EFTA02411799.pdf

SUBS UBS Investment Research UBS Business Jet Survey Recovery Stalls • Index holds at 50 Our March Business Jet Index came in at 50, indicative of a stable market and in line with our prior survey from January following increases in each of our previous eight surveys. While our Index continues to reflect a stable market, our straight up measure of absolute business conditions moved modestly lower this time, the first decline since March of 2009 and indicative of a slight degradation in market conditions since January. • Survey reflects improving customer interest Our survey continues to reflect improving customer interest and a strong I2-month outlook, although it is still weighed down by very high used inventory levels. Pricing in most models is off 30-40% from peak levels, but now appears to be stabilizing. Overall, our respondents cited an increased willingness to add to their own inventories this time, reflecting increased confidence in near-term pricing/liquidity. Despite improved buyer interest/outlook. we think significant oversupply on the used market, particularly in small/midsize aircraft, will continue to overhang new aircraft orders. • Prefer GD/COL Our Buy rating on GD reflects an improved defense risk profile and stabilization in our bizjet survey. with particular strength at the high end. Our Neutral rating on TXT reflects concerns over the shape of the recovery at Cessna, given significant oversupply, fractional weakness, and increased competition at the low-mid end (Embraer). Of the suppliers. Buy rated COL is our preferred play on business jets. Global Equity Research Americas Aerospace Sector Comment 24 March 2010 ww* ute cony nvestmentresearch David E. Strauss Ana/5i davId.Straungisba Oten •1-212.7136185 Cristina Fernandez Anaysl cnsbnalemandez@Lissoom •1.212.713 3321 Darryl Genovesi Asscoate Analys1 darrAgecovest.tbs com •1.212.7134016 Tasneem Azim Assooate MOM taSneemezimIrkts can +1416-814 3678 Chart 1: UBS Business Jet Market Index Chart 2: Overall Business Conditions Score 100 0 ss--aga pt cold 1.13131111-11;313 UBS Bustiess Jet MAN Index —• Rol Pert 011iS) '50 230 210 190 170 c! 150 130 cr 110 90 70 ' Simple average stock price performance kItlex indurlas GD(TXT Scums UBS Business Jet Survey al-44 3 10 - 0 (43 I 'it In (4.' 4 '2' 31 3 c% 3 g34Egk4 3 AL 2 Source UBS Business Jet Survey I-44 This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 17. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. EFTA_R1_01473294 EFTA02411799 UBS Business Jet Survey 24 Mach 2010 Business Jet Market Survey Our UBS Business Jet Market Survey is designed to provide timely market data supplied directly by industry professionals. We regularly survey a group of US domestic and international broker/dealers, manufacturers, fractional providers, financiers and others, from whom we received 150 responses in March. Investment Conclusion Our March Business Jet Index came in at 50, indicative of a stable market and in line with our prior survey from January following increases in each of our previous eight surveys. Our Index measures the change in our respondents' views from our prior survey and is not meant to be an absolute measure of business conditions. Our straight up measure of absolute business conditions continues to reflect a depressed market, moving modestly lower this time to 3.6 (from 3.7), the first decline since March of 2009 and indicative of a slight degradation in overall market conditions since our prior survey. Our survey continues to reflect improving customer interest and a strong I?- month outlook, although it is still weighed down by very high used inventory levels. Pricing in most models is off 30-40% from peak levels, but now appears to be stabilizing. Overall, our respondents cited an increased willingness to add to their own inventories this time, reflecting increased confidence in near term pricing/liquidity. Despite improved buyer interest/outlook, we think significant oversupply on the used market, particularly in smalUmidsize aircraft, will continue to overhang new aircraft orders. While not a component of our composite index, our young inventory score remains well below 50, indicating significant oversupply of high-quality young used aircraft. Our Financing score, also not