John H. Young, Jr. President and CEO EADS North America Defense Company April 10, 2006

2. Assessing the Health of the Defense Industry John H. Young, Jr. President and CEO EADS North America Defense Company April 10, 2006 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

3. Purpose • Some DoD reports have indicated the defense industry is flush with cash and not facing any financial problems. • This presentation provides an industry perspective of the current environment and of the industry’s needs for the future. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

4. Essentials of a Healthy Defense Industry • Defense companies must: • Earn a profit that exceeds cost of capital. • Attract investors by demonstrating profitability, positive cash flow, payment of dividends, stock appreciation. • Attract and retain world class employees. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

5. Defense Industry Economic Environment • Cash balances are higher, but, cash balances do not correlate to profitability: • DoD at peak of spending cycle • Improved industry cash management • DoD payment rules • Merger and acquisition activity reduced • Profit margins up slightly, but lower than other industries. • Stock buybacks and dividends less than other industries. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

6. Defense Industry Economic Environment (cont’d) • R&D programs have an increased share of Defense outlays. Large development programs require substantial up-front investments – often not recovered for up to 10 years. • Risk higher margin production programs will not materialize. • Deployment of cash by defense companies is in alignment with DOD interests. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

7. Programs Require Upfront Investment Defense: A Cyclical Business $475 $475 $450 $450 Positive Cash SDD Start $425 Production Start $425 $400 $400 LRIP Start $ billions $375 $375 $350 $350 Negative Cash $325 $325 $300 $300 $275 $275 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2005 Program Year Fiscal Year Defense Outlays, 1952-2009 (Constant 2005 $) Typical Program Cash Position Defense Cash Flows • Industry needs access to capital markets both during peaks and valleys • Budget pressures from war expenditures and Katrina clean up • Cyclical market introduces instability and risk to investors • Capital assets could take many years to fully recover the cost • Initial program inventory stays negative for some time • Unallowable costs never recovered • Higher margin production programs may never materialize NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

8. R&D Programs Continue to Increase Share of Total Defense Outlays RDT&E Outlays as a Percentage of Total RDT&E and Procurement • The number of RDT&E contracts have increased dramatically • Greatest challenges and performance risks faced in the development phase • Production contracts less likely to materialize • Our ability to manage increased risk has been affected • Diminishing leadership workforce • Aging workforce predicament affecting both the Aerospace/Defense industryand DoD’s acquisition community NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

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10. CSIS Defense Index • Acquisitions eliminate R&D duplication and inefficiencies • GAO report concluded DoD net savings from acquisitions, $3.3B (1993 – 2000) Debt Reduction • R&D $’s constant since early ’90’s Dividends Net Interest Equity Buybacks Acquisitions Capital Expenditures R&D Source: Factset, CSIS Defense-Industrial Initiatives Group NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

11. Higher Returns/ Risk Lower Returns/ Risk Cash Deployment Alternatives NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

12. Defense Companies Hold Less Cash Than Other Companies Cash as a % of Sales Defense Other Source: CSFB Holt and Northrop Grumman Analysis NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

13. Defense Companies Return Less Cash to Shareholders Than Other Companies Payout as a Percent of Available Cash Defense Other • Notes: • “Payout” = total dividends plus share repurchases • “Available Cash’ represents cash available for investment, which equals Cash From Operations less Interest Source: CSFB Holt and Northrop Grumman Analysis NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

14. Still single digit margins Defense Industry Margins Note: CSIS Defense Index comprises 36 publicly-traded companies with majority revenues derived from US defense business. Boeing Military results have also been included. Sources: FactSet, Company Reports, CSIS Analysis. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

15. Defense margins lower than • All S&P Sectors • Public Utilities Industry Has the Lowest Returns of its Peers Industry Average Operating Margin, 1980-2004 (weighted by revenue) Notes: 1) CSIS Defense Index comprises 36 publicly-traded companies with majority revenues derived from US defense business. Boeing Military results have also been included. (2) S&P Sub-sector constituents accurate back to 1994; composition held constant for years 1980 to 1993. Sources: FactSet, S&P Compustat, Energy Information Administration, Company Reports, CSIS Analysis. NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

16. Goldman Sachs Investment Perspective David J. Kostin (212) 902-6781 david.kostin@gs.com Source: Compustat, First Call, I/B/E/S, IDC and Goldman Sachs Research estimates. From Sector Strategy: Where to Invest Now, “Uncertainty leads to Opportunity," September 2005 NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

17. DoD Training in Defense Industry Economics • Current education and training programs focus on Government contracting. • An informed Government customer should understand industry economics. • Corporate finance and capital structure • Role of capital markets, rating agencies, shareholders, investors • Importance of industry health to DoD objectives NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management

18. Next Steps • Monitor industry financial health • For report to Congress, use independent assessment group, with Government and industry input • Include industry economics in DOD training • Maintain cash flow policies • Provide reasonable returns and adequate funding on development contracts • Result will be a stronger industry with best people NCMA World Congress 2006 : Achieving High Performance in Global Business: Leadership, Outsourcing, & Risk Management