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THE FUTURE OF SENSORTRONICS

By Bake-off Inc.

Agenda

SensorTronics generals

Company overview Market trends and implications Risks & Strategy Public Comparison Analysis (multiples) Transaction Comparison Analysis (M&A)

Financial Analysis

DCF

Valuation Recommendation Summary

Agenda

SensorTronics generals

Company overview Market trends and implications Risks & Strategy Public Comparison Analysis (multiples) Transaction Comparison Analysis (M&A)

Financial Analysis

DCF

Valuation Recommendation Summary

SensorTronics generals
Company Overview

Sensor Electronics Technology Inc. aka SensorTronics is a market leader in the supply of IT and Technical Engineering services to the DoD and Intelligence community

The primary target market / revenue source of SensorTronics is the US Government


SensorTronics management team plans to

Expand its geographical coverage and consequently its client base, starting with the UK office that was recently opened.

Increase sales to existing clients through cross-selling opportunities between the companys 2 divisions IT Defense Communications Division and Defense Systems Engineering Division
Leverage the economies of scale in the cost structure to increase operating margins

SensorTronics challenges
Organizational revenues

Sensortronics

43%

57% Defense Systems Engineering

IT Defense Communication

26% Intelligence and Counter Int. support

10% IT Modernization and Sustainment

7% Cybersecurity

33% Systems and Infrastructure Development

24% Test and Evaluation

SensorTronics generals
Market trends and implications

In the US, post 9/11 attacks, the annual defense budget more than doubled to $700b Recent financial crisis placed great emphasis on US government to reducing spending, that includes defense industry budget Cyber security, Intelligence Solutions, Specialized Services (predictive analytics, cloud computing, virtualization and identity management) are potentially significant growth opportunities Geopolitical turbulence in MENA region opens up a market for military IT and Technology services

SensorTronics generals
SensorTronics Risks & Strategy
Main risk identified :

The primary target market / revenue source of SensorTronics is the US Government (94% of revenue, and unpredicted annual budget for spending risk*)

The future strategy of SensorTronics is based around :


Need to access debt and capital markets for growth potential Need to realize economies of scale through merging with / acquisition by a complementary or supplementary service company (smaller budget, competitive market, reduce cost) Diversify portfolio by offering a larger array of services to a wider customer base (risk reduction, revenue increase) Value proposition market champion in cyber security and intelligence solutions, proven track record with DoD and Intelligence, ~ employees having US government security clearances, international presence, high caliber management team

Agenda

SensorTronics generals

Company overview Market trends and implications Risks & Strategy Public Comparison Analysis (multiples) Transaction Comparison Analysis (M&A)

Financial Analysis

DCF

Valuation Recommendation Summary

Financial Analysis
Public Comparison Analysis (multiples)
Company ARS Inc. CNI Inc. KAI International Stock Price ($) 64.57 75.45 23.23 12.19 Market Cap ($mln) 1,446 1,788 1,898 2,502 Firm Value ($mln) 1,899 2,211 2,443 2,955 EPS ($) 4.44 3.74 1.59 1.29 Firm Value / Sales 0.7x 0.9x 0.7x 1.1x Firm Value / EBITDA 6.50x 6.00x 7.00x 6.10x EBITDA Margin 7.7% 8.7% 8.2% 9.4% P/E 14.5x 20.2x 14.6x 9.4x

Trident Scientific

All figures are from 2011. The above 4 comps were chosen based on the following criteria: 1. Annual revenue = $2.6 bln +/- 25% 2. EBITDA Margin = 9.37% +/- 2.0% 3. Functional similarities with SensorTronics Firm Value / EBITDA range was selected 6.0x 7.0x as a result. Subsequently, firm value, market cap, and stock price ranges were computed. Firm Value = (Firm Value / EBITDA) * EBITDA Market Cap = Firm Value Debt ($200 mln) + Cash ($84.8 mln) Stock Price = Market Cap / No. of diluted shares (36,421,000) SensorTr onics 37.4 43.7 1,349 1,593 1,464 1,708 3.43 6.0x 7.0x 9.37%

Financial Analysis
Transaction Comparison Analysis (M&A)
Target Integral Systems LaBarge Inc. Platinum Solutions Herley Industries Applied Systems Acquirer Kratos Ducommun Incorporated SRA International Kratos CACI International Transaction Value ($mln) 566 340 90 265 620 Firm Value / Sales 0.7x 0.8x 1.9x 0.8x 0.9x Firm Value / EBITDA 7.2x 7.5x 18.2x 8x 8x Sales ($mln) 809 425 47 331 689 EBITDA ($mln) 79 45 5 33 78 EBITDA Margin 9.7% 10.7% 10.4% 10.0% 11.3%

The above 5 comps were chosen based on the following criteria: 1. EBITDA Margin = 9.37% +/- 2.0% 2. Additional filtering of the comps was done based on transaction value.

