Cracking the Organizational Code for Growth Aerospace & Defense Growth Analysis

Cracking the organizational code for growth Aerospace & Defense growth analysis

March 2013

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

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 © OLIVER WYMAN 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

46.5 42% 32.7

58% 28.5

26.4

24.9

24.1 Annual average growth in the market 5.7% (2006-2011) 18.1

Note: © OLIVER WYMAN Categorization by revenue is relative to the overall A&D top 100 sample 5 Source : Bloomberg, Oliver Wyman proprietary analysis 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 TransDigm Group Incorporated Superstars 7% of companies 25% 27% of companies

Accelerating Growth Decelerating Growth

20%

GKN Aerospace 2011)

- Korea Aerospace Industries, Ltd. FLIR Systems

Rheinmetall AG 15% Meggitt PLC BE Aerospace, Inc. Cubic Corporation Zodiac Aerospace AAR CORP. BBA Aviation Moog Inc. Singapore Technologies Engineering Nabtesco Corp Esterline Technologies Corporation Israel Aerospace Industries Ltd. Parker Hannifin Aerospace Orbital Sciences Corporation Avio Spirit AeroSystems 10% Teledyne Technologies Incorporated -10% 0% 10% 20% 30% 40% 50% European Aeronautic Defence and Space Company. Xi'an Aircraft Industry (Group) Company Ltd. MTU Aero Engines Holding AGCurtiss -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. Revenue Growth (CAGR (CAGR GrowthRevenue 2009 General Dynamics Corporation Delta Tucker Holdings / DynCorp International Cobham plc 0 The Boeing Company Thales Elbit Systems Ltd. Raytheon Company 0% L-3 Communications Holdings, Inc. Exelis Dassault Aviation

Anemic Finmeccanica SpA Stalling

8% of companies Bombardier Aerospace BAE Systems plc 58% of companies -5%

-10% Note: Origins of each axis set to 10% to differentiate Revenue Growth (CAGR 2005-2007) double-digit growth © OLIVER WYMAN 6 Source : Bloomberg, Oliver Wyman proprietary analysis 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% 2005-2007 10% 2009-2011

RevenueCAGR 0% 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 -10%

-20%

-30%

-40%

-50%

-60%

-70% Company Rank © OLIVER WYMAN 7 Source : Bloomberg, Oliver Wyman proprietary analysis 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 European Aeronautic Defence and Space Highly profitable growth 10% of companies Company EADS N.V. 60% 33% of companies

50%

Thales

The Boeing Company

2011) 2011) 40% - Korea Aerospace Industries, Ltd. GKN Aerospace Saab AB

NABTESCO CORPORATION 30% Orbital Sciences Corporation TransDigm Group Incorporated Avio Zodiac Aerospace Parker Hannifin Aerospace BE Aerospace, Inc. 20% Teledyne Technologies Incorporated Moog Inc. Israel Aerospace Industries Ltd. Cubic Corporation Embraer S.A. Esterline Technologies Corporation

EBITDA EBITDA CAGR (2009 Safran United Technologies Corporation Singapore Technologies Engineering Curtiss-Wright Corporation BBA Aviation Northrop Grumman Corporation Cobham plc Chemring Group PLC 10% MTU Aero Engines Holding AG Meggitt PLC Alliant Techsystems Inc. Spirit AeroSystems Rolls-Royce Holdings plc AAR CORP. General Dynamics Corporation Textron Inc. L-3 Communications Holdings, Inc. FLIR Systems BAE Systems plc Rockwell Collins, Inc. 0% Lockheed Martin Corporation Raytheon Company -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% Dassault Aviation

Falling behind Exelis Bombardier Aerospace -10% 43% of companies Xi'an Aircraft Industry (Group) Company Ltd. Less or unprofitable growth Elbit Systems Ltd. 14% of companies

-20% © OLIVER WYMAN 8 Source : Bloomberg, Oliver Wyman proprietary analysis Revenue Growth (CAGR 2009-2011) Aerospace & Defense: Market Capitalization Companies experiencing highly profitable growth clearly outperformed the market cap growth of their competitors 40.0%

30.1%

20.0%

2011) -

1.3% 0.0% Market Cap CAGR MarketCAGR Cap (20009 Falling behind Less or unprofitable growth Highly profitable growth Efficiency play -1.8%

-5.0%

-20.0%

50%

TransDigm Group Incorporated

45%

40%

35%

Meggitt PLC

FLIR Systems

30%

2011) -

Chemring Group PLC 25%

Rockwell Collins, Inc. Cobham plc 20% BE Aerospace, Inc.

