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Aerospace & Defense

Random Industry Thoughts

(Not a forecast or a formal perspective)

KPMG Aerospace and Defense

#KPMGAerospace

October 18, 2019

1© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Jim Adams

Partner at KPMG, National Leader for Aerospace and Defense

Been consulting in Aerospace & Defense for ~15 years

Spent 10 years at Hughes / Boeing as an Engineer, Program Manager

Some would call me over-educated – UC Berkeley, UCLA, and UCLA

On a personal note… live in California, attempting to raise my two

boys to be aerospace geeks, coach little league baseball

Hopefully you will enjoy today’s presentation and find it informative,

interesting, and not too much of a random walk



Disruption within A&D

Industry 4.0

Softening industry lines

Tech companies and DoD

Macro level trends

Battle for Value

Geo-Political Environment

Disruption

Vertical integration

Lifecycle value

Supply base consolidation

Control customer value

Pursuing scale

Uncertainty

Tariffs and trade wars

Tax Policy / Incentives

China

Localizing foreign markets



900

0

400

500

700

600

800

300

100

200

9753 93 210555 0779

$M

57 59 61 63 65 67 69 71 73 77 8175 85 87 8983 95 99 01 03 0991 13 15 17 231911

Vietnam War Gulf War OEF / OIF

DoD (051) Budget Authority (Constant FY19 Dollars), 1953-2023 ($B)

Note(s): (a) Base and OCO values from FY2019 President’s Budget Request. Values are adjusted to current FY2019 dollars

Source(s): (1) 2019 DoD Comptroller Data (Green Book)

DoD Historical Budget FY20 Budget Request Aggregate

Historic U.S. defense acquisition budget



700

500

200

0

600

100

900

300

400

800

$M

0753 55 8157 7359 1961 63 918365 67 69 0971 75 8777 79 8985 0393 95 2197 99 05 11 13 15 231701





History through lens of party in the White House



400

700

200

600

500

800

900

0

100

300

53 69 9555 231793 0777

$M

57 59 61 837365 67 71 75 79 81 85 89 91 97 99 01 211305 11 15 1963 0987 03

+43% -31% +53% -33%

+91%

-24%

+13%






Acquisition is a highly cyclical low growth market




DoD (051) Budget Authority; RDT&E and Procurement (Constant FY19 Dollars), 1953-2023 ($B)



‘Investment’ accounts matter for contractors

700

0

400

800

900

600

100

200

500

300

1975 096353 59 65 8367 69 73 77 0771 8781 85 8961 91 97 99 05 1157 15 17 21 23037955 0195

$M

93 13

ProcurementRDT&E Forecasted Aggregate




DoD (051) Budget Authority; RDT&E and Procurement (Constant FY19 Dollars), 1953-2023 ($B)



‘Investment’ accounts tend to get hit harder

800

0

600

700

300

200

500

900

100

400

059559 79 01

$M

53 55 136957 61 63 65 67 8171 9373 75 77 1983 8785 1191 97 99 0389 09 15 17 21 2307

RDT&E Procurement Forecasted Aggregate

144%136%

148%45% 50%

38%33%



0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

79 07636159 71 0565 1367 1569 8373 0975 0377 81 85 2387 89 9591 93 97 99 1901 11 17 21

Forecasted Deliveries Other BoeingAirbus

Last ~60 years of commercial aircraft deliveries

Note(s): (a) Other includes Embraer, Bombardier, ATR, and limited Russian aircraft; excludes China

Source(s): (1) Boeing, Airbus, Embraer, Bombardier, and ATR corporate websites, Speednews Commercial Delivery data

Global Commercial Aircraft Deliveries, 1958-2024



0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

79 07636159 71 0565 1367 1569 8373 0975 0377 81 85 2387 89 9591 93 97 99 1901 11 17 21


Last ~60 years of commercial aircraft deliveries






0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

63 8759 61 7365 67 69 71 75 9777 79 170581 8983 85 2191 1193 0195 99 03 07 09 13 15 19 23


