Long Recommendation - Alpha Challenge

Long Recommendation Allison Transmission Holdings, Inc. (NYSE: ALSN)

Company Overview

The Allison Brand is the Dominant Market Leader

Source: Company filings

LTM Net Sales by End Market

NA On-Highway 42%

NA Hybrid Transit Bus

5% NA Off-Highway

2%

Defense 13%

Ex-NA On-Highway

15%

Ex-NA Off-Highway

5%

Aftermarket & Other 18%

Largest global manufacturer of fully-automatic transmissions for medium- and heavy-duty commercial vehicles

The industry may have passed a demand inflection point – net sales

are stabilizing

Premier brand: premium price components for end users

Consistently strong EBITDA margin and free cash flow generation

Investment Rationale

Long-Term Revenue Growth

Potential

Margin Expansion

Opportunities

Returns to Shareholders

• Global market leader – 62% global market share of fully-automatic transmissions

• Cyclical recovery in North America construction, private fleet, and municipal markets, as well as continued investments in oil & gas services industries

• Adoption and increased penetration of fully-automatic transmissions in emerging markets

• Historically strong operating margins (~33% adjusted EBITDA margin) • Superior products give ALSN advantages as end users are willing to pay

premium (higher equipment residual values in the used markets) • Capability and commitment to delivering strong operating margins during

periods of slower demand by executing initiatives to align costs • Multi-tier labor agreement – allows ALSN to hire lower-cost employees

• Strong FCF generation – 7.7% FCF yield and cash conversion cycle of ~35 days • Low CapEx requirements – allows free cash flow to paydown debt, resulting

in multiple expansion • During 3Q13, ALSN repurchased $100mm of its common stock • ALSN currently pays a quarterly dividend of $0.12 per share – increased from

$0.06 per share

Limited Downside Risk; Demand-Driven Upside Potential

#1

#2

#3

Investment Rationale (#1): LT Revenue Growth Potential

Developed Market Recovery Combined with Continued Adoption in Emerging Markets

Source: Company filings, ACT Research

Total NA Production in Core Market (‘000s)

Penetration of Fully-Automatic Transmissions

• Continued cyclical recovery, from 2009 cyclical low, expected in core North American end markets (42% of LTM net sales)

• Long-term runway for growth: • End users have deferred equipment

purchases • Incremental demand for fuel efficient

driven by regulatory mandates and increasing fuel prices

• Buyers’ focus on maximizing productivity: ALSN’s transmissions offer lower maintenance costs and improved safety

• Emerging markets today predominantly utilize

manual transmissions • Low penetration and increasing adoption

outside North America present a significant growth opportunity for ALSN • The multi-year conversion could result in

potentially doubling the international markets within the next five years

vs. 74%

5%

Fully Automatic

North America

26%

95% Other

Ex-North America

Investment Rationale (#2): Margin Expansion Opportunities

Premium Vocational Pricing Model Combined with Cost Controls and Productivity Improvements

Source: Company filings, ACT Research, and Oppenheimer research as of September 4, 2012

• ~90% of NA unit volume was covered by long-term customer supply agreements

• Average annual CapEx spending of ~$100mm, or approximately 14% of adjusted EBITDA, over the last 3 years • Facility investments in

India and Hungary should generate manufacturing efficiency

• ALSN also acquires licenses to obtain technology to complement its portfolio of products and product initiatives (development agreement with Torotrak and Fallbrook)

ALSN’s North American Market Share

• 100% share in wheeled military vehicles • Exclusive transmission provider on two of

the US Army’s three tracked platforms

Adjusted EBITDA Margin

Investment Rationale (#3): Returns to Shareholders

Avenues to Create Shareholder Value via Deleveraging, Dividend Increases, and Share Repurchases


• ALSN generates significant amount of free cash flow

• Positioned for long-term cash earnings growth

• Management is committed to reducing leverage with the long-term goal of investment-grade status • Deleveraging could

result in multiple growth opportunities

• Share repurchases and/or increases in dividends paid

• Theoretically, ALSN could buy back ~50% of its total shares with adjusted FCFs over the next five years (at today’s share price)

