Cracking the organizational code for growth Aerospace & Defense growth analysis

Cracking the organizational code for growth Aerospace & Defense growth analysis March 2013

Contents Page 1) Key organizational challenges in the industry 2 2) Growth performance of key players 4 3) How industry players are exploiting organizational levers 13 4) Why participate in Oliver Wyman s study? 17 1

Section 1 Key organizational challenges in the industry 2

Organizing for growth in the Aerospace and defense industries While strategic issues impacting this sector have been analysed at length, designing and implementing the right organization remains a key lever to both enable and achieve sustainable growth Major A&D companies need to overcome the organizational challenges associated with: - Creating the right organizational set-up to prepare the future while delivering short-term results - Achieving the right power and resource distribution between: Regions, business units and the corporate center (to achieve synergies and remain agile) Programmes and functions (for clear lines of command and matrix ways of working) - Developing an efficient footprint to balance global and local needs - Re-inventing their products and conception processes to create and sustain demand - Design for customization to serve multiple customers using the right enabling platforms / catalogues - Migrating from ATA to functions and from make to systems integration - Implementing customer-oriented processes and developing a growth-nurturing culture - Doing more without more - Implementing organization and processes aimed at reducing cost and time to market - Gearing for growth and innovation in a very constrained environment - Increasing efficiency while maintaining a healthy cost base - Implementing new ways of working with customers and suppliers - Working with suppliers and customers in an ever more integrated manner - Keeping and developing critical skills and making efficient use of contractors - Building and executing complex deals involving offset agreements and offshoring of activities Oliver Wyman is currently launching a study to further understand, qualify and quantify the required organizational levers and how they impact the long-term sustainable growth prospects within the aerospace and defense industry The following pages provide a preliminary view of recent growth results within the sector, based on publicly available information, in order to showcase the importance of identifying the organizational levers that propelled star performers growth trajectories 3

Section 2 Growth performance of the key players 4

Top sector players The industry is highly concentrated 2011 market influence of the top ten players Top ten global players in the Aerospace and Defense industry (2011 B$) 68.7 68.4 58.2 42% 32.7 46.5 58% 28.5 26.4 24.9 24.1 Annual average growth in the market 5.7% (2006-2011) 18.1 Source : Bloomberg, Oliver Wyman proprietary analysis Note: Categorization by revenue is relative to the overall A&D top 100 sample 5

Revenue Growth (CAGR 2009-2011) What was the impact of the 2008 economic crisis on the industry? While 85% managed double-digit growth pre-crisis, only 34% achieved this following the worst effects of the recession 30% Catching-up 7% of companies 25% Accelerating Growth TransDigm Group Incorporated Decelerating Growth Superstars 27% of companies 20% GKN Aerospace Korea Aerospace Industries, Ltd. FLIR Systems Cubic Corporation Nabtesco Corp Israel Aerospace Industries Ltd. Avio Spirit AeroSystems 15% Zodiac Aerospace BBA Aviation Rheinmetall AG Meggitt PLC BE Aerospace, Inc. AAR CORP. Moog Inc. Singapore Technologies Engineering Esterline Technologies Corporation Parker Hannifin Aerospace Orbital Sciences Corporation 10% -10% 0% 10% Teledyne Technologies Incorporated 20% 30% 40% 50% European Aeronautic Defence and Space Company. Xi'an Aircraft Industry (Group) Company Ltd. MTU Aero Engines Holding AG Curtiss-Wright Corporation Saab AB United Technologies Corporation Loral Space & Communications Inc. Rolls-Royce Holdings plc Safran 5% Embraer S.A. Textron Inc. Rockwell Collins, Inc. Lockheed Martin Corporation Alliant Techsystems Inc. Anemic 8% of companies Delta Tucker Holdings / DynCorp International 0 Raytheon Company Exelis Bombardier Aerospace General Dynamics Corporation Cobham plc The Boeing Company Thales 0% -5% L-3 Communications Holdings, Inc. Dassault Aviation Finmeccanica SpA BAE Systems plc Elbit Systems Ltd. Stalling 58% of companies Source : Bloomberg, Oliver Wyman proprietary analysis -10% Revenue Growth (CAGR 2005-2007) Note: Origins of each axis set to 10% to differentiate double-digit growth 6

Revenue CAGR Aerospace & Defense: Revenue CAGR Rank While the shape of the curve remains the same, the curve has shifted down by close to 10% - revenue growth post recession has slowed 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 2005-2007 2009-2011 0% -10% 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51-20% -30% -40% -50% -60% -70% Source : Bloomberg, Oliver Wyman proprietary analysis Company Rank 7