a component of our index, continues to reflect incremental improvement in financing availability. Table 1: UBS Business Jet Survey Results and Comparison to Prior Survey Component Better Same Worse Score Last Tine Change Customer Interest 54% 39% 7% 74 76 -3% Kiting 15% 66% 19% 48 45 7% 12 Month Outlook 61% 35% 4% 79 82 -4% Inventory Levels 2% 6% 92% 5 7 -31% Wiringness 26% 53% 21% 53 50 6% Composite Index 29% 41% 30% 50 50 0% Your, Inventory 8% 25% 67% 20 20 2% Finanong 24% 74% 3% 60 60 0% Business Conditions nla ni a Na 3.6 3.7 -1% Source. UBS Bissmess Jai Survey $43-44 Our Buy rating on GD reflects an improved defense risk profile and stabilization in our bizjet survey, with particular strength at the high end. Our Neutral rating on TXT reflects concerns over the shape of the recovery at Cessna, given significant oversupply, fractional weakness, and increased competition at the low-mid end (Embraer). Among the suppliers, Buy-rated COL is our preferred play on business jets. LIBS 2 EFTA_R1_01473295 EFTA02411800 UBS Business Jet Survey 24 March 2010 Chart 3: GD and TXT Forward PIE Multiples 30x 25x 20x ig 15x • 1 10x • • f t\ - 5x ex ti 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 GO TXT Note: Forward PE using ruing 12-month (actual) EPS through June 2009 and UBS eamMes for fauns periods. TXT PE rmillica 10 the current period reaects cur 2010 estimate. Source: UBS tamales UBS Business Jet Market Index Our UBS Business Jet Index is a proprietary index designed to measure the total "value" of the responses to our survey questions. We have weighted each factor in our index based on our perception of its overall importance to the condition of the new business jet market. Our index is scored on a scale of zero to 100, with 51-100 representing incrementally strengthening market conditions. 50 incrementally stable, and 0-49 incrementally weakening market conditions. Our March Business Jet Index came in at 50, indicative of a stable market and in line with our prior survey from January. Chart 4: UBS Business Jet Market Index 100 0 B ra ge g - 123 - •0 3 g 91 • 41 S 8 a a m m • iz ) ????4444344“MMW;a99s.9a;$;;M:EM;$fl• nASIAIPS1441A&IAIMAInsprnmAgiAgni Source: UBS Busmess Jet Survey 11-44 leS EFTA_R1_01473296 EFTA02411801 LIB5 Business Jet Survey 24 March 2010 Survey Participant Profile Of the 150 market professionals who responded to our survey, a majority (59%) arc broker/dealers. Brokers/dealers are involved in the purchase and sale of both new (direct from manufacturer) and used aircraft, often purchasing on spec. Chart 5: Business Jet Market Survey—Participant Role Other 11% 11 Mater 13% - \ DealenBrdcer Financier 59% 17% Note: Other ndudes appraisers, fractional providers. management charter, FBO and MRO service providers. Source: UBS Business Jel Survey N44 The majority of our participants are located in North America (75%), although most transact a significant proportion of their business with foreign customers. Chart 6: Business Jet Market Survey—Participant Location Chart 7: Proportion of Business Transacted Outside the US Leal America MI None Middle East 8 3% Aso 8 Patric 9%\ &Me 19% 2% More hint n‘ 79% Less than 25% In 29% Africa 1% 410North America 75% 50-75%_ 21% ‘zs-sax 22% Source: UBS Business Jet Survey N44 Sane: UBS Business Jet Survey N44 Respondents varied fairly uniformly in average transaction size with the majority in the 55-20 million range. Chart 8: Business Jet Market Survey—Average Transaction Size 530M, 6% 50-51A 4 .20% 5203W 16% 55-1CM 27% $10-20M_ 31% Source: UBS Business Jel Survey #44 IBS 4 EFTA_R1_01473297 EFTA02411802 UBS Business Jet Survey 24 Mardi 2010 Survey Results Overall Business Conditions In the first question, we asked, "On a scale of zero to 10. how would you characterize overall business conditions after factoring typical seasonality (0 = the worst ever, 5 = normal, 10 = the best ever)?" Note that while our Business Jet Market Index (discussed earlier) indicates incremental change from the prior period, this question is meant to measure the absolute level of business conditions. We received 144 responses (six participants did not respond to this question) with scores ranging from zero to eight. Chart 9: Indication of Overall Business Conditions, March 2010 35% - 30% - 25% • I 20% • 15% - at 10% - 5% - 0% 12% 3% 3% 0 I 2 3 4 5 6 7 8 9 Business Cannons Rank 7% 7% I. 3% A r. 0% 0% 1% 10 Sane: UBS Bootless Jet Surrey #44 Overall, our average business conditions score came in at 3.6, 1% lower compared to our prior survey at 3.7. Chan 10: Overall Business Conditions Score 10 I 3 5 O 0 U1 V, co " ve. 1111 1111111 4 co, fl?!rng 1.