Historically, fairly consistent peak-trough cycles




-19%-25%

-48%

-19%



15 years6 years 5 years 8 years 5 years

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

59 61 63 7165 73 0367 75 77 79 998981 83 8569 9787 91 1793 95 1101 05 07 09 13 15 19 2321

Forecasted Deliveries BoeingAirbusOther

Current growth period at ~15 years






0

400

200

1,000

800

600

2173 1179 178159

$M

95938961 63 1565 0967 9169 71 75 77 83 85 87 0597 1999 01 03 07 13 23

DoD (051) Budget Authority (Constant FY19 Dollars), 1953-2023 ($b)

Few periods of aligned trajectory

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

67 97

#

1959 61 6963 65 7571 0177 79 178173 85 87 1589 91 93 95 99 03 05 07 09 11 13 21 2383




Other Airbus BoeingForecasted Deliveries



A&D market overview – four segments

Commercial Aerospace

▪ Commercial Transport

▪ Regionals

▪ Business & General Aviation

▪ Civil Helicopters

▪ MRO

Government Services

▪ Cyber

▪ IT Operations & Sustainment

▪ Training

▪ MRO

Defense

▪ Military Aircraft and UAVs

▪ Surface and Underwater

▪ Ground Vehicles

▪ Missiles

▪ C4ISR / Defense Electronics

Space

▪ Launch Vehicles

▪ Satellites

▪ Satellite Services

US A&DMarket

$865B

Projected Growth4%+



Commercial aerospace market outlook

Commercial Transport

▪ Future of the duopoly

▪ Growth in single aisle… and the

challenges

▪ MRO growth, but remains competitive

▪ Cyclicality – Have we moved beyond?

▪ Can the supply chain keep up?

Growth

56%

Replacement

44%

Retained fleet

2027 20372017

Middle East

Europe

Asia Pacific

13%

40%

21%

5%

20%

N. America

ROW

Commercial Aircraft Deliveries



Commercial aerospace market outlook

Commercial Transport

▪ Duopoly secured (for now)

▪ Growth in single aisle

▪ MRO growth, but remains competitive

▪ Cyclicality – Have we moved beyond?

▪ Can the supply chain keep up?

Business and General Aviation

▪ Signs of life in business / GA, no clear

uplift yet, used inventories stabilizing

▪ Business Aircraft sales ($24.7B, 2019)

expected to reach $36.4B in 2030

▪ Slow growth in civil rotorcraft

0

200

400

600

800

1,000

1,200

20152000 2005 2010 2020

Business Jet Deliveries



Government services market outlook

▪ IDIQs

▪ Differing strategies

▪ Affordability matters

▪ Heightened pace of M&A

U.S. Government IT Services M&A Annual

Transactions by Volume 2016-2018



Defense market outlook

▪ US defense budget up ($165B in FY18

and FY19)

▪ Focus on readiness and modernization

▪ Globally defense spending is up

▪ International competition

▪ Localization pressure

▪ Election year uncertainty

0

300

100

200

500

400

600

700

800

900

2019

$B

2005 2010 2015 2023

DoD Historical Budget

FY20 Budget Request Aggregate

DoD (051) Budget Authority

(Constant FY19 Dollars), ($B)



Space market outlook

▪ Contested space

▪ Government space up after a few years

of drought

▪ Small satellites here to stay

▪ Commercial EO capability and analytics

▪ World-wide capacity growth

▪ Launch remains dynamic

▪ Additive manufacturing is an enabler

▪ Space Force

2010 2012 20182014 2016 20222020

Satellite Services

Satellite Manufacturing

Launch Industry Forecast

Ground Equipment

Global Space Industry Revenues



The satellite industry is being reshaped

Tailored Earth Observation• Rapidly evolving and adaptive ecosystems of

spacecraft and analytics• On-demand models with capabilities based on

specific customer segments (e.g., mining)

Recapitalization• Recapitalize existing fleet using new tech• New tech enables pursuit of new segments

