Industry Presentation

1. Industry Presentation A Perspective to Consider 25 Aug 04 Craig Johnston, Mahesh Reddy, Tom McLaulin, Andy Bonnot

2. Agenda • Market Perspective • Best Value Overview • Staffing and Security Clearance Issues • Controversial Points

3. “Changing” Corporate Environments • Focus on Value • A Stock Market Imperative • Why? If you don’t “create” value, you whither & die • The Aerospace Industry “competition” – the whole market! • Value has Multiple elements • Many Traditional Metrics are incomplete (e.g. ROS, EPS, …) • Many Outside an Enterprise control it (e.g. economy, tax-rates, mutual fund mgrs, disruptive technologies, …) • Key Value Drivers • Return on Invested Capital – “Efficiency” • Weighted Average Cost of Capital – “Minimum Expectations” • Growth – “Staying Power” • ROIC must be greater than WACC to create Value Corporations Must Create Value for the Shareholders

4. WACC “Minimum Expectations” Equities Premium vs Bonds 11.0% 76 yr Historical Average 12.3% “Risk Adjusted” Stock 9.1% “Debt Adjusted” Return 7.9% Average Company Aerospace Gets a Break on Risk Pay Your Debtors First – Cash Helps Weighted Average Cost of Capital – WACC“LM Example”

5. Stock Market Responds to Value Value created when Company invests funds better than Financial Competitors

6. Moore’s Law Major Acquisition Process ATF1983 YF-221st Flt1991 F/A-221st Flt 2000 IOC 2005 Micro 2000 Pentium 500 10M 18 Years 1M 25 AMRAAM 1977 - 1991 80386 18 Months 80486 Transistors Mips JSFX-35 1st Flt 2001 F-35 IOC 2008 100K 1.0 80286 8080 10K 0.10 8086 4004 A-121983-1991 0.01 75 80 85 90 95 AFX 1991-1994 JAST 1994-1996 Processing Speed Doubles Every 18 Months Airframe Service Life A-12 IOC F-35 JSF Selection 1982 2001 2008 U-2S 1st Flt U-2A 81 Years XC-130 C-130J 1st Flt 1st Flt B-52A B-52H 1950 1960 1970 1980 1990 2001 2031 National Military Strategy ? Pre-emption 1-4-2-1 SSCs 9/11 2 MRCs Counter-Soviet Expansion 1 – 8 Years The Challenge

7. Theme: Best Value Awards and Contracts • Best Value vs Lowest Cost Affords • A sustainable contract for both Govt & Industry • Provides inherent flexibility to address real and emerging Warfighter capability needs • The right underpinning of SE and disciplined processes • Flexibility in evolution/spiral dev/tech insertion • A healthy company • A practical approach to LCC & TCO • Acknowledges and accommodates political realities • Small/Disadvantaged businesses

8. Best Value Solutions • Requires • Good JCIDS (requirements definition) • Commitment to pay the bill for professional SSEB participation • Good BCA benchmark • Contracting approach (type and incentives) • Provides • Mature risk analysis • Realistic basis for award decision • Appropriate staffing • Security clearances • Professional diversity and depth • Supportability of long term funding • Partnership & Pride • Through the good and the bad

9. Risk Avoidance Lowest Cost Contracts Over Cost Start of a new dev cycle ROI/ROA Realistic Assessment • IPT/OIPT • Opportunities • Issue • AAR • Plans & Schedules Market Position Cultural Needs Preservation IB Profit Sustainment/Follow on Work Group Political necessity Speed--Combat/Threat Necessity Growth Pride in Performance Team Work Partnership Should These be Common Perspectives?

10. IPT/OIPT • Opportunities • Issue • AAR • Plans & Schedules Team Work Where & When Does It Start? What is the Substance? We Understand the Issues--do we make a difference? Partnership Technology isn’t the Challenge---It’s Communications, Understanding & Relationships • Market Survey • ICE/BCA • Pre RFP Prep • Contract Design • Contract Kick Off Meeting • MSD’s • QPR’s • OIPT’s • Daily Operations • Realistic Proposals • Relevant Metrics • Telling it like it is • Honesty & Integrity at all levels • Mutual Respect • Sharing Credit & Blame • Hard Work • Empowerment, Mentoring, Training • Smart & Useable Practices and Processes

11. Staffing / Security Challenges • Staffing ramp up and realism • Core Team • Recruiting • Key personnel • Economy dependent: Commercial vs. Gov’t Business • Aging Work Force • Security Clearance Issues*: • DoD Taking Longer To Review Industry Security Clearance Requests, GAO says - Defense Daily 5/11/04 • ~ 2 million Security clearances issued by DoD as of Sept 30, 2003 (34% held by industry) • Clearance backlog ~ 188,000 • 101,000 backlogged investigations; 61,000 reinvestigations, 25,000 awaiting adjudication • Waiting period for security clearance • Average 90 day has ballooned into 400 to 500 days • “Such delays prevent personnel from beginning or continuing work on classified programs & activities , hinder industrial contractors from hiring most experienced & best qualified personnel, increase the time needed to complete national security-related contracts & increase costs to the Federal Government,” Greg Wilshusen said May 6th in prepared testimony to the House Committee on Government Reform • Workers with security clearance earning 15 to 25 % higher salaries (Washington Times 5/06/04) • Clearance not always accepted across the Government, causing further delays in carrying out contracts

12. Controversial Points • Industry value perspective – shareholder focus • R&D, Maturity of technology • Trappers & Skinners or Partners? • We can give you any answer you want but will you love us tomorrow? • Capture Team Leaders (Trappers) are frequently different folks from the company PM (Skinner): • Different skill set: Business Development vs. Execution focus • Frequently changed at contract award: Hand-off to the Skinner • Government counterparts need to understand what motivates and how to partner with both types • Sometimes they are the same person • Ideal situation is where industry puts both individuals on the capture team – best continuity • Make sure you understand the difference between Business Development/Strategy and Marketing

13. Controversial Points • Political VS Best Value Source Selection • Clearly some Source Selection decisions are political: keep in mind all of the contractors have typically spent a lot of Sales Expense/Bid-and-Proposal $$s on their preparation and submittal – it hurts to loose • SDD programs are a necessary evil • A lot of ‘fun’ but represents to the contractor team the highest risk phase of a product life cycle • The competitions are brutal and inherently introduce high risk propositions to win • This is where we typically put our star PMs, engineers, etc. • FRP is what industry really wants • Product is typically stable and predictable • Highest profit opportunity • Predictable business, jobs • Opportunity for FMS/DCS • Can there ever really be Govt/Industry Partnership? • Should there be more Industry exposure to government PMOs/PEOs – 1 yr assignment of an industry Proj. Mgr on a Gov’t acquisition team? • ‘Up or Out’: How do you succeed as an acquisition professional? • Does that put you on a collision course with your industry counterpart?

14. Back - Up

15. Controversial Points • Industry value perspective – shareholder focus • R&D, Maturity of technology • Trappers & Skinners or Partners? • Political VS Best Value Source Selection • SDD programs are a necessary evil • Can there ever really be Govt/Industry Partnership? • ‘Up or Out’: How do you succeed as an acquisition professional?