EBITDA CAGR (2009-2011) Should growth or efficiency be pursued? With an average revenue growth of 7 % and EBITDA growth of 9%, strategies were to protect EBITDA, sometimes at the detriment of revenue 80% 70% Efficiency play Rheinmetall AG 10% of companies Highly profitable growth 60% European Aeronautic Defence and Space Company EADS N.V. 33% of companies 50% Thales The Boeing Company Parker Hannifin Aerospace BE Aerospace, Inc. 20% Teledyne Technologies Incorporated Moog Inc. Israel Aerospace Industries Ltd. Cubic Corporation Embraer S.A. Esterline Technologies Corporation Safran United Technologies Corporation Singapore Technologies Engineering Curtiss-Wright Corporation BBA Aviation Northrop Grumman Corporation 10% Cobham plc MTU Aero Engines Holding AG Meggitt PLC Alliant Techsystems Inc. Spirit AeroSystems Rolls-Royce Holdings plc AAR CORP. General Dynamics Corporation L-3 Communications Holdings, Inc. Textron Inc. FLIR Systems BAE Systems plc Rockwell Collins, Inc. Lockheed Martin Corporation Bombardier Aerospace Dassault Aviation Exelis 40% 30% -10% Elbit Systems Ltd. Saab AB Avio Korea Aerospace Industries, Ltd. NABTESCO CORPORATION Orbital Sciences Corporation Xi'an Aircraft Industry (Group) Company Ltd. Zodiac Aerospace GKN Aerospace TransDigm Group Incorporated Chemring Group PLC 0% -20% -15% -10% -5% Raytheon Company 0% 5% 10% 15% 20% 25% 30% Falling behind 43% of companies Less or unprofitable growth 14% of companies Source : Bloomberg, Oliver Wyman proprietary analysis -20% Revenue Growth (CAGR 2009-2011) 8

Market Cap CAGR (20009-2011) Aerospace & Defense: Market Capitalization Companies experiencing highly profitable growth clearly outperformed the market cap growth of their competitors 40.0% 30.1% 20.0% 0.0% 1.3% Falling behind Less or unprofitable growth Highly profitable growth Efficiency play -1.8% -5.0% -20.0% Source : Bloomberg, Oliver Wyman proprietary analysis 9

EBITDA Margin (2009-2011) Does company size impact growth? Smaller companies tend to display higher variability in EBITDA 50% TransDigm Group Incorporated 45% 40% 35% Meggitt PLC 30% FLIR Systems 25% Chemring Group PLC 20% BE Aerospace, Inc. Cobham plc Rockwell Collins, Inc. 15% 10% Esterline Technologies Corporation Triumph Group, Inc. Zodiac Aerospace Dassault Aviation United Technologies Corporation Avio MTU Aero Engines Holding AG ITT Corporation Curtiss-Wright Corporation Rolls-Royce Holdings plc Moog Inc. Exelis General Dynamics Corporation Alliant Techsystems Inc. BBA Aviation Saab AB Parker Hannifin Aerospace Safran Raytheon Company Singapore Technologies Engineering Teledyne Technologies Incorporated L-3 Communications Holdings, Inc. BAE Systems plc Lockheed Martin Corporation Korea Aerospace Industries, Ltd. AAR CORP. Northrop Grumman Corporation Nabtesco Corp Cubic Corporation Spirit AeroSystems GKN Aerospace Textron Inc. Loral Space & Communications Inc. Elbit Systems Ltd. Rheinmetall AG Bombardier Aerospace The Boeing Company Orbital Sciences Corporation Embraer S.A. Finmeccanica SpA 5% Israel Aerospace Industries Ltd. Xi'an Aircraft Industry (Group) Company Ltd. Delta Tucker Holdings / DynCorp International Aerospace Communications Holdings Co., Ltd. Thales European Aeronautic Defence and Space Company EADS N.V. 0% 500 5000 50000 Source : Bloomberg, Oliver Wyman proprietary analysis Average Revenue (2009-2011) 10