FCF Generation

Net Debt-to-Adjusted EBITDA

2013E Implied Valuation Based on EBITDA Multiple: 2013E Implied Valuation Based on DCF:

2014E Adjusted EBITDA $680.0 Assumed Terminal Growth Rate 3.0%

Enterprise Value / Adjusted EBITDA 11.0x WACC (Discount Rate) 10.5%

Implied Enterprise Value $7,480.5 Implied Enterprise Value $7,274.6

Less: 2013E Total Debt (2,731.2) Less: 2013E Total Debt (2,731.2)

Plus: 2013E Cash and Cash Equivalents 197.7 Plus: 2013E Cash and Cash Equivalents 197.7

Plus: Present Value of NOLs (US Tax Shield) 825.0 Plus: Value of NOLs 825.0

Implied Equity Value $5,772.0 Implied Equity Value $5,566.1

2013E Diluted Shares Outstanding 188.6 2013E Diluted Shares Outstanding 188.6

Implied Share Price $30.60 Implied Share Price $29.51

Price Appreciation 27.1% Price Appreciation 22.6%

Dividend Yield 2.0% Dividend Yield 2.0%

Total Returns to Shareholders 29.1% Total Returns to Shareholders 24.6%

Implied Share Price $30.06

Price Appreciation 24.9%

Dividend Yield 2.0%

Total Returns to Shareholders 26.9%

Valuation

Based on EBITDA Multiple and DCF Analysis

Please refer to the “Issues for

Consideration” slide

Weighting two methodologies equally

Assumes 0.5x multiple expansion

Sensitivity Analysis

Sensitivity on DCF Analysis

Sensitivity on EBITDA Multiple and Gross Margin

38.0%

35.5%

33.0%

30.5%

28.0%Ad

just

ed

EB

ITD

A M

argi

nSensitivity on Sales Growth and Gross Margin

EBITDA Multiple

12.0x 11.5x 11.0x 10.5x 10.0x

50.0% 40.77 38.70 36.62 34.54 32.47

47.5% 37.49 35.55 33.61 31.67 29.73

45.0% 34.21 32.41 30.60 28.80 27.00

42.5% 30.93 29.26 27.60 25.93 24.26

40.0% 27.65 26.12 24.59 23.06 21.53

Gro

ss M

argi

n

Terminal Growth Rate

3.50% 3.25% 3.00% 2.75% 2.50%

9.5% 38.49 36.92 35.47 34.13 32.88

10.0% 34.82 33.50 32.28 31.14 30.07

10.5% 31.68 30.56 29.51 28.53 27.61

11.0% 28.96 28.00 27.09 26.24 25.44

11.5% 26.59 25.75 24.96 24.22 23.52

WA

CC

2014E Net Sales Growth

8.0% 7.5% 7.0% 6.5% 6.0%

50.0% 36.93 36.77 36.62 36.46 36.31

47.5% 33.89 33.75 33.61 33.47 33.33

45.0% 30.86 30.73 30.60 30.48 30.35

42.5% 27.82 27.71 27.60 27.48 27.37

40.0% 24.79 24.69 24.59 24.49 24.39

Gro

ss M

argi

n

Metrics implied by the current stock price of $24.07

Issues for Consideration


Ownership

• The Carlyle Group and Onex Corporation each hold a ~34% equity stake in ALSN (lock-up expired in September 2012)

• Large block trades could create downward pressure on ALSN stock price • However, increased liquidity in ALSN stock could expand investor base

NOLs

• Acquisition by the Carlyle Group and Onex Corporation from General Motors in August 2007 created tax shield due to a step-up in the tax basis of ALSN assets

• ALSN estimates as of 4Q12 that the present value of tax savings from both amortization of intangibles and federal NOLs is between $825 million and $1,020 million