Application Layer• Variety of apps to capitalize on or manage data

derived from the space segment• Includes optimization applications to employ

space assets more effectively

Mega-Constellations• New entrants planning to launch large

numbers of small sats• Universal, low-cost point-to-point coverage

Satellite Market Trends

Mobile Device Adoption• Mobile traffic• Primary growth driver in developing economies• 2014 mobile data > 30x all 2007 internet traffic

Internet of Things• Device connectivity• Growth in autonomous vehicle technologies

will create a boom of demand• Satellites needed for non-urban coverage

Shift in Video Viewing Habits• Viewing moving from broadcast to IPTV

• Ultra-HD increases capacity requirements

Adaptable Satellites• Software definition enables flexibility• Modular hardware may enable additional

adaptability• Result is fewer spacecraft needed



0

400

200

1,000

800

600

2173 1179 178159

$M

95938961 63 1565 0967 9169 71 75 77 83 85 87 0597 1999 01 03 07 13 23


Few periods of aligned trajectory…

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

67 97

#

1959 61 6963 65 7571 0177 79 178173 85 87 1589 91 93 95 99 03 05 07 09 11 13 21 2383







0

400

200

1,000

800

600

2173 1179 178159

$M

95938961 63 1565 0967 9169 71 75 77 83 85 87 0597 1999 01 03 07 13 23


… inflection points drive the industry to evolve

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

67 97

#

1959 61 6963 65 7571 0177 79 178173 85 87 1589 91 93 95 99 03 05 07 09 11 13 21 2383







~40 year history of the FYDP Projections

300

350

400

450

500

550

600

650

700

750

800

850

0781 1982 85 108483 88 1186 908987 120191 1692 93 0294 95 96 97 98 99 00 0603 211304 1505 08 09 14 17 18 20

DoD Budget History vs. FYDP ProjectionsDoD 051 Budget Authority Topline / Long-Range Forecast in Constant $FY17 Billion

Bush TrumpReagan Clinton Bush Obama

Current Budget

Request Period

FYDP Actual DoD budget



One thing that remains certain, is uncertainty

300

350

400

450

500

550

600

650

700

750

800

850

82 0488 9881 1683 8784 85 86 89 90 09029691 0392 93 94 95 97 99 1500 0801 1105 06 1307 10 12 14 2117 2018 19

DoD Budget History vs. FYDP ProjectionsDoD 051 Budget Authority Topline / Long-Range Forecast in Constant $FY17 Billion

Bush TrumpReagan Clinton Bush Obama

Current Budget

Request Period

FYDP Actual DoD budget

FYDP is especially inaccurate

during inflection periods



Quiz…

What do all of these late-1980s carrier aircraft have in common?

A-7E Corsair II

Vought Aircraft

F-14A Tomcat

Grumman

A-6E Intruder

Grumman

T-2C Buckeye

North American Aviation

C-2A Greyhound

Grumman

EA-6B Prowler

Grumman

E-2C Hawkeye *

Grumman

S-3A Viking

Lockheed

http://en.wikipedia.org/wiki/File:T-2C_Buckeye_Pax_River.jpg

http://en.wikipedia.org/wiki/File:C-2A_DN-SC-89-09037.JPEG

http://en.wikipedia.org/wiki/File:Usnavy.ea6b.prowler.750pix.jpg

http://en.wikipedia.org/wiki/File:E-2C_Hawkeye_Bear_Aces.jpg

http://en.wikipedia.org/wiki/File:Viking_S-3B.jpg



During the 1986-97 budget downturn, contractors

removed significant production capacity

The factory that built them no longer exists* Production moved to St.