Sales Revenue CAGR (2009-2011) Aerospace & Defense: Revenue CAGR vs. Average Revenue Smaller companies show agility and ability to grow at a higher rate, yet the main players still display consistent growth rates, even though lower. Midsize players appear to be in a danger zone. 30% TransDigm Group Incorporated 25% Chemring Group PLC 20% GKN Aerospace Korea Aerospace Industries, Ltd. FLIR Systems 15% Cubic Corporation AAR CORP. Nabtesco Corp Meggitt PLC BE Aerospace, Inc. Moog Inc. BBA Aviation Rheinmetall AG Zodiac Aerospace Singapore Technologies Engineering Esterline Technologies Corporation 10% 5% Orbital Sciences Corporation Israel Aerospace Industries Ltd. Avio Teledyne Technologies Incorporated Spirit AeroSystems Xi'an Aircraft Industry (Group) Company Ltd. Curtiss-Wright Corporation MTU Aero Engines Holding AG Loral Space & Communications Inc. Saab AB Embraer S.A. Rockwell Collins, Inc. Alliant Techsystems Inc. Parker Hannifin Aerospace Rolls-Royce Holdings plc Textron Inc. Safran European Aeronautic Defence and Space Company EADS N.V. United Technologies Corporation Lockheed Martin Corporation 0% Cobham plc Delta Tucker Holdings / DynCorp International Elbit Systems Ltd. General Dynamics Corporation Raytheon Company L-3 Communications Holdings, Inc. Dassault Aviation 500 5000 Exelis Finmeccanica SpA 50000 Thales The Boeing Company -5% Bombardier Aerospace BAE Systems plc -10% Northrop Grumman Corporation -15% Source : Bloomberg, Oliver Wyman proprietary analysis Average Revenue (2009-2011) 11

EBITDA Margin (2009-2011) EBITDA vs. Sales Revenue There is a consistent grouping in the area of 12 to 15% EBITDA margin, however, growth above 12% (twice the industry growth) tends to generate oversized returns 50% TransDigm Group Incorporated 45% 40% 35% Meggitt PLC 30% FLIR Systems 25% Chemring Group PLC 20% Cobham plc Rockwell Collins, Inc. BE Aerospace, Inc. Northrop Grumman Corporation Dassault Aviation United Technologies Corporation Esterline Technologies Corporation Teledyne Technologies Incorporated General Dynamics Corporation Avio Zodiac Aerospace MTU Aero Engines Holding AG Exelis Alliant Techsystems Inc. Curtiss-Wright Corporation 15% Raytheon Company Parker Hannifin Aerospace Moog Inc. BBA Aviation L-3 Communications Holdings, Inc. Rolls-Royce Holdings plc BAE Systems plc Nabtesco Corp SAFRAN Singapore Technologies Engineering Lockheed Martin Corporation Saab AB Spirit AeroSystems Korea Aerospace Industries, Ltd. Elbit Systems Ltd. AAR CORP. GKN Aerospace Bombardier Aerospace Cubic Corporation 10% Textron Inc. Loral Space & Communications Inc. Finmeccanica SpA Embraer S.A. Orbital Sciences Corporation Rheinmetall AG The Boeing Company Israel Aerospace Industries Ltd. Thales European Aeronautic Defence and Space Company EADS N.V. Xi'an Aircraft Industry (Group) Company Ltd. 5% Delta Tucker Holdings / DynCorp International 0 0 0% 0.00% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% Sales Revenue CAGR (2009-2011) Source : Bloomberg, Oliver Wyman proprietary analysis 12

Section 3 How industry players are exploiting organizational levers 13

BAE Systems KEY ORGANIZATIONAL ATTRIBUTES (con t) COMPANY AT A GLANCE Sales 2011: $28.5 Billion 93,500 employees Presence in more than 100 countries Second largest global defense supplier KEY ORGANIZATIONAL ATTRIBUTES PURPOSE / VISION To be the premier global defense, aerospace and security company To deliver sustainable growth in shareholder value through commitment to Total Performance STRATEGY Support customers in safeguarding their vital interests Drive shareholder value by improving financial performance and competitive positions across the business Sustain a leadership position in the electronic warfare market Increase productivity and efficiency Improve profit and cash generation Increase international business ACQUISITONS Acquisition to sustain the group s position - especially for its Cyber and Intelligence division: 2011: L-1 Identity Solutions, Inc. s Intelligence Services Group 2011: Norkom Group plc 2011: ETI A/S 2011: Stratsec.net Pty Limited ORGANIZATION The business is reported through five principal reporting segments Electronic Systems Cyber & Intelligence 3 Platforms & Services: US UK and International Executive Committee and other direct reports to the Chief Executive TALENT Center for Performance Excellence dedicated to the development and transfer of best practices Jobs campaign through radio and social media to detect and support the talent pipeline in the US CEO is homegrown was the former COO INNOVATION 2011: 1,807 M$ spent on R&D (7% of Revenue) BAE Systems investment in innovation (I3) is a multi-million dollar program to develop technologies Partnership with academia as well as small and medium size businesses CULTURE AND VALUES Trusted Innovative Bold (challenge and initiative) Customer Focus, Financial Performance, Program Execution and Responsible Behavior Diversity ( 25% of BAE Board are women) TRANSFORMATION In October 2011, the Group announced changes to its external reporting segments to improve performance visibility Source : Public information, annual report 14