Firm Value / EBITDA range was selected 7.0x 8.0x as a result. Subsequently, firm value, market cap, and stock price ranges were computed. Firm Value = (Firm Value / EBITDA) * EBITDA Market Cap = Firm Value Debt ($200 mln) + Cash ($84.8 mln) Stock Price = Market Cap / No. of diluted shares (36,421,000)
SensorTronics TBD 1,708 1,952 0.66x 0.75x 7.0x 8.0x 2,604 244.0 9.37%

An offer price range for SensorTronics stock was calculated as 43.7 50.4, using the stock price calculation shown above.

Financial Analysis
DCF

DCF analysis was based on the forecasting of free cash-flows to the firm for a period of 10 years, according to the following assumptions:

The cost of debt (Kd) was estimated using current capital market conditions for different levels of debt / capital and ratings. Our analysis indicated that, assuming a target 20% debt / total capital ratio, Kd=9.0% would be a reasonable approximation.
Borderline IG Rating D/(D+E) Spread over 10y Treasury BBB 12.5% 4.0% Typical Speculative BB 22.5% 6.0%

The firms cost of equity (Ke) was estimated based on the CAPM using E[Rm-Rf]=6.0% (risk premium) and Rf=3.5% (UST10y). The same process for comparables as in slide was followed in order to select levered Betas which were delevered (using T=40%), averaged and re-levered using know corporate finance relationships. The companys levered Beta was estimated at 1.44 and its Ke=12.16%

Financial Analysis
DCF

Since we are proceeding with a FCFF we calculated the expected WACC with a target D/(D+E)=20%. The result was WACC=10.81%.
Within the analysis both complete financial statements for the 10 year period and a terminal value assuming perpetual growth were projected. The indicative outcome and sensitivity analysis follow.
ENTERPRISE VALUE Debt Equity Value Shares Target Price per share As of February 2011 2,464,306.52 500,000.00 1,964,306.52 36,421.00 53.93

20% 80%

WACC

10.0% 10.8% 12.0% 13.0% 14.0%

Perpetuity Growth 1% 2% 3% $54.50 $57.65 $61.49 $51.00 $53.93 $57.50 $46.29 $48.92 $52.13 $42.68 $45.09 $48.03 $39.37 $41.57 $44.26

The DCF implies a point estimate of $53.93 and a price range between $45.09 and $57.65.

Agenda

SensorTronics generals

Company overview Market trends and implications Risks & Strategy Public Comparison Analysis (multiples) Transaction Comparison Analysis (M&A)

Financial Analysis

DCF

Valuation Recommendation Summary

Valuation
Summary of methodologies
$80 Equity Value per share 75.5 69.2 $60 57.7

$40

43.7 37.0

46.9
32.4

50.4 43.7

45.1

$20 EV/ EBITDA comparable EV/ Sales comparable P/E comparable Acquisition comparables DCF

Public comparables

Implied multiples: P/E 10.8 12.8 Sales 0.7 1.1 EBITDA 6.0 7.0

13.7 22.0 0.6 0.7 7.5 11.7

9.4 20.2 0.5 1.0 5.3 10.8

12.8 14.7 0.66 0.75 7.0 8.0

13.1 16.8

EV / Sales and P/E Comps were also computed in the same manner as the EV/EBITDA comparable, but will not be used as basis for valuation as they exhibit high variances

Valuation
IPO

Based on the historical capital expenditure and the future expectation of investments, we assume that $500 mln needs to be raised in the next year for SensorTronics.
Based on the public comparables analysis, we value the current share price at $37 - $44

Target equity to Capital ratio = 0.8


(Current equity ($1,602 mln) + New Equity ) /

((Current equity ($1,602 mln) + New Equity) + (Debt ($200 mln) + New Debt) = 0.8

Knowing that New Debt + New Equity = $500 mln, we get New Equity = $239.6 mln, an amount that should be raised through an IPO

We suggest to double the number of current shares outstanding (36.4 mln), and issue new shares at a price of $22 each in the amount of 10.9 mln. Price of $22 is suggested to be attract Institutional as well as retail investors.

So, the offer price for IPO = $22.

Total number of shares outstanding after IPO = 83.7 mln

Valuation
Potential Acquirer
Potential acquirer of SensorTronics were selected after using the following filters in the given order:

Break-even stock price based on 100% stock financing of the acquisition

The breakeven price was calculated as follows:

P / E (acquirer) = Break-even price / EPS (target)

If the break-even price was greater than $ 43 (i.e. minimum price obtained in acquisition comparables analysis), then the company was retained as a potential acquirer.