• Area for further due diligence

Government Entities

• Sales of hybrid-propulsion systems in transit buses (5% of LTM net sales) are negatively impacted as government entities do not elect to subsidize purchases by end users

• Military spending cuts by government entities (13% of LTM net sales) could reduce ALSN’s future earnings potential

Appendix Allison Transmission Holdings, Inc. (NYSE: ALSN)

Historical Price

Source: Bloomberg

Ownership Summary

Source: Bloomberg

Management

Source: Company website

Lawrence E. Dewey Chairman, President,

and CEO

• Joined ALSN in 1989 • Promoted to the current position since the sale of ALSN to Carlyle and Onex in August

2007 • Currently serves on the Board of Directors of the Indiana Chamber of Commerce, the

Indiana Sports Corporation, and the Greater Indianapolis Progress Committee

David S. Graziosi EVP, CFO, and

Treasurer

• Joined ALSN in 2007 • Between 2006 and 2007, served as EVP and CFO of Covalence Specialty Materials

Corporation • From 2005 to 2006, served as VP of Finance Precursors and Epoxy Resins at Hexion

Specialty Chemicals, Inc. • From 2004 to 2005, served as EVP and CFO at Resolution Performance Products LLC

David L. Parish SVP, Operations and

Purchasing

• Joined ALSN in 1977 • Responsible for global plant operations, service parts operations, supply chain facilities,

environmental, and manufacturing engineering and has facilitated the growth of ALSN’s global footprint through the construction of new facilities in India and Hungary in August 2012

James L. Wanaselja VP, NA Marketing, Sales, and Service

• Joined ALSN in 1995 • Prior to joining ALSN, worked for Voith Transmission, Inc. from 1982 through 1995 • Prior to joining Voith Transmission, Inc., began career with General Electric in 1974

Comparable Company & WACC Analyses

Source: Capital IQ (as of November 8, 2013), Ibbotson, Company filings

Assumptions: Levered Total Market Debt / Unlevered

Tax Rate 38.5% Company Beta Debt Equity Mkt. Equity Beta

Risk Free Rate 2.75% Eaton 1.46 $9,693 $33,500 28.9% 1.13

Equity Risk Premium 6.62% PACCAR 1.37 9,570 20,127 47.5% 1.03

Market Cap. Size Premium 0.94% Cummins 1.66 1,793 24,488 7.3% 1.57

Pre-Tax Cost of Debt 4.00% 4.50% 5.00% 5.50% 6.00%

After-Tax Cost of Debt 2.46% 2.77% 3.08% 3.38% 3.69%

Mean

Debt/ Debt/ Unlevered Levered Cost of

Capital Mkt Equity Beta Beta Equity WEIGHTED AVERAGE COST OF CAPITAL

17.5% 21.2% 1.24 1.41 13.0% 11.15% 11.21% 11.26% 11.31% 11.37%

22.5% 29.0% 1.24 1.47 13.4% 10.93% 11.00% 11.07% 11.14% 11.21%

27.5% 37.9% 1.24 1.53 13.8% 10.71% 10.80% 10.88% 10.97% 11.05%

32.5% 48.1% 1.24 1.61 14.4% 10.49% 10.59% 10.69% 10.79% 10.89%

37.5% 60.0% 1.24 1.70 15.0% 10.27% 10.39% 10.50% 10.62% 10.73%

42.5% 73.9% 1.24 1.81 15.7% 10.05% 10.18% 10.31% 10.44% 10.57%

47.5% 90.5% 1.24 1.94 16.5% 9.83% 9.98% 10.12% 10.27% 10.42%

52.5% 110.5% 1.24 2.09 17.5% 9.61% 9.77% 9.93% 10.10% 10.26%

57.5% 135.3% 1.24 2.28 18.8% 9.39% 9.57% 9.75% 9.92% 10.10%

Market Enterprise % 52-Wk. Debt/ EBITDA/ EV/EBITDA P/E LT EPS Div.