Augustine, Florida

A-7E Corsair II

Vought Aircraft

F-14A Tomcat

Grumman

A-6E Intruder

Grumman

T-2C Buckeye

North American Aviation

C-2A Greyhound

Grumman

EA-6B Prowler

Grumman

E-2C Hawkeye *

Grumman

S-3A Viking

Lockheed

Grand Prairie, Texas Calverton, New YorkCalverton, New YorkColumbus, Ohio

Calverton, New York Calverton, New York Calverton, New York Burbank, California

What do all of these late-1980s carrier aircraft have in common?

http://en.wikipedia.org/wiki/File:T-2C_Buckeye_Pax_River.jpg

http://en.wikipedia.org/wiki/File:C-2A_DN-SC-89-09037.JPEG

http://en.wikipedia.org/wiki/File:Usnavy.ea6b.prowler.750pix.jpg

http://en.wikipedia.org/wiki/File:E-2C_Hawkeye_Bear_Aces.jpg

http://en.wikipedia.org/wiki/File:Viking_S-3B.jpg



We’ve seen similar actions in the most recent

downturn

▪ […] closed 4 sites, reduced headcount (4,000+), divested services business

▪ […] announced consolidation of 4M+ sqft and executive reductions

▪ At least 4 companies did major re-organizations / consolidated units

▪ Many companies “re-aligned” portfolios with divestitures

▪ […] closed legacy plant and re-opened modern facility

▪ […] shifted work to Eastern Europe, Mexico, and other activities to Malaysia

▪ Total headcount reduction of about 20%

▪ Many stood up HQ’s, operations, design centers, etc. here in Florida

ALL PUBLICALLY RELEASED EXAMPLES



Inflection points drive industry evolution

Example of Deal Themes

Adding Scale

Diversification / Access to New

Technology

PE Portfolio Activity

Vertical / Horizontal Integration

Consolidation of Capabilities /

Suppliers

A&D Transaction Trends (Number)

94112

144

184 197

254

296 295

347

11156

65

6566

104

102134

114

2011

2013

2017

2012

2014

2015

2016

263

2018

TT

M2Q

’19

205

168

209

461

249

358

398

429



View varies depending on place in supply chain

▪ (Generally) stable output /

deliveries

▪ Still takes heroics to meet

schedule

▪ Rate changes planned

▪ Manage back-log and skyline

▪ Re-capture value, pursue

affordability

Prime / OEM View




▪ Increasing supplier power

▪ Both “A” and “D”, OEM and

aftermarket

▪ Preserving value

▪ Noisier demand

▪ Benefits and challenges of

growth

Major Tier “0.5” / Tier 1




▪ Noisy signals

▪ Lacks supply chain visibility

▪ Capital intensity

▪ Many single point failures

Lower Tiers



0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

7959 017161 65 7367 1769 75 77 81 83 85 0987 89 91 93 95 97 99 03 05 11 13 15 19 21 230763

-25%-19%

-48%

-19%

BoeingOtherForecasted Deliveries Airbus

Natural business cycle?






0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

7767 8359 61 63 1165 69 73 0571 75 79 1981 85 9187 89 93 95 97 99 01 171507 0903 21 2313

-25%-19%

-48%

-19%

BoeingOtherForecasted Deliveries Airbus

Black swan event?



‘73 Oil

Crisis




0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

59 231913036563 0567 978169 71 73 75 77 79 83 87 89 150191 93 95 99 07 09 11 17 2161 85

-25%-19%

-48%

-19%

Other BoeingAirbusForecasted Deliveries

Black swan event?



‘73 Oil

Crisis

‘79 Oil

Crisis




0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

6359 7365 67 8771 75 77 79 81 1583 85 9589 1991 93 97 99 01 0503 07 11 13 17 21096961 23

-25%-19%

-48%

-19%

AirbusOther BoeingForecasted Deliveries

Black swan event?




‘73 Oil

Crisis

‘79 Oil

Crisis

’90 Kuwait

Invasion



0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

69 116559 61 63 67 0771 8373 0575 1577 79 81 85 13039987 89 91 95 97 01 09 17 19 21 2393

-25%-19%

-48%

-19%


Black swan event?




‘73 Oil

Crisis

‘79 Oil

Crisis

’90 Kuwait

Invasion

’01

GWOT



Closing thoughts… what to consider?

