not by what you make

– Existing Equipment . . . . . . . . . . OK? YES NO

– Understand Specialty Metals . . .OK? YES NO

• Remember to question Conventional Wisdom. For example:

Diversification Strategy

example:– Processes designed for Automotive Production (i.e, low

setup time, high OEE rating). . . How cost-effective is this equipment for low volume aerospace applications?

– Tooling designed for this equipment was also designed for the same Automotive production purposes . . .can the cost of re-tooling be justified?

• Expect a Learning Curve:- Order Management - Specifications / Requirements- Specialty metals - Composites- Source Inspections - ?????

Client Diversification Strategy

CompanyABC

AerospaceCommercial

Government& Defense

AlternativeEnergy Medical

Boeing

Lockheed

Dept. Commerce

Dept. Transportation Our Objective:P id th ti

Northrop Defense

Army

Navy

Air Force

Provide the expertiseto help a companyto be prepared to

Transition and Position

What Many Companies Think The Process Will Be Like . . .

Quite Often What The Process Turned Out To Be Like . . .

Recent Example – Check Fixtures Client• Roll-Out Plan

– October 2007 . . . 100% Automotive– October ’07 thru December ’08 - Initiated a project to

identify Aerospace opportunities– January ’08 - Materials and presentations to Boeing– January ’08 – Boeing On-Site Visit– February thru June ’08 – System Development– July ’08 – Boeing Approved

S t b B i O d R i d– September – Boeing Orders Received– April ’09 – AS9100 Certification

• As of July ’09 . . . . Nearly 60% of business is Aerospace

Recent Example – Machining Client• Roll-Out Plan

– 100% Automotive– December ’08 - Initiated a project to identify Aerospace

opportunities– January ’08 - Materials and presentations to Honeywell– January ’08 – Honeywell On-Site Visit– February - March ’08 – RFQ’s Received and Reviewed– April ’08 – Honeywell On-Site Review

M ’08 P j t E d d b th C– May ’08 – Project Ended by the Company

• WHY??? – Level of commitment and resources required plus low volumes, approved sources, difficulty in quoting, regulations, and . . . .

Strategic Steps – Aerospace• Develop a Roll-Out Strategy and Action Plan:

– Establish Management Action Team –g– Assign Responsibilities – Decide your market position– Identify potential / most-likely aerospace customers– Prepare a company overview

• Management Team• Capabilities• Financial Strength . . . .Altman Z Score, Current Ratio• Growth Potential• Quality and Customer History / Scorecards• Equipment, Tooling, Etc.

• Establish a Time-Based Action Plan

Strategic Steps – Aerospace• Review the customer’s web site:

– Identify potential products or services that fit your y p p ycapabilities . . .What do they need????

– Complete on-line Supplier Registration application if available

– Conduct web searches for more company-specific data and information

• Initiate contacts, provide the company overview and request a site visit

• Launch internal program to test new processes, learn about materials, gain new skills, etc.

Federal Government – What’s Involved?

• Dedication – time and effort– Allocate resources– Track website information – login / passwords– Solicit questions and understanding– Research, review

• Sign up with your Local PTAC Office:(Procurement Technical Assistance Center)

Utilize PTAC’s experience and knowledge– Utilize PTAC s experience and knowledge– Attend FREE training seminars– Government and State Contracting 101– How to Become a Government Contractor– Counseling– www.ptacsofmichigan.org/


• Gather your business information (Registration Checklists available))

– Duns number, tax ID number– Business start date– Annual revenue– Financial Institution, account and routing numbers– Contact names

• Define your product / service by code:• Define your product / service by code:– NAICS (North American Industry Classification System)– SIC (Standard Industry Classification)– FSC/PSC (Federal Supply Code / Product Service Code)

www.drms.dla.mil/asset/fsclist.html– NSN (National Stock Numbers)


• Explore government contracting websites:– Learn about Government processesp– What information is required – Types of solicitations– Contracting opportunities– Electronic payments

• Responsive & Responsible:R b ’ ki ith th t– Remember – you’re working with the government

– Complete, accurate & timely – I’s dotted, T’s crossed– What’s your outlook on success?– Are you financially capable?– Similar work and performance history

