Atlantic Council Copyright 2013, Exelis Inc.

The Business of Defense in an Age of Austerity: Perspectives from the Mid-Tier Atlantic Council

October 2, 2013

Atlantic Council Copyright 2013, Exelis Inc.

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Historical 2013 FYDP $1T Cut 2017 Cyclical Low

Another cyclical defense downturn is upon us, but the uncertainty is unprecedented

Defense Spending

$369B (1955) $382B (1975) $384B (1998) $390B (2017 est.)

Historical Troughs

* Constant = Real / Inflation Adjusted

Peak $735B in 2008

Defense Budget Authority – Base Plus OCO (FY2013 Constant*)

Sequestration

2

Cyclical Low

FY13 FYDP

Source: DOD, Exelis analysis

Atlantic Council Copyright 2013, Exelis Inc.

The State of Global Security

War

State Concern

Civil Unrest

Piracy

Drug War

Natural Disaster

Unstable

Highly Unstable

Nuclear Proliferation

Terrorism

Border Tension

Cyber Attack

Threats are numerous, asymmetric and unlikely to abate

3

Source: Exelis analysis

Atlantic Council Copyright 2013, Exelis Inc.

Government Adaptation

From To

Concepts Current Future

Budgets Land Centric “Commons Centric”

Programs Multiple Programs

of Record Select POR +

Affordable Upgrades

Contracts New Starts Extensions

Investment Driver Requirements Resources

Competition Robust Relentless

Declining budgets and expanding requirements are forcing shifts in the shared ecosystem of government and industry

4

Atlantic Council Copyright 2013, Exelis Inc.

Industry Trends

Uncertainty has been the key factor behind the pause in industry investment activity

5

2014 2015 2016 2013 2012

Today

Differentiated performance will drive valuation spreads both within and between sectors –

Valuations comparable to early 90’s

Cost takeout, portfolio rationalization, M&A on hold

Market declines priced in?

Sequestration begins to impact industry

Sequestration Election

Industry realignment?

FY14-16 budget cycles lend clarity to USG spending plan

“Return Value” strategy loses steam and more differentiated strategies emerge

Pol / econ climate will determine future DOD

spending outlook Washington

Industry

Wall Street

…big war era draws to close

Midterm Election

Source: RSA Advisors, Exelis analysis

Atlantic Council Copyright 2013, Exelis Inc.

Mid-tier Strategic Choices

Mid-tiers have a full range of strategic choices

Stay the Course

Reposition

Scale Up Diversify

Exit

6

Atlantic Council Copyright 2013, Exelis Inc. 7

Coherent and complementary

portfolio positions have become increasingly important

Electronic Warfare

Critical Networks

ISR & Analytics

Aerostructures

Coherent and Complementary Portfolio Positions

Atlantic Council Copyright 2013, Exelis Inc.

Capital Deployment

8

Interest Rates

Availability of Quality M&A

Targets

Clarity of Customer Funding &

Requirements

Pension Liability

Equity Market Returns

Timing and Degree of Industry

Realignment

Market & Competitor Dynamics

Stock Price

Corporate agility is key to deploying capital in a fluid environment

M&A Share

Repurchase

Pension Dividend

Policy

Allocation Choices

Influencers

Atlantic Council

U.S. Congress

Trade Organizations BRT, AIA, NDIA, etc.

Gov’t & International Customers DoD, NASA, FAA, DHS, etc.

“Competimates”

Commercial Customers

Media & Influencer Groups

Partnerships and Engagement

How can we best forge productive partnerships?

9 Copyright 2013, Exelis Inc.

Atlantic Council Copyright 2013, Exelis Inc.

Industry Concerns

• Congressional funding levels

• Industrial base durability

• Government assumptions regarding industry investment

• Trade and ITAR reform

• Clarity of customer requirements

10

Government / industry engagement is the key to success