Company Ticker Price Cap Value High Cap EBITDA Interest 2013E 2014E 2013E 2014E Growth PEG Yield

Eaton ETN $70.60 $33,500 $41,899 97% 38% 3.3x 9.2x 12.6x 10.9x 17.1x 14.4x 10% 1.7x 2.3%

PACCAR PCAR 56.84 20,127 26,865 95% 60% 4.1 nm 14.5 13.8 17.3 15.7 10% 1.7 1.4%

Cummins CMI 130.70 24,488 23,988 94% 19% 0.9 nm 9.8 8.3 17.3 14.0 10% 1.7 1.6%

Navistar International NAV 39.82 3,202 6,877 99% nm nm -2.4x nm 9.1 nm 43.4 5% na 0.0%

Truck-Oriented Mean 96% 39% 2.8x 3.4x 12.3x 10.5x 17.2x 21.9x 9% 1.7x 1.3%

Manufacturers Median 96% 38% 3.3 3.4 12.6 10.0 17.3 15.1 10% 1.7 1.5%

Allison Transmission ALSN $24.07 $4,547 $7,126 88% 38% 4.2x 3.8x 11.2x 10.5x 12.3x 10.4x 9% 1.5x 2.0%

Financial Projections: Income Statement

CAGR

($mm, except as noted) 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E '13E – '18E

Net Sales $1,926.3 $2,162.8 $2,141.8 $1,927.5 $2,062.4 $2,240.1 $2,413.7 $2,577.4 $2,755.6 7.4%

Cost of Sales 1,098.1 1,208.3 1,187.5 1,077.2 1,134.3 1,226.5 1,315.5 1,398.3 1,488.0 6.7%

Gross Profit 828.2 954.5 954.3 850.3 928.1 1,013.6 1,098.2 1,179.2 1,267.6 8.3%

Selling, General and Administrative Expenses 384.9 409.1 419.0 347.0 366.1 392.0 416.4 438.2 461.6 5.9%

Engineering – Research and Development 101.5 116.4 115.1 96.4 98.0 100.8 102.6 103.1 103.3 1.4%

Operating Income 341.8 429.0 420.2 407.0 464.0 520.8 579.3 637.9 702.7 11.5%

Interest Income 3.5 0.9 0.9 0.8 0.8 0.8 0.8 0.8 0.8 0.0%

Interest Expense (281.0) (218.2) (152.1) (140.1) (112.1) (111.7) (86.8) (100.4) (106.8) (5.3%)

Premiums and Expenses on Tender Offer for Long-Term Debt - (56.9) - - - - - - - N/A

Other (Expense) Income, Net 19.0 (4.2) (52.8) (9.6) - - - - - (100.0%)

Income before Income Taxes 83.3 150.6 216.2 258.1 352.8 410.0 493.3 538.4 596.6 18.2%

Income Tax Benefit (Expense) (53.7) (47.6) 298.0 (101.5) (135.8) (157.8) (189.9) (207.3) (229.7) 17.8%

Net Income $29.6 $103.0 $514.2 $156.6 $217.0 $252.1 $303.4 $331.1 $366.9 18.6%

Diluted EPS Attributable to Common Stockholders $0.16 $0.56 $2.76 $0.83 $1.15 $1.34 $1.61 $1.76 $1.95 18.6%

Dividends per Common Share $0.00 $0.00 $0.18 $0.42 $0.48 $0.53 $0.55 $0.58 $0.61 7.8%

Weighted Average Shares of Common Stock Outstanding 181.4 181.4 182.0 185.0 184.4 184.4 184.4 184.4 184.4 (0.1%)

Dilutive Effect Stock-Based Awards - 1.9 4.2 3.6 3.6 3.6 3.6 3.6 3.6 0.0%

Diluted Weighted Average Shares of Common Stock Outstanding 181.4 183.3 186.2 188.6 188.0 188.0 188.0 188.0 188.0 (0.1%)

Financial Projections: Income Statement (cont’d)

CAGR


Adjusted Metrics:

Net Income $29.6 $103.0 $514.2 $156.6 $217.0 $252.1 $303.4 $331.1 $366.9

Interest Expense, Net 277.5 217.3 151.2 139.3 111.3 110.9 86.0 99.6 106.0 (5.3%)

Income Tax (Benefit) Expense 53.7 47.6 (298.0) 101.5 135.8 157.8 189.9 207.3 229.7 17.8%

Depreciation of Property, Plant and Equipment 99.6 103.8 102.5 110.1 117.2 124.3 131.5 138.6 145.7 5.8%

Amortization of Intangible Assets 154.2 151.9 150.0 105.4 98.8 97.1 92.4 89.7 86.2 (3.9%)

Premiums and Expenses on Tender Offer for Long-Term Debt - 56.9 - - - - - - - N/A

Others 2.4 31.4 85.2 22.1 - - - - - (100.0%)

Adjusted EBITDA $617.0 $711.9 $705.1 $635.0 $680.0 $742.2 $803.1 $866.2 $934.5 8.0%

Net Cash Provided by Operating Activities $388.9 $469.2 $497.5 $416.3 $462.7 $401.6 $550.9 $537.3 $625.5 8.5%

Additions of Long-Lived Assets (73.8) (96.9) (123.9) (72.3) (75.0) (75.0) (75.0) (75.0) (75.0) 0.7%

Fee to Terminate Services Agreement with the Sponsors - - 16.0 - - - - - - N/A

Technology-Related License Expenses - - 12.0 6.0 6.0 6.0 6.0 6.0 6.0 0.0%

Adjusted Free Cash Flow $315.1 $372.3 $401.6 $350.0 $393.7 $332.6 $481.9 $468.3 $556.5 9.7%

Key Metrics:

Gross Profit 43.0% 44.1% 44.6% 44.1% 45.0% 45.3% 45.5% 45.8% 46.0%

SG&A as % of Net Sales 20.0% 18.9% 19.6% 18.0% 17.8% 17.5% 17.3% 17.0% 16.8%

R&D as % of Net Sales 5.3% 5.4% 5.4% 5.0% 4.8% 4.5% 4.3% 4.0% 3.8%

Depreciation as % of Total PP&E 10.2% 9.2% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5%

Adjusted EBITDA Margin 32.0% 32.9% 32.9% 32.9% 33.0% 33.1% 33.3% 33.6% 33.9%

Net Debt to Adjusted EBITDA 4.3x 3.9x 4.0x 3.3x 2.7x 2.0x 1.4x 0.8x

Effective Tax Rate 64.5% 31.6% (137.8%) 39.3% 38.5% 38.5% 38.5% 38.5% 38.5%

Financial Projections: Net Sales

CAGR

($mm, except as noted) 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E '13E – '18E

Net Sales by End Market:

North America On-Highway $727 $813 $848 $933 $1,003 $1,078 $1,132 $1,189 7.0%

North America Hybrid Propulsion Systems for Transit Bus 134 115 96 82 70 63 58 55 (10.6%)

North America Off-Highway 280 157 39 52 62 69 74 78 15.0%

Military 304 305 212 159 143 143 143 143 (7.6%)

Outside North America On-Highway 277 290 289 332 382 421 463 509 12.0%

Outside North America Off-Highway 87 114 96 101 116 131 147 166 11.4%

Service, Parts, Support Equipment & Other 354 348 366 403 463 510 561 617 11.0%

Total Net Sales $2,163 $2,142 $1,928 $2,062 $2,240 $2,414 $2,577 $2,756 7.4%


North America On-Highway 34% 38% 44% 45% 45% 45% 44% 43%

North America Hybrid Propulsion Systems for Transit Bus 6% 5% 5% 4% 3% 3% 2% 2%

North America Off-Highway 13% 7% 2% 3% 3% 3% 3% 3%

Military 14% 14% 11% 8% 6% 6% 6% 5%

Outside North America On-Highway 13% 14% 15% 16% 17% 17% 18% 18%

Outside North America Off-Highway 4% 5% 5% 5% 5% 5% 6% 6%

Service, Parts, Support Equipment & Other 16% 16% 19% 20% 21% 21% 22% 22%

Total Net Sales 100% 100% 100% 100% 100% 100% 100% 100%

Financial Projections: Balance Sheet

CAGR


Assets

Current Assets

Cash and Cash Equivalents $314.0 $80.2 $197.7 $396.2 $62.3 $349.1 $622.2 $983.6 37.8%