-77 Al flglAA44- p gifll Source. UBS Business Jet Sway a1.44 LIBS5 EFTA_R1_01473298 EFTA02411803 UBS Business Jet Survey 24 WO 2010 This month's decline in overall business conditions was driven by our domestic participants, partially offset by a slight improvement internationally. Chart 11: UBS Business Jet Market Index 10 Dom: 3.5 Ina 6,1 rK 1 5 • • = 0 co tiliffill1111111111111111 4132 2, ALial 4 A4i34,%4A214g la rgARIA,%4 4 MDorneW intematt0M SosccUBSBusemMSereyr44 Customer Interest In the next question, we asked, "Since our last survey in January, the level of customer interest improved, stayed the same or deteriorated?" Of the 147 responses (three participants did not respond to this question). 54% indicated that customer interest had improved, while 7% indicated that customer interest had deteriorated. The remaining 39% indicated that customer interest had stayed the same. This represents a modest decline from our prior survey, in which 55% indicated that customer interest had improved, 4% indicated customer interest had deteriorated and 41% indicated that customer interest had stayed the same. Chart 12: Indication of Customer Interest, March 2010 Deteriorated 7% StaW Pie same 39% SOWS' UBS Business Jet Survey 444 UE3S 6 EFTA_R1_01473299 EFTA02411804 UBS Business Jet Survey 24 March 2010 Our customer interest score came in at 74, slightly lower from January, but still well above 50, indicating that on average customer interest is improving. Chart 13: UBS Business Jet Survey Score—Customer Interest 100 1 so 0 e 2 2 8 2 A 8 2 g a s:ask-2*$ s 2 0m ????M4I4M4W444”,99.79“E3;””””W:- nISIA4gAS14444S1.44411A4IASiMAS4gA4.14g144 Source: UBS Business Jet Survey 41-44 This slight decline in our customer interest score was driven by our domestic participants, while international customer interest increased this month. Chart 14: Customer Interest, Domestic vs. International 100 111111111111i1111 ?; 4444 1rrnm.O1f1A1229n112frVI III I T -71 A3P143ncsIgamx.2,314,%.-x2 .8432-ctag MI Domestic Intemrionai Source: UBS Business Jet Surrey #1.44 Customer Interest by Cabin Class In the next question. our participants were asked to indicate the class of aircraft in which they were seeing the most interest from potential buyers. Respondents were asked to choose from Large Cabin, Midsize Cabin or Small Cabin. Of the III responses (39 participants did not respond to this question). 62% indicated they were seeing the strongest interest in large cabin aircraft, with 15% indicating midsize and 23% indicating small cabin. These results are broadly in line with our prior survey, in which 66% indicated they were seeing the strongest interest in large cabin aircraft, 14% indicated midsize and 20% indicated small cabin. U0S7 EFTA_R1_01473300 EFTA02411805 UBS Business Jet Survey 24 March 2010 Chart 15: Cabin Class with Most Buyer Interest, March 2010 Small Can 23% Maize Cabn_ 15% Large Cabin 62% Source: UBS Bu smess Jet Sway #44 Pricing In the next question, we asked, "Since our last survey in January, overall pricing levels increased, stayed the same, or decreased?" Of the 145 responses (five participants did not respond to this question), 15% indicated that pricing levels had increased, while 19% indicated that pricing levels had decreased. The remaining 66% indicated that pricing levels had stayed the same. These results represent an improvement from our prior survey, in which 14% indicated that pricing levels had increased. 