Size of the potential acquirer

If the size of the acquirer is much smaller than SensorTronics then the acquirer was filtered out.

Using a 70% stock financing and 30% debt financing, Pro-forma EPS

EPS of the combined company (after the acquisition) was calculated and this EPS should be higher than the pre-acquisition EPS of the acquirer, for the deal to be meaningful for the acquirer. There were no synergies assumed for this calculation.

Whether the functions of SensorTronics complement or supplement those of the company

Based on the company descriptions, it was analyzed how the acquisition might make sense for the company.

Valuation
Potential Acquirer
Company GD Corp KAI Internation al KWY Honeywell ington ViaSatellit e Stock Price ($) 89.63 23.23 EBITDA ($mln) 1,021 254 No. of shares (mln) 94.1 81.7 New shares (mln) 14.2 54.9 New Debt Issued ($mln) 546 546 After-tax interest on new debt ($mln) 39.3 31.3 EPS acquire r 8.32 1.59 Combine d EPS 8.02 1.64

27.21 124.23 34.21

168 569 411

23.7 72.7 45.8

46.8 7.3 37.3

546 546 546

39.3 51.9 39.3

0.27 9.20 1.07

1.31 9.27 1.62

ViaSatellite seems to be the best potential acquirer based on the 4 filters discussed before., as it has the combined EPS much higher than the current EPS and the current operations of ViaSatellite would supplement those of SensorTronics.

Agenda

SensorTronics generals

Company overview Market trends and implications Risks & Strategy Public Comparison Analysis (multiples) Transaction Comparison Analysis (M&A)

Financial Analysis

DCF

Valuation Recommendation Summary

Recommendations
Our recommendation is to take the company public at a price of 22$ per share, and start a road show to gauge the interest of potential buyers. The roadshow should emphasize on how the money raised will help SensorTronics strengthen its leadership position in the cybersecurity and intelligence services in the US two areas where future growth opportunities are highly likely, while allowing the company to have the means to expand its international reach. Should the roadshow turn out unsuccessful, ViaSatellite has been identified as a potential acquirer for the activities of SensorTronics. The proforma EPS, shows an increase from the original EPS, making this transaction accretive for ViaSatellite, while the potential offer price remains very attractive for SensorTronics. From an industry point of view, the deal would be seen as a reinforcement of ViaSatellite and SensorTronics intelligence data gathering and network security management offerings.

Agenda

SensorTronics generals

Company overview Market trends and implications Risks & Strategy Public Comparison Analysis (multiples) Transaction Comparison Analysis (M&A)

Financial Analysis

DCF

Valuation Recommendation Summary

Summary
Preferred option : IPO
Transaction: Transaction Structure: IPO of SensorTronics Get 48% of the required capital by issuing equity and 52% by issuing debt, to reach the target equity to capital structure of 80%. $239.6 mln $19 - $22 10.9 mln 83.7 mln $1,842.1 mln Capital acquisition for investment and extension opportunities Sale of SensorTronics to ViaSatellite 70% stock payment and 30% Cash raised by debt $546 mln $50 $1.62 37.3 mln Higher value for shareholders and creation of stronger entity

New Equity value: Share price range: No. of new shares @ $22: No. of total shares @ $22: Market capitalization: Purpose: Transaction: Transaction Structure: New Debt Issued: Offer Price for SensorTronics: New EPS value: No. of new shares: Purpose:

Second scenario : Acquisition Analysis

Appendixes

Public Comparison Analysis (multiples)

SensorTronics challenges
Public Comparison Analysis (multiples)
Sensor Tronics Ars Inc AVU Inc CNI Inc Liner Corp ESV Corp GD Honeywe Kai KWY Corp llignton International Holding Patriot Corp SCIA Int Trident ViaSat Scientific ellite

Intelligence & Counter intelligence Support - operations - improve data gathering - secure information, networks, IT Defense Communications Division IT modernization and sustainment - design, dev, deploys, modern, IT systems Cybersecurity - identifying/neutr cyber attacks - manage security - network attack/defense/eXploitation

Defense Systems Engineering Division

System and Infrastucture Development - system engineering services - military hw and sw (air/sea/land)

Test and Evaluation - test and eveluation Other Activities International EXposure

X
Weap., warfighter Vehicles, Energy Systems Vehicles, turbine Weap. engine, Jet power units, aircraft infr. prot. inteligence Missile syst, def combat product, sensors syst Comm syst. satelites

96% of revenues from US 1 office in the UK

US + int. US

US

US

US

US

INT

US gov + allies

US dep US int def agencies

US gov

X : potential operational match