Accounts Receivable 194.7 165.0 198.7 162.9 229.9 193.4 258.6 224.6 2.5%

Inventories 155.9 157.1 165.9 157.3 192.1 182.7 215.7 208.2 4.7%

Deferred Income Taxes, Net 3.4 55.3 56.9 58.3 53.6 54.8 57.5 59.5 0.9%

Other Current Assets 34.7 32.7 33.2 34.0 31.3 31.9 33.5 34.7 0.9%

Total Current Assets 702.7 490.3 652.4 808.8 569.2 811.8 1,187.5 1,510.6 18.3%

Total Property, Plant and Equipment 1,015.6 1,111.7 1,158.7 1,233.7 1,308.7 1,383.7 1,458.7 1,533.7 5.8%

Accumulated Depreciation and Amortization (433.8) (515.5) (625.6) (742.8) (867.1) (998.6) (1,137.1) (1,282.8) 15.4%

Property, Plant and Equipment, Net 581.8 596.2 533.1 490.9 441.6 385.1 321.6 250.9 (14.0%)

Total Intangible Assets 2,551.0 2,551.0 2,576.3 2,576.3 2,576.3 2,576.3 2,576.3 2,576.3 0.0%

Accumulated Amortization (684.9) (834.9) (940.3) (1,039.1) (1,136.2) (1,228.6) (1,318.3) (1,404.5) 8.4%

Intangible Assets, Net 1,866.1 1,716.1 1,636.0 1,537.2 1,440.1 1,347.7 1,258.0 1,171.8 (6.5%)

Goodwill 1,941.0 1,941.0 1,941.0 1,941.0 1,941.0 1,941.0 1,941.0 1,941.0 0.0%

Deferred Income Taxes, Net 0.8 32.3 1.1 - - - - - (100.0%)

Other Non-Current Assets 100.2 90.1 73.0 82.6 76.0 77.6 81.4 84.3 2.9%

Total Assets $5,192.6 $4,866.0 $4,836.6 $4,860.5 $4,467.9 $4,563.3 $4,789.5 $4,958.6 0.5%

Financial Projections: Balance Sheet (cont’d)

CAGR


Liabilities

Current Liabilities

Accounts Payable $162.6 $133.1 $163.9 $131.3 $187.9 $154.5 $209.4 $177.9 1.6%

Product Warranty Liability 33.9 36.2 38.6 38.9 35.7 36.5 38.3 39.7 0.5%

Current Portion of Long-Term Debt 31.0 19.5 11.4 - - - - - (100.0%)

Notes Payable 2.6 - - - - - - - N/A

Deferred Revenue 19.9 21.6 21.6 21.6 21.6 21.6 21.6 21.6 0.0%

Other Current Liabilities 199.9 167.4 162.8 165.3 151.9 155.2 162.8 168.6 0.7%

Total Current Liabilities 449.9 377.8 398.3 357.1 397.1 367.8 432.2 407.7 0.5%



Long-Term Debt 3,345.0 2,801.3 2,719.8 2,620.0 2,037.5 1,926.3 1,815.1 1,703.9 (8.9%)

Deferred Income Taxes 214.2 0.1 37.0 38.9 35.7 36.5 38.3 39.7 1.4%

Other Non-Current Liabilities 239.5 213.8 193.5 204.1 187.7 191.7 201.2 208.3 1.5%

Total Liabilities 4,370.9 3,509.1 3,443.4 3,324.6 2,754.1 2,620.3 2,589.7 2,466.2 (6.5%)