24% indicated that pricing levels had decreased, and 62% indicated that pricing levels had stayed the same. Chart 16: Indication of Pricing, March 2010 Decreased 1 014 increased 15% Stayed the same 66% Source: Source: UBS Business Jet Survey 444 UBSS EFTA_R1_01473301 EFTA02411806 UBS Business Jet Survey 24 Mena 2010 Our pricing score increased 7% this time, the eighth straight increase, and is now nearing the 50 mark, indicating pricing is well on its way to stabilizing following significant declines over the past two years. Chart 17: UBS Business Jet Survey Score—Pricing 100 - 50 0 F m a s a ;-, IS 3 s a a m a Fa $ 21: § ;4 23 12 $ 9 cc,- of 21:S;B§: 2M03 1Bi” nAx441P,W41.1x4Agfx4i4psii,lk-Wgi4PA4A3 Source UBS Buwess Jet Survey #1.44 Pricing by Cabin Class In the next question, our participants were asked to indicate the cabin class of aircraft in which they were seeing the strongest pricing. Respondents were asked to choose from Large Cabin, Midsize Cabin or Small Cabin. Of the 107 responses (43 participants did not respond to this question), 75% indicated they were seeing the strongest pricing in large cabin aircraft, with 8% indicating midsize and 17% indicating small cabin. These results are broadly in line with our prior survey, in which 71% indicated they were seeing the strongest pricing in large cabin aircraft, 12% indicated midsize and 17% indicated small cabin. Chart 18: Cabin Class with Strongest Pricing, Much 2010 Aliso Catlin 8% Smell Cain 17% lio Large Cabin 75% Source. U8S Busness Jel Survey #44 leS9 EFTA_R1_01473302 EFTA02411807 UBS Business Jet Survey 24 Mach 2010 12-Month Outlook In the next question, we asked, "Over the next 12 months, do you expect overall business conditions to improve, stay the same or deteriorate?" Of the 149 responses (one participant did not respond to this question), 61% expect business conditions to improve, while 4% expect business conditions to deteriorate. The remaining 35% expect business conditions to stay the same over the next 12 months. These results represent modest degradation from our previous survey, in which 66% expected business conditions to improve, 3% expected conditions to deteriorate and the remaining 31% expected business conditions to remain relatively unchanged over the following 12 months. Chart 19: 1241onth Forward Outlook for Business Conditions, March 2010 Deteriorate 4% Stay the same 35% 61% Source: UBS Business Jot Swim 444 Our 12-month outlook score came in at 79 this timc, slightly below our prior survey, but still well above 50, indicating that our survey participants expect market conditions to improve over the next 12 months on average. Chart 20: UBS Business Jet Survey Score-12-Month Outlook S 0 100 - 0 z 5-, 2 a a <7` Z a Z Z ZPICCtz s Z S 2 ti Rq R nicti44114q4-4-O ,4 p. 444,W4WI I,4IIMml, ” Source: UBS Business Jet Survey #1-44 USS 10 EFTA_R1_0 1473303 EFTA02411808 UBS Business Jet Survey 24 WO 2010 Overall Inventory Levels In the next question, we asked, "How would you characterize current inventory levels?" In this question, we targeted broker/dealers, but in some cases, other participants also responded. The survey participants were asked to select "high", "average", or "low." Of the 128 responses (22 participants did not respond to this question), 2% believe inventory levels are low, while 92% believe inventory levels are high. The remaining 6% believe inventory levels to be at average levels. These results represent modest degradation from our previous survey, in which I% believed inventory levels to be low. 88% believed inventory levels to be high. and the remaining 11% believed inventories to be at average levels. Chart 21: Indication of Inventory Levels, March 2010 Low µgh 92% Average 6% Source: UBS Business Jet Survey 944 Our inventory score at five continues to reflect extraordinarily high overall inventory levels. Chart 22: UBS Business Jet Survey Score—Inventory Levels toe 1 5° 0 s 3 t.; O b'filtrpszp9.“”qm4”c vn tg”;9”ImIn't flla45134.ga4AaPa4A3144§.345,s411a4la4g43PaPa Source: UBS Busitess Jet Surrey 91-44 US'S It EFTA_R1_01473304 EFTA02411809 UBS Business Jet Survey 24 Math 2010 Young Inventory Levels In the next question, we asked, "How would you characterize current inventory levels of relatively young used aircraft?" In this question, we targeted broker/dealers, but in some cases, other participants also responded. The survey participants were asked to select "high", "average", or "low." Of the 126 responses (24 participants did not respond to this question). 