Registrations

• CCR Central Contractor Registration Databasewww ccr govwww.ccr.gov

• TPIN Trading Partner Identification Number

• DUNS Data Universal Numbering Systemwww.dnb.com/duns

• CAGE Commercial and Government Entity• CAGE Commercial and Government EntityIdentifier

• FAR 52 Representations and Certifications(52.213-3)

Registrations

• CAGE - Commercial and Government Entity identifieridentifier

“The Defense Logistics Information Service (DLIS) in Battle Creek, MI is the only authorized source of CAGE Codes. “

• Facility ID Pre-Award Survey Bidder’s Lists

• Government use in various search systems

• Assigned as part of CCR process

Registrations• CAGE - Commercial and Government Entity

identifier

“The Defense Logistics Information Service (DLIS) in Battle Creek, MI is the only authorized source of CAGE Codes. “

• Facility ID Pre-Award Survey Bidder’s Lists• Facility ID Pre-Award Survey Bidder s Lists

• Government use in various search systems

• Assigned as part of CCR process

Registrations

Finding Opportunities

www.FBO.gov

• FedBizOps

• The Mother of All ListingSites

• No password or registrationgrequired for searching

• Includes Navy, Army, Air Force, Homeland Security, other agencies

Where’s The Money?• Federal Spending:

– FY 2006 - $423 BillionFY 2006 $423 Billion– FY 2007 - $457 Billion– FY 2008 – $518 Billion– FY 2009 – Estimated about the same as 2007/2008

• 23% Allotted to Small Businesses

• Set-Aside Goals:• Set-Aside Goals:– Woman Owned – 5%– Service-Disabled Veteran-Owned – 3%– HUBZone – Historically Underutilized Business Zone – 3%– Small Disadvantaged Business Certification – 5%

Example – Michigan HUBZone Map

Be Sure To SEARCH Your Address!

HUBZone

396 HUBZone Companies Registered in Michigan!

Where’s The Money?

• SBA

– ARC Loan Program . . .Effective June 15, 2009:• SBA’s America’s Recovery Capital Loan Program can

provide up to $35,000 in short-term relief.www.sba.gov/recovery/arcloanprogram/index.html

– 7(a) Loan Guaranty Program . . .Loans of up to $2,000,000

– Certified Development Company (CDC), a 504 Loan Program

• Provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization.

Where’s The Money?

• SBA

– Microloan Program:• Loans of up to $35,000 to qualified start-up, newly

established, or growing small business concerns.

• Loans are arranged through nonprofit community based lenders (intermediaries).

– Good Web Sites:• http://usgovinfo.about.com/od/smallbusiness/a/sbaloans.htm • http://usgovinfo.about.com/od/smallbusiness/a/sbaloanlist.htm

Where’s The Money?• Michigan Economic Development (MEDC):

– Michigan Supplier Diversification Program launched 5/20/2009g pp g– Participation with a lending organization required– Provides maximum of $500,000– Applications now being accepted

• Michigan Economic Development (MEDC):– Aid 400 manufacturing firms in navigating the diversification

process $10 000 per compan Match req iredprocess . . . $10,000 per company. Match required.– Assist 100 firms in achieving quality systems certification in

four new markets– Create an online matchmaking database to connect these

Michigan manufacturers to national OEMs– http://www.michiganadvantage.org/Diversification/

• AS9100 – Aerospace & Defense StandardUHY Deliverables

• Process Mapping / Cost Analysis

• DCAA (Defense Contract Audit Agency) Audit Understanding and Preparation.

• FAR (Federal Acquisition Regulations)• FAR (Federal Acquisition Regulations) Accounting Requirements . . .FAR 12 & 15

• ITAR (International Traffic in Arms Regulations) Understanding and Implementation

• AS9100:– Intended for organizations that design, develop, and/or

AS9100 Certification

produce aviation, space and defense products . . and

– By organizations providing post-delivery support, including the provision of maintenance, spare parts, or materials

– Adopted and typically required by nearly every major aerospace prime manufacturer in the world, including

• Boeingg• Lockheed• General Electric• Airbus, Embraer• Bombardier• Northrop

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Preliminary Review

Preliminary Business Review:Market Questionnaire:- Current Market/Industry Status- Capabilities / Strengths / Plans- Financial Capabilities- Business Objectives- Diversification Potential

MeetCriteria?