THE BOEING COMPANY COMPANY AT A GLANCE Sales 2011: $68.7 Billion 175,000 employees Activities in more than 70 countries KEY ORGANIZATIONAL ATTRIBUTES PURPOSE / VISION People working together as a global enterprise for aerospace leadership STRATEGY Boeing Commercial Airplanes: Maximizing growth while improving efficiency To profitably increase production rates to deliver our 3,771-airplane backlog Expanding and diversifying manufacturing and engineering base to continue to grow services business Boeing Defense, Space & Security: Reducing infrastructure and other costs, and further increase productivity to enable continued investment in innovation, Extending and grow core business by bringing capability and affordability to customers and capture additional international business KEY ORGANIZATIONAL ATTRIBUTES (con t) ORGANIZATION Two business units: Boeing Commercial Airplanes and Boeing Defense, Space & Security Three shared units : Boeing Capital Corporation (financing solutions) Shared Services Group (for global worldwide services) Boeing Engineering, Operations & Technology (innovation) ACQUISITONS Many acquisitions to enhance Boeing capabilities in strategic areas such as cyber and space technologies and special operations TALENT Disciplined approach to leadership development, guided by leaders at every level of the company Develop people with $150 million in internal learning programs annually 95% of today's senior leaders were promoted from within the company CEO joined in 2005 ( previously CEO of 3M ) INNOVATION AND R&D Boeing is a leading innovator in the aviation industry R&D: more than 4 B$ expensed in 2011 CULTURE AND VALUES Leadership, Integrity, Quality, Diversity, Customer satisfaction, Corporate citizenship and People Involvement Source : Public information, annual report 15

AIRBUS COMPANY AT A GLANCE Sales 2011: $33.1 billion 59,000 people worldwide Subsidiaries in the United States, Japan, China and India 16 sites in Europe KEY POINTS OF THE TRANSFORMATION ORGANIZATION An organization based around specific airframes with plants empowered and accountable for delivery Organizational emphasis on: teamwork, faster decision-making and execution, simpler ways of working and a focus on deliverables All engineering teams was regrouped under one single leadership. Creation of a procurement operations function to strengthen supplier management PURPOSE / VISION Creating the best and safest aircraft STRATEGY To take the company s business excellence to a higher level Reinforce customer focus, innovation and quality To strengthen supplier management To encourage an environment based on teamwork ACQUISITION 2011 : Satair, a leading distributor of aviation parts INNOVATION More than 90 per cent of Airbus research and technology initiatives are for the benefit of the environment Airbus Fly Your Ideas challenges students around the globe to develop new ideas for the eco-efficient aviation industry of the future TALENT Competency mapping to develop a complete profile for managers Employees are given many opportunities to progress through specialist training, regular reviews and tailored career paths Each year, approximately 190,000 person days are spent on activities aimed at maximizing skills and knowledge CULTURE The Airbusway sets guiding principles to develop teamwork, talent and career, drive improvement and innovation, in an effort to deliver customer value Diversity, safety, quality and performance TRANSFORMATION New organization aims to boost Airbus overall performance, making the company more agile Lines of command have been shortened Significant emphasis on the empowerment of multifunctional teams Integration of the quality function at plant level Source : Public information, annual report 16

Section 4 Why participate in Oliver Wyman s study? 17

Why participate in Oliver Wyman s study? To understand the organizational drivers behind the variations in growth results - looking beyond the typical strategic contributors Reasons for participating The most comprehensive study in the sector on the subject High caliber of global corporations participating within your industry Privileged access to insights on the key trends to face industry challenges Customized report highlighting how your company s measures against best practices Flexible approach to optimize your involvement (a short interview or online questionnaire) Complimentary participation For more info, or to register for participation, please contact us at OT@Oliverwyman.com Cracking the Organizational Code for Growth: Feedback Report - Company X 1. Key Industry Trends A comprehensive view of key trends and their impact on the industry Perspectives on how these trends have had an impact on growth within the industry Conclusions as to what has contributed to the success of the Superstars and those companies achieving highly profitable growth 2. Customized analysis: how Company X measures up against the industry A detailed comparison of Company X against each of the identified organizational levers and best practices Comparison to peers with respect to the application of the levers and best practices and the resulting growth success 3. Key highlights and best practices A summary perspective of Company X relative to the industry and our best practices analysis 4. Backup Flat report with answers from Company X 18

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