8% believe young inventory levels are low, 67% believe young inventory levels arc high, and the remaining 25% believe young inventories to be at average levels. These results are roughly in line with our prior survey. Chart 23: Indication of Young Inventory Levels, March 2010 Low 8% Average 25% 119h_ 67% Source: UBS Bessiess Jet Surey 1144 While our young inventory score reflects a drawdown from the recent peak, it still reflects a significant oversupply of high-quality. young used aircraft. Chart 24: UBS Business Jet Survey Score—Young Used Inventory Levels Young Inventory Score 100 50 0 91 91 86 90 87 91 90 83 77 1111111 11 1iii ii tikt; i 4 N 20 .. ; .;i ii cri 4 4 1 2,, 3 3 4 5i &) 1 ;F. -rt (,; &, 25) 3 g i g Source: UBS Business Jet Survey /11-44 UBS 12 EFTA_R1_01473305 EFTA02411810 UBS Business Jet Survey 24 Math 2010 Willingness to Increase inventories In the next question, we asked, "Over the next month, will you be more or less willing to increase your inventory?" In this question, we again targeted broker/dealers, but in some cases, other participants also responded. The survey participants were asked to select "more willing", "same", or "less willing." Of the 76 responses (74 participants did not respond to this question), 26% indicated they would be more willing to take on inventory, while 21% indicated they would be less willing to take on inventory. The remaining 53% indicated no change in their willingness to take on inventory. This represents an improvement from our prior survey, in which 25% indicated they would be more willing to take on inventory, 26% indicated they would be less willing to take on inventory and the remaining 49% indicated no change in their willingness to take on inventory. We use this question to validate sentiment in the marketplace with regard to the near-term outlook. Chart 25: Willingness to Increase Inventory Levels, March 2010 Less yang 21% More 26% Source: UBS Banes, Jet Sony #44 While this is the most volatile component of our survey, our willingness score increased 6% this time to 53, indicating respondents are more likely to add to inventories and reflective of increased confidence in near-term pricing/liquidity. Chart 26: UBS Business Jet Survey Score—Willingness to Increase Inventory Levels 100 a* as 2 g GI s $ _ 8 S Yt 8 ,.. 42 *DV St 2 ???0p4n9.4 ”m””9999 /9”;$2mEmE91.2•2 k'ndi A314A4i2rMA-2-1,t4fifl,A4A,MAg4gAillA04A1 Source: UBS Busiless Jel Survey #1-14 13 EFTA_R1_0147 3306 EFTA02411811 UBS Business Jet Survey 24 Mardi 2010 Customer Financing In the next question, we asked, "Since our last survey in January, has the availability of customer financing improved, stayed the same, or deteriorated?" Of the 148 responses (two participants did not respond to this question), 24% indicated that customer financing conditions had improved, while 3% indicated that financing conditions had deteriorated. The remaining 73% indicated that financing conditions had stayed the same. These results are roughly in line with our prior survey. Chart 27: Financing Conditions, March 2010 DeIsom-died 3% knproved h 24% Stayed the SalTr8 73% Source: UBS Busriess Jet Surrey #44 Our financing score came in at 60 this time, in line with our previous survey and indicating continued incremental improvement in financing availability. Chart 28: UBS Business Jet Survey Score—Financing 100 1 57 58 60 60 60 53 2 50 4 1 r. ' M I 0 73 Source: UBS Bustiess Jel Survey N44 J15 14 EFTA_R1_01473307 EFTA02411812 UBS Business Jet Survey 24 Mardi 2010 Commentary The following arc selected comments from business jet professionals. Current Market Conditions ■ Things are getting better, but we are not in a 'V' recovery, not even close. ■ Still too many buyers only interested in buying at wholesale prices. ■ We have seen a strong upturn, back to the levels of 18 months ago. ■ International (Non-US) markets are holding a good level of interest and sales, reflecting an improved economy in some regions, Brazil for example. ■ Flying has picked up 5-10% since this time last year. ■ Best first quarter in years! Prices have been dropping over the last couple of weeks, which probably helps. Business is getting better by the day! ■ Business is improving. ■ The used market is approaching normal levels, although pricing remains highly depressed. Interest & Inquiries ■ Call volume and interest are still rising, with most of our interest coming from overseas. ■ There is activity in the marketplace but it seems to come in spurts. Other dealers have said the same thing to me. Things heat