Esterline Technologies Corporation Triumph Group, Inc. Dassault Aviation United Technologies Corporation Zodiac Aerospace Avio ITT Corporation MTU Aero Engines Holding AG Rolls-Royce Holdings plc EBITDA EBITDA Margin(2009 Curtiss-Wright Corporation Exelis General Dynamics Corporation 15% Moog Inc. Alliant Techsystems Inc. Safran BBA Aviation Saab AB Parker Hannifin Aerospace Raytheon Company Singapore Technologies Engineering L-3 Communications Holdings, Inc. Teledyne Technologies Incorporated BAE Systems plc Lockheed Martin Corporation Korea Aerospace Industries, Ltd. Northrop Grumman Corporation AAR CORP. Nabtesco Corp Cubic Corporation Spirit AeroSystems GKN Aerospace Textron Inc. Elbit Systems Ltd. Loral Space & Communications Inc. Bombardier Aerospace 10% Rheinmetall AG The Boeing Company Finmeccanica SpA Orbital Sciences Corporation Embraer S.A.

Israel Aerospace Industries Ltd. Thales European Aeronautic Defence and Space Company EADS Xi'an Aircraft Industry (Group) Company Ltd. N.V. 5% Delta Tucker Holdings / DynCorp International Aerospace Communications Holdings Co., Ltd.

0% 500 5000 50000 Average Revenue (2009-2011) © OLIVER WYMAN 10 Source : Bloomberg, Oliver Wyman proprietary analysis 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. Mid- size 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

Meggitt PLC Rheinmetall AG 15% BE Aerospace, Inc.

2011) Cubic Corporation

AAR CORP. Moog Inc. Zodiac Aerospace - Nabtesco Corp BBA Aviation Singapore Technologies Engineering Esterline Technologies Corporation Orbital Sciences Corporation Israel Aerospace Industries Ltd. Parker Hannifin Aerospace Avio 10% Teledyne Technologies Incorporated Spirit AeroSystems European Aeronautic Defence and Space Company EADS Xi'an Aircraft Industry (Group) Company Ltd. N.V. Curtiss-Wright Corporation MTU Aero Engines Holding AG Loral Space & Communications Inc. Saab AB United Technologies Corporation Embraer S.A. Rolls-Royce Holdings plc 5% Rockwell Collins, Inc. Textron Inc. Safran Alliant Techsystems Inc. Lockheed Martin Corporation

General Dynamics Corporation Cobham plc Delta Tucker Holdings / DynCorp International Thales The Boeing Company Elbit Systems Ltd. Raytheon Company 0% L-3 Communications Holdings, Inc. Dassault Aviation

500 5000 Exelis Finmeccanica SpA 50000 Sales Revenue CAGR Sales RevenueCAGR (2009

Bombardier Aerospace BAE Systems plc -5%

-10% Northrop Grumman Corporation

-15% Average Revenue (2009-2011) © OLIVER WYMAN 11 Source : Bloomberg, Oliver Wyman proprietary analysis 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% 2011) - Meggitt PLC

FLIR Systems 30%

Chemring Group PLC 25%

Rockwell Collins, Inc. Cobham plc

20% BE Aerospace, Inc. EBITDA EBITDA Margin(2009

United Technologies Corporation Esterline Technologies Corporation Dassault Aviation Teledyne Technologies Incorporated Zodiac Aerospace General Dynamics Corporation MTU Aero Engines Holding AG Avio Exelis Alliant Techsystems Inc.Curtiss -Wright Corporation 15% Moog Inc. Raytheon Company Parker Hannifin AerospaceBBA Aviation L-3 Communications Holdings, Inc.Rolls -Royce Holdings plc Nabtesco Corp Northrop Grumman Corporation BAE Systems plc 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 Rheinmetall AG Embraer S.A. Orbital Sciences Corporation The Boeing Company Israel Aerospace Industries Ltd. Thales European Aeronautic Defence and Space Company EADS N.V. Xi'an Aircraft Industry (Group) Company Ltd.

Delta Tucker Holdings5% / DynCorp International

0 0 0% 0.00% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% Sales Revenue CAGR (2009-2011) © OLIVER WYMAN 12 Source : Bloomberg, Oliver Wyman proprietary analysis Section 3 How industry players are exploiting organizational levers