Black Swans or natural business cycle? industries evolve at inflection points

‒ Strategy adjustments

‒ M&A / consolidation

‒ Technology

Talent pool – is the cliff finally upon us?

‒ Both commercial and defense up markets

‒ More boomers in A&D then most (if not all) major industries

‒ Economics: market (401k), individual stocks in A&D, housing

Competitive environment – affordability still matters

‒ Competition is fierce

‒ Scale and supplier power

Given all this… how to meet market demands in a smart way?

‒ Wise investments vs wringing out capacity / flexible capacity

‒ Leveraging commercial technology, where appropriate

‒ Cost take-out to fund the future



Investment opportunities…

infrastructure, academics, etc.Artificial Intelligence / Big Data & AnalyticsDevelopment of computing systems, adaptive analytics

Connectivity / 5G / RF & ElectronicsConnected platforms, sensors, and other capabilities enabled by

very high bandwidth

Urban Air Mobility & VTOLLightweight, hybrid / electric VTOL systems

Cyber Resiliency & AssuranceIncreasingly challenging environment to secure networks,

information, enterprises, and physical platforms

Autonomy & RoboticsGrowth & penetration of autonomous systems, robotics, and

platforms into ground, sea, air, cyber, and space

Directed Energy & LasersTechnologies including laser, microwave, particle beams for use to

target flying objects, optical devices, communications, & energy

transmission

Quantum ComputingQuantum-mechanical phenomena to perform nearly instantaneous

simultaneous computations

Hypersonic & Advanced PropulsionDevelopment of aerodynamics and propulsion technology

Electrification, Hybrid & Hydrogen PowerShift towards electric vehicles, battery-electric, hybrid-electric, and

hydrogen fuel cell technologies for e-propulsion

Advanced Materials & StructuresVery light / strong, reliable materials (e.g., advanced metal alloys,

nanotechnologies, ceramics, composites) and the underlying

processes for manufacturing, and test

Additive ManufacturingTechnologies to build 3D objects by adding layers of materials to make

parts, integrated components with advanced metallurgies and designs

Industry 4.0 & Digitalization of ManufacturingDigital technologies to create a step change in factory performance /

productivity improvement and supply chain management systems

Human / Machine Interfaces & CollaborationContinued evolution of HMI to provide seamless handoff between

humans and machines to improve collaboration and greatly enhance

strength, endurance, intelligence, dexterity

Augmented RealitySolutions to provide real-time visual, data-driven enhancements, to

improve skills transfer, knowledge retention, and training aides

New Space. LEO, Reusable Launch, In-Orbit ServiceShift in capabilities beyond traditional players and approaches to

leverage new launch, technologies, in-orbit capabilities

Thank youJim Adams

Partner, A&D Strategy

Los Angeles

[email protected]

310-766-3601

mailto:[email protected]

Thank you

The information contained herein is of a general nature

and is not intended to address the circumstances of

any particular individual or entity. Although we

endeavor to provide accurate and timely information,

there can be no guarantee that such information is

accurate as of the date it is received or that it will

continue to be accurate in the future. No one should

act upon such information without appropriate

professional advice after a thorough examination of

the particular situation. Service offerings are subject to

legal and regulatory restrictions. Some of the services

included herein may not be available to KPMG's

financial statement audit or other attest service clients.

© 2018 KPMG LLP, a Delaware limited liability partnership and

the U.S. member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are

registered trademarks or trademarks of KPMG International.



UPDATE

Defense & Security Priority Description

Technolo

gy

Cybersecurity• Spans mission segments

• Includes enterprise / critical infrastructure, platform-integrated, and offensive

Autonomy• Capitalizes on machine learning and cognitive computing

• Unmanned systems, robotics, and mission integration (e.g., targeting)

EMS1 dominance• Countering near-peer capability advancements in EW and anti-access radar

• Convergence of comms, EW, SIGINT, radar

Effectiveness Personnel training &

simulation

• Enable readiness of force

• Use of real and virtual solutions and services

Platform sustainment &

modernization

• All solutions and services used to enable platform readiness

• Solutions supporting MRO, logistics, upgrade / conversion

Mis

sio

n-

specific

Air & missile defense• Integrated air-and-missile defense systems

• Includes both kill system (e.g., interceptor, directed energy) and C2 / targeting