up, some sales take place and then everything goes quiet for a few weeks. ■ We continue to observe a gradual improvement in demand. ■ Interest levels continue to rise, but this has not yet translated into a significant improvement in sales. Pricing ■ Buyers are seeking large discounts on repo purchases. ■ We have been trading corporate jets in the global market since 1977 and this is the worst price collapse we have ever seen. ■ Increasing rumors about heavily discounted new OEM product are negatively impacting pre-owned valuations. ■ Gulfstream products remain the strongest; Challenger 604 and Citation Excel have improved; Citation X and Hawker 400/800 are still declining. ■ Prices continue to erode. ■ Prices arc still low and buyers are looking for bargains, but them are plenty of buyers out there. USS 15 EFTA_R1_01473308 EFTA02411813 UBS Business Jet Survey 24 Mettn 2010 Financing ■ Liquidity has yet to fully return. The banks are hurting their asset value by failing to fund an orderly market again. ■ Dealer floor plan financiers are nearly extinct. ■ As the market works through inventory, credit will become more available. However, we may never sec rates go as low as in the past. ■ Financing is very difficult to find. ■ Banks' client selection and underwriting scrutiny have never been more stringent. ■ While lender scrutiny is relaxing and overall the financing environment appears to be opening up, availability remains depressed. We are still far from the conditions of 2006-07. ■ Still very limited lending. ■ Many banks and finance companies are more focused on reducing repo inventory than supporting buyers with competitive financing. Transactions ■ It is a kind of hit or miss world for most. If the moon, sun and stars align and you have the right buyer, seller and airplane you can make a deal. ■ Younger aircraft are selling, while older aircraft are taking forever to sell. ■ In the last 30 days we have closed four transactions to retail buyers. ■ The market has improved somewhat, but buyers are still a bit hesitant to pull the trigger. International buyers are only slightly more aggressive. ■ We have three aircraft pending sale: one Challenger 601 and two Hawker 800s. All three are for retail customers with financing secured, and all are likely to close within the next 1-3 weeks, but these are VERY cheap compared to the rest of the market and compared to book value. Outlook ■ I do not expect the market to fully recover for at least another 1-2 years. ■ We may be running into a double-dip situation, similar to 1984.85. ■ The traditional corporate flight department is awakening from its long winter nap, which should mean a much stronger 2010-1 I than 2009. ■ Until we see hiring resume, production increase, housing starts and sales on a steady incline, consumer spending increase and consumer confidence grow each month we will see more of the same in aircraft sales activity. ■ The two major hurdles are the trade gap and credit availability / rates. USS 16 EFTA_R1_01473309 EFTA02411814 UBS Business Jet Survey 24 Mart 2010 ■ Statement of Risk The business jet market is cyclical in nature, largely driven by the general economic environment. Business jet manufacturers' earnings and cash flow arc dependent on end-user demand, availability of customer financing, program execution and inventory management. Our estimates, ratings and price targets for both General Dynamics and Textron are subject to additional risks including poor program execution and government funding related to their defense and security businesses. Additionally, Textron faces liquidity risks related to it its asset based lending businesses. ■ Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (I) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. USS 17 EFTA_R1_01473310 EFTA02411815 UBS Business Jet Survey 24 Medi 2010 Required Disclosures This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Investment Research: Global Equity Rating Allocations UBS 12-Month Rating Rating Category Coverage' IS Services Buy Neutral Sell Buy Hold/Neutral Sell 48% 40% 13% 40% 35% 26% UBS Short-Tenn Rating Rating Category Coverage la Services Buy Sell Buy Sell less than 1% less than 1% 17% 67% 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 31 December 2009. UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition Buy Sell Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. u6S 18 EFTA_R1_01473311 EFTA02411816 UBS Business4st Survey 24 Maids 2010 KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of. the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any. follows. UBS Securities LLC: David E. Strauss; Cristina Fernandez: Darryl Genovesi. UBS Securities Canada Inc: Tasneem Azim. Company Disclosures Company Name Reuters 12-mo rating Short-term rating Price Price date General Dynamics Corp. GD.N Buy N/A USS76.94 23 Mar 2010 Rockwell Collins Inc.'