1. February 2013
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Executive Summary
Contractors are reporting 4Q and full year 2012 results including Budget Highlights
2013 guidance; as the March 1 sequestration deadline approaches,  Budget uncertainties continue to loom
investors increasingly see sequestration-magnitude cuts as a reality large over defense stock performance
and are locking down 2012 paper profits. We should expect - The Jan. 1 ATRA deal delayed
sequestration until March 1, 2013
continued volatility through the first half of 2013.
and removed $6B from the
President’s FY13 budget
Macro Environment - If sequestration is triggered, another
 Companies began reporting 4Q and full year 2012 results and are $7B installment will be removed from
communicating FY13 revenue and EPS guidance to the Street the budget March 31, toward a total
 Of the companies that have reported to date, the majority believe that of $41B in GFY13
sequestration will be triggered on March 1 and accord high probability - The Pentagon must submit its
to a full-year continuing resolution scenario strategy for dealing with
 Nevertheless, most companies’ FY13 guidance does not account for sequestration to the White House by
sequestration—likely because the cuts will not materially affect Feb. 8
business until FY14 - The FY13 CR, funding the federal
 Industry has reported changes in customer behavior over the quarter government at 2012 levels and
as department and program officers begin to prepare for sequestration restricting new starts, also expires
and/or a full year CR March 31; a full-year CR will disrupt
 As Fig. 1 below shows, the Big 5, reporting Jan. 23-Jan. 30, lost 4% to of major programs
8% of their value as investors came to grip with the fiscal realities  According to industry, customer buying
impacting the sector; as of Feb. 6, the Big 5 are down ~7% YTD patterns reflect a working assumption
 Of the Avascent indices, the Hybrid Index has outperformed both the that sequestration and/or a full year CR
commercial benchmark and its defense peers; for defense equities, the will take effect
downward trend continues into February
Figure 1: Avascent Defense and S&P 500 Indices % Change in Share Price, January 2013
-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%
Avascent Hardware Index Avascent Hybrid Index Avascent Services Index Big 5 S&P 500 Index
6% GY
4% GEOY
FNC
2%
SAI
0% FLIR
-2% ^DJI
HO
-4%
^SPX
-6% ATK
16-Jan
10-Jan
11-Jan
12-Jan
13-Jan
14-Jan
15-Jan
17-Jan
18-Jan
19-Jan
20-Jan
21-Jan
22-Jan
23-Jan
24-Jan
25-Jan
26-Jan
27-Jan
28-Jan
29-Jan
30-Jan
1-Jan
2-Jan
3-Jan
4-Jan
5-Jan
6-Jan
7-Jan
8-Jan
9-Jan
KBR
NCI
HII
Source: Cap IQ; Avascent analysis
KEYW
QQ.
AVAV

2. Avascent Defense Universe
 GY, GEOY and FNC are this month’s top performers. GY has recently secured financing to acquire United
Technologies’ space unit, Rocketdyne, which will double GY’s market capitalization. GEOY’s shares are up due to
its proposed acquisition by Digital Globe, approved today by GEOY’s board. FNC’s share price movement is
influenced by Italian market trends, though the company may also be benefiting from its recently-announced
teaming agreement with GD on Air Force T-38 trainers.
 RTN’s shares were the biggest losers within the Avascent Defense Index, shedding ~8.5% of their value in January
despite strong 4Q and full year results, including a robust FY13 funded backlog. There seems to be no clear
explanation, but we can offer two conjectures:
From Nov. 2012 through Jan. 21, RTN shares appreciated ~7%; it is likely that investors have decided to lock
down some of these paper profits ahead of the earnings release.
Investors may have been rotating to other defense stocks, such as GD/NOC; both of these companies have gone
through recent corporate resets and may have more margins upside.
 LMT’s shares dropped 6% for the month following the company’s announcement that it made a $2.5B
contribution to its pension plan; investors are concerned that the move will leave the company with less cash for
FY13 share buybacks
 With new management at the helm, GD took advantage of the Street’s grace period and recorded a non-cash
charge of ~$3B in goodwill impairment and other restructuring costs. The company also announced a significant
drop in YoY revenue for Combat Systems (~$800M) due to declining business in European Land Systems
Figure 2: Avascent Defense Index Universe Monthly Performance: January 1- January 31
-10% -5% 0% 5% 10% 15% 20%
GY
Avascent Services GEOY
FNC
Avascent Hardware SAI
FLIR
Big Five ^DJI
Industry Indices HO
^SPX
ATK
KBR
NCI
HII
KEYW
QQ.
AVAV
BAH
LLL
BA.
VSEC
XLS
CACI
NOC
GD
ESLT
MANT
LMT
RTN
Source: Cap IQ; Avascent analysis

3. ABOUT THE AUTHOR
Roy Levy is an engagement manager with Avascent and lead’s the firm’s analysis of how senior leaders can align their
corporate strategies with capital market signals. Before joining Avascent, Roy was a consultant with the Defense
Industrial Initiatives Group at the Center for Strategic and International Studies (CSIS) where he led the Wall Street
and the Pentagon project, focusing on the relationships between defense budgets, defense acquisitions policies, and
the financial health of the global defense industrial base.
ROY LEVY
E. RLEVY@AVASCENT.COM
O. 202.280.6877
C. 917.921.3160
NOTICE:
This document has been prepared and issued by Avascent on the basis of
publicly available information. The opinions presented herein are those of the
author, are not meant to be comprehensive, and are for informational
purpose only. No party should treat any of the contents herein as advice. No
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© Copyright The Avascent Group (2013). All rights reserved.