Pre-Assessment

4-Hour On-Site Assessment:- Team - UHY / TMLytle / Dusek Network / Industrial Visions- Items Reviewed: * Business Strengths / Weaknesses * Management Team Commitment * Core Business Capabilities * Market Diversification Potential * Financial Strength * Long Term Growth Strategies- Output - Preliminary Report with Project Proposal . . . .schedule and fees

YES

ProposalOK?

- Project Management- Market Diversification Strategies- Product Mapping / Cost Analysis- AS9100 Implementation / Certification- FAR 15 and FAR 12 Accounting Elements- Understanding of Risks and Opportunities

i.e., . . . . Enterprise Risk Management . . . . Foreign Corrupt Practices Act- Lean Operations and Planning- DCMA / DCAA Audit Preparation- DFAR – Overview & Understanding- ITAR Awareness and Requirements

TMLytle Group:- Product Review & Readiness

* TRL – Technology Readiness Level * MRL – Manufacturing Readiness Level- Defense Market Development - Defense Introduction / Teaming

Dusek Network: - Engineering Development Process- Lean Engineering & Product Development

JRG Associates, Ltd.:- Aviation OEM Representation & Teaming- Aviation Overhaul & Repair

Brad Barnard – Raytheon:- Marketing/Industry Links and Teaming

Industrial Visions Company:- Market and Marketing Strategy

Development

- Boeing- Honeywell- TARDEC- TACOM

Engagement Launch

Assessment

2-Day On-Site Assessment:- Team - UHY / TMLytle / Dusek Network /

Industrial Visions- Items Assessed:

* Business Strengths / Weaknesses * Management Team Commitment * Core Business Capabilities * Market Diversification Potential * Financial Strength * Long Term Growth Strategies- Output - Diversification Report:

* Project Schedule and Milestones * Responsibilities * Market Potential * Market Strategies and Planning Steps

YES

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ITAR – INTERNATIONAL TRAFFIC IN ARMS REGULATIONS EAR – EXPORT ADMINISTRATION REGULATIONS

PRELIMINARY REVIEW CHECKLIST PRODUCTS / SERVICES YES NO NA1. Have customers communicated ITAR compliance is applicable to the products/services

provided?

2. Has the organization otherwise discovered its products or services require ITAR or EAR compliance? If yes, describe:

3. Has the U.S. Munitions List been reviewed to verify designated/restricted items to identify the applicable products requiring ITAR/EAR control?

4. Has a process been established and implemented for the receipt, identification, classification and tracking of ITAR/EAR controlled products/services?

4a. If question 4 is yes, does the company have the necessary data to correctly classify restricted items?

5. Does the process include labeling/tagging ITAR/EAR controlled items to maintain identification during processing?

6. Does the organization import or export, either permanently or temporarily, classified or unclassified defense articles?

6a. If question 6 is yes, has approval been obtained from the DDTC? 7. Is the pertinent business confined to the production of unclassified technical data only? 7a. If question 7 is yes, are records maintained for each export including a description of the

technical data, name of the recipient end-user, date and time of export and method of transportation?

8. Are any manufacturing or export activities licensed under the Atomic Energy Act of 1954? 9. Does the organization outsource any manufacturing, assembly or testing processes to a

foreign person/organization?

9a. If question 9 is yes, are the appropriate agreements/contracts in place? 10. Are products packaged for shipping identified as an ITAR/EAR controlled product? 11. Is the organization involved or assist in re-export or re-transfer of defense articles or

services?

11a. If question 11 is yes, have licenses or agreements been obtained by the appropriate governmental agency?

12. Does the company have any known plans to merge with or acquire another company, or subsidiary or division of another company? Anticipated Date:

PERSONNEL / SCREENING YES NO NA13. Has the organization established a process for verifying the status of its employees (i.e. U.S.

Citizen or non U.S. Citizen)?