* 4 5' a a a L IL 16.15s COL.N Buy N/A USS62.85 23 Mar 2010 Textron Inez s. a a lic' 7' a la TXT.N Neutral N/A USS22.45 23 Mar 2010 Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 2. UBS AG. its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months. 4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 5. UBS AG. its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided. 6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC. and non-investment banking securities-related services are being, or have been, provided. 6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided. 7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity. 8. The equity analyst covering this company, a member of his or her team, or one of their household members has a long common stock position in this company. USS 19 EFTA_R1_01473312 EFTA02411817 UBS Business Jet Survey 24 Mardi 2010 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 18a. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Rockwell Collins Inc. 18b. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Textron Inc. The analyst responsible for this report has reviewed the material operations of the issuer and/or met with senior management. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. General Dynamics Corp. (USE) Abe Target CUSS) — Stock erce CUSS) I / g I 4 4 4 0 ' • 4 '1 4 4 4 • 4 0 4 4' 4 t • 4 i Pi '4 4 4 E. s a s s S s S s S I I I I I I I 1 I I I • I Say 2 Buy I Weevil No Rung Source: UBS: as of 23 Mar 2010 Rockwell Collins Inc. (USE) Buy' Ate Targel (US$) — Axe Ate (002) I I I $ $ $ 4 4 .1 4 4 4 4, 4 II 1 7,1 7 Neubil I 1442 No Rothe I 7 I I I 3 Source: UBS: as of 23 Mar 2010 u8S 20 EFTA_R1_01473313 EFTA02411818 UBS Business Jet Survey 24 Meth 2010 Textron Inc. (US$) Am Tale, NSSI — Boot Rye (USE/ 800- 60r 4 20D 001 I I I I I I I I I I I I I I I I I I 76 /1/ g I / g i / / a own I I EttY Neutral No Refray I 1 Source: UBS; as of 23 Mar 2010 Note: On August 4.2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table for details). From September 9. 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6% above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA. lower degree of predictability; Neutral 1 = FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA, lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6% below the MRA, lower degree of predictability. The predictability level indicates an analyst's conviction in the FSR. A predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller, range of possibilities. A predictability level of '2' means that the analysts estimate of FSR is in the middle of a broader, or larger, range of possibilities. From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%. Additional Prices: Bombardier Inc., C$5.87 (23 Mar 2010); Embraer, US$24.66 (23 Mar 2010); Source: UBS. All prices as of local market close. UP'S 21 EFTA_R1_01473314 EFTA02411819 USG Business Jet Survey 24 Mardi 2010 Global Disclaimer Thia revolt has been pitman, Dh UBS Savn,» Lie. en cabbala of U8S AG UBS AG. as bondman honeles cad alionns ern reironbd to ',Pear es U8$ In «Man witnes. UBS AG a »Wed lo as UBS SA. The newt is tee &straiten cede uncle son cecuncetancen as may be winded by apple.sra, Law. None» in trio resort constitutes a recresentaecec that any '»ettmen Wategy wommemlayon Øker») hoe» n sortable ce ~evade to e recpac s ntilvdical ow bantam:es a Wow» commutes a rasa», inceanenOsson It n published >WO lac 'domain» porpron. 11 doen rat consume an advenitemerl and 4 nu to be COntlfund asa ~ton or an offs to tir a wd an, froCurtbfrn d related f onyanrants in any idndiclion No reaesentatyon Cr warrant,. 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