Border security /

infrastructure protection

• Sensors and systems to detect, track, and prevent uncontrolled access

• Typically non-defense buyers (e.g., DHS)

Doctr

inal Nuclear modernization

• Upgrade of US nuclear triad (e.g., Columbia, B-21, GBSD)

• Includes weapons systems, delivery vehicles, platforms, and associated C2

Force projection / lethality• Naval and air platforms and systems needed for expeditionary purposes

• Aircraft carriers, F-35, refueling, ISR, advanced munitions

1

2

3

4

5

6

7

8

9

1) Electro-magnetic spectrum



….

Workforce, talent management, and the STEM pipelineThe A&D workforce is facing a wave of retirements (and has been for years, although

it appears to have started), the industry will need to think through knowledge transfer

to new employees. Additionally, as the traditional pension had disappears, the

industry will have to develop new retention approaches for employees.

Artificial intelligence and maintaining US leadershipAutonomous flight, swarming drones, “loyal autonomous wingman”: Rising

adoption of AI by A&D companies is driven applications including predictive

maintenance, pilot training simulators, autonomous aircrafts, etc.

Social acceptance of autonomyTaking the next step function change in safety as automation flight is introduced.

Public and regulatory hurdles will likely slow adoption of autonomous flight

regulatory ecosystem, including ATM, keeping pace with the innovation ecosystem will

be critical – will likely start with packages with people coming much later

True cost and skill needs of cyber resiliencyCybersecurity / platform resiliency is adding evolving requirements for A&D

companies – our adversaries are continuously looking for vulnerabilities.

Hardening our systems, platforms, and infrastructure will require us to innovate in

a dynamic world

Achieving sustainable environmentally friendly aviationSocietal expectations (both public and regulatory) are placing a burden on the industry

to be more efficient and clean. A&D must also communicate the benefit of flight to

society. These environmental expectations may force platforms into early retirement.

Solving the next generation green aircraft remains an ongoing challenge.

Breaking the development cost curveDevelopment costs and timelines are becoming an economic challenge for A&D

Primes. This issues is compounded with the impact of over-rums and delays.

This is in part from new and innovative technology being introduced into new

platforms. However, to remain economically viable the current development cost

curve must be broken.

Increasing innovation clockspeed in A&DAs industries mature and processes are introduced, this can slow innovation.

Balancing process and business cases with innovation will be critical in A&D. We

need the next generation of leaders to maintain focus on the importance of

innovation

Micro-electronic industrial baseSome critical technologies have slowly migrated

globe, leaving a void in some of the historic producers (e.g., the

for micro-electronics has been practically depleted).

threat is that from the lack of American-made micro

and the potential for cybersecurity breaches.



A few facts about the 4 states in The Aerospace Alliance

Key Facts

• Aerospace growth in each of the 4 states has brought thousands of jobs up to 200K

• 2019: New Airbus assembly line begun manufacturing the A220 adding 400 jobs in Mobile, Alabama

• 8 Active Space Launch licenses for companies located in Florida through 2023 (more than any other location globally)

• New Raytheon 50K sqft facility broke ground in Forest, MS to produce s-band radars, including the SPY06 Air and Missile Defense Radar program



Space market outlook (cont.)

Satellite Constellations (2013 - )

Space Launch Report YOY*

*Launch Total by Country of First or Core Stage Manufacture

** 3 Constellations actually completed since 2013

Constellations

Launched

over 50% of

Planned**

7

Constellations

Planned > 74

Satellites

24

Total

Constellations

Active/Planned

84

Officially

Cancelled

Constellations

17

0

10

20

30

40

50

60

70

80

90

100

110

120

201820142012 2016

US North Korea

China

Europe

Russia

India

Japan

New Zealand

Ukraine

Israel

Iran

Forecast

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