14. Does the organization employ any foreign person(s)? 15. Does the organization maintain documentation to show evidence of employee verification

and status?

15a. If question 15 is yes, have any licenses or agreements been issued by the Government authorizing access?


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16. Has a process been established for screening customers, suppliers, carriers and/or countries to verify Foreign Persons?

16a. If question 16 is yes, does the screening include sources for consulting, removal of scrap materials and visitors in the plant?

16b. If question 16 is yes, does the policy define who will be screen and how often? Frequency:

16c. If question 16 is yes, are the screening results documented (i.e. date, performed by, lists and records screened, etc.)?

17. Does the organization periodically screen customers against the Denied Parties and Prohibited Countries list?

18. Has someone been designated as roles as the Compliance Officer and/or an Empowered Official? List Person & Title Designated:

18a. If question 18 is yes, does the Compliance Officer have direct access to the President/CEO? 18b. If question 18 is yes, is this depicted on the organizational chart? 18c. If question 18 is yes, have backups been established for these roles?

List Backups:

TECHNICAL DATA & RECORD CONTROL YES NO NA19. Has a process been established for the receipt, identification, classification and tracking of

ITAR/EAR controlled technical data (hardcopy & electronic)?

20. Has a process been established for the control, access and security of electronic and hardcopy data?

21. Have access and security controls of electronic and hardcopy data been implemented? 22. Does the organization import or export, either permanently or temporarily, classified or

unclassified technical data?

22a. If question 22 is yes, has approval been obtained from the DDTC? 23. Does the company have a policy for handling outside requests for information regarding

products produced or data retained by the company?

24. Has a process been established and implemented for controlling and maintaining records? 24a. If question 24 is yes, does the records control policy include records relating to political

contributions, commissions and/or fees?

25. Are records maintained in a manner capable of being reproduced on paper exhibiting a high degree of legibility and readability?

26. Are records stored in a manner to prevent alterations from its original recording? 26a. If question 26 is no, does the system include a provision for recording changes made, who

made them and when?

27. Does the company keep all records of its communications regarding ITAR and/or export control to help prove due diligence?

28. Does the system define record retention of 5 years from the expiration of the license or other approval?

COMPLIANCE / TRAINING YES NO NA29. Have duties, responsibilities and authority been identified and documented for key personnel

responsible for the daily operations and compliance oversight?

30. Has a compliance program been developed, documented and implemented? 31. Has the organization established an employee training program to ensure awareness and

understanding of the ITAR/EAR regulations and laws?

31a. If question 31 is yes, have employees received training? 32. Does the program require training to be conducted annually?


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33. Has someone been assigned the responsibility for maintaining the compliance registration and/or licensing? List Person & Title Designated:

INTERNAL AUDITS / MONITORING YES NO NA34. Has an audit program been established and implemented to ensure continued compliance to

ITAR/EAR requirements applicable to the organization?

35. Is the information resulting from audits reviewed with management on at least an annual basis?

36. Is there evidence the organization uses the information to measure the effectiveness of day-to-day operations for ITAR/EAR control?

37. Does the company have a policy for reporting incidents and violations? 38. Does the company have a policy for handling outside requests for information about export

compliance?

APPROVALS / LICENSING YES NO NA39. Has the organization registered with the Directorate of Defense Trade Controls? 39a. If question 39 is yes, is the organization aware re-registration is required annually at least

30 days prior to expiration?

40. Has the organization obtained a license for exporting products/services? 40a. If question 40 is yes, is the organization aware of the expiration of the license (e.g. by

quantity, dollar amount and/or term)?

For More Information . . .For More Information . . .For More Information . . .For More Information . . .Alan Lund, Consulting PrincipalAlan Lund, Consulting Principal

UHY Advisors, Inc.UHY Advisors, Inc.26200 American Drive, Suite 50026200 American Drive, Suite 500

S thfi ld Mi hi 48034S thfi ld Mi hi 48034Southfield, Michigan 48034Southfield, Michigan 48034

alund@[email protected](248) 204(248) 204--94479447

hhwww.uhywww.uhy--us.comus.com

diversification strategies

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