13 BAE Systems

KEY ORGANIZATIONAL ATTRIBUTES (con’t) ORGANIZATION COMPANY AT A GLANCE  The business is reported through five principal reporting segments • Sales 2011: $28.5 Billion • Electronic Systems • 93,500 employees • Cyber & Intelligence • 3 Platforms & Services: US – UK – and International • Presence in more than 100 countries  Executive Committee and other direct reports to the Chief Executive • Second largest global defense supplier TALENT KEY ORGANIZATIONAL ATTRIBUTES  Center for Performance Excellence dedicated to the development and transfer of best practices PURPOSE / VISION  Jobs campaign through radio and social media to detect and support the talent  To be the premier global defense, aerospace and security company pipeline in the US  To deliver sustainable growth in shareholder value through  CEO is homegrown – was the former COO commitment to Total Performance STRATEGY INNOVATION  Support customers in safeguarding their vital interests  2011: 1,807 M$ spent on R&D (7% of Revenue)  Drive shareholder value by improving financial performance and  BAE Systems investment in innovation (I3) is a multi-million dollar program to competitive positions across the business develop technologies  Sustain a leadership position in the electronic warfare market  Partnership with academia as well as small and medium size businesses  Increase productivity and efficiency  Improve profit and cash generation  Increase international business CULTURE AND VALUES  Trusted – Innovative – Bold (challenge and initiative) ACQUISITONS  Customer Focus, Financial Performance, Program Execution and Responsible  Acquisition to sustain the group’s position - especially for its Cyber and Behavior Intelligence division:  Diversity ( 25% of BAE Board are women) • 2011: L-1 Identity Solutions, Inc.’s Intelligence Services Group • 2011: Norkom Group plc TRANSFORMATION • 2011: ETI A/S  In October 2011, the Group announced changes to its external reporting • 2011: Stratsec.net Pty Limited segments to improve performance visibility

COMPANY AT A GLANCE KEY ORGANIZATIONAL ATTRIBUTES (con’t) • Sales 2011: $68.7 Billion ORGANIZATION • 175,000 employees  Two business units: • Activities in more than 70 countries Boeing Commercial Airplanes and Boeing Defense, Space & Security  Three shared units : • Boeing Capital Corporation (financing solutions) KEY ORGANIZATIONAL ATTRIBUTES • Shared Services Group (for global worldwide services) • Boeing Engineering, Operations & Technology (innovation) PURPOSE / VISION  People working together as a global enterprise for aerospace ACQUISITONS leadership  Many acquisitions to enhance Boeing capabilities in strategic areas such as cyber and space technologies and special operations STRATEGY Boeing Commercial Airplanes: TALENT

 Maximizing growth while improving efficiency  Disciplined approach to leadership development, guided by leaders at every  To profitably increase production rates to deliver our 3,771-airplane level of the company backlog  Develop people with $150 million in internal learning programs annually  Expanding and diversifying manufacturing and engineering base to  95% of today's senior leaders were promoted from within the company continue to grow services business  CEO joined in 2005 ( previously CEO of 3M )

Boeing Defense, Space & Security: INNOVATION AND R&D  Reducing infrastructure and other costs, and further increase  Boeing is a leading innovator in the aviation industry productivity to enable continued investment in innovation,  R&D: more than 4 B$ expensed in 2011  Extending and grow core business by bringing capability and affordability to customers and capture additional international business CULTURE AND VALUES  Leadership, Integrity, Quality , Diversity , Customer satisfaction , Corporate citizenship and People Involvement

KEY POINTS OF THE TRANSFORMATION COMPANY AT A GLANCE ORGANIZATION • Sales 2011: $33.1 billion  An organization based around specific airframes with plants empowered and accountable for delivery • 59,000 people worldwide  Organizational emphasis on: teamwork, faster decision-making and execution, • Subsidiaries in the United States, Japan, China simpler ways of working and a focus on deliverables  All engineering teams was regrouped under one single leadership. and India  Creation of a procurement operations function to strengthen supplier • 16 sites in Europe management

TALENT PURPOSE / VISION  Creating the best and safest aircraft  Competency mapping to develop a complete profile for managers  Employees are given many opportunities to progress through specialist STRATEGY training, regular reviews and tailored career paths  Each year, approximately 190,000 person days are spent on activities aimed at  To take the company’s business excellence to a higher level maximizing skills and knowledge  Reinforce customer focus, innovation and quality  To strengthen supplier management CULTURE  To encourage an environment based on teamwork  The Airbusway sets guiding principles to develop teamwork, talent and career, drive improvement and innovation, in an effort to deliver customer value ACQUISITION  Diversity, safety, quality and performance  2011 : Satair, a leading distributor of aviation parts

TRANSFORMATION INNOVATION  New organization aims to boost Airbus’ overall performance, making the  More than 90 per cent of Airbus’ research and technology initiatives are company more agile for the benefit of the environment • Lines of command have been shortened  Airbus Fly Your Ideas challenges students around the globe to develop • Significant emphasis on the empowerment of multifunctional teams new ideas for the eco-efficient aviation industry of the future • Integration of the quality function at plant level

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

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