Stockholders' Equity

Common Stock 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 0.0%

Non-Voting Common Stock - - - - - - - - N/A

Treasury Stock (0.2) (0.2) (99.7) (99.7) (99.7) (99.7) (99.7) (99.7) 0.0%

Paid In Capital 1,560.8 1,601.5 1,645.2 1,659.5 1,673.8 1,688.0 1,702.3 1,716.6 0.9%

Accumulated Deficit (683.7) (202.3) (119.3) 9.1 172.8 387.6 630.2 908.6 N/A

Accumulated Other Comprehensive Loss, Net of Tax (57.0) (43.9) (34.8) (34.8) (34.8) (34.8) (34.8) (34.8) 0.0%

Total Stockholders' Equity 821.7 1,356.9 1,393.2 1,535.9 1,713.8 1,942.9 2,199.8 2,492.5 12.3%

Total Liabilities & Stockholders' Equity $5,192.6 $4,866.0 $4,836.6 $4,860.5 $4,467.9 $4,563.3 $4,789.5 $4,958.6 0.5%

Financial Projections: Cash Flow Statement

CAGR


Cash Flows from Operating Activities:

Net Income $29.6 $103.0 $514.2 $156.6 $217.0 $252.1 $303.4 $331.1 $366.9 18.6%

Add (Deduct) Items:




Deferred Income Taxes 51.5 39.8 (303.8) 68.1 3.0 (3.1) 0.8 1.8 1.4 (54.3%)

Unrealized (Gain) Loss on Derivatives 28.8 13.9 (26.2) (2.7) - - - - - (100.0%)

Amortization of Deferred Financing Costs 11.6 12.1 14.5 11.2 - - - - - (100.0%)

Impairment Loss on Investments in Technology-Related Initiatives - - 14.4 2.5 - - - - - (100.0%)

Stock-Based Compensation 8.5 8.0 6.4 14.3 14.3 14.3 14.3 14.3 14.3 0.0%

Loss (Gain) on Repurchases and Redemptions of Long-Term Debt (3.3) 16.0 22.1 0.7 - - - - - (100.0%)

Loss on Re-Measurement of Employee Benefit Plans - - 2.3 - - - - - - N/A

Excess Tax Benefit from Stock-Based Compensation - - (5.3) (9.3) (10.6) (10.6) (10.6) (10.6) (10.6) 2.6%

Other 2.1 (1.4) (0.2) (4.2) 0.1 (1.8) 0.4 1.0 0.8 N/A

Changes in Assets and Liabilities:

Accounts Receivable 23.7 (25.0) 29.9 (33.7) 35.8 (66.9) 36.5 (65.2) 34.0 N/A

Inventories (11.8) (11.0) (1.8) (8.8) 8.6 (34.8) 9.5 (33.1) 7.5 N/A

Accounts Payable 3.2 24.9 (29.4) 30.8 (32.6) 56.5 (33.4) 54.9 (31.6) N/A

Other Assets and Liabilities (8.8) (23.7) 7.9 (24.6) 11.1 (25.5) 6.2 14.7 11.0 N/A

Net Cash Provided by Operating Activities 388.9 469.2 497.5 416.3 462.7 401.6 550.9 537.3 625.5 8.5%

Financial Projections: Cash Flow Statement (cont’d)

CAGR


Cash Flows from Investing Activities:


Investments in Technology-Related Initiatives - - (14.4) (6.3) - - - - - (100.0%)

Collateral for Interest Rate Derivatives (21.8) 38.6 (1.0) 1.7 - - - - - (100.0%)

Proceeds from Disposal of Assets 0.3 2.4 0.6 0.5 - - - - - (100.0%)

Net Cash Used for Investing Activities (95.3) (55.9) (138.7) (76.3) (75.0) (75.0) (75.0) (75.0) (75.0) (0.4%)

Cash Flows from Financing Activities:

Issuance of Long-Term Debt - 500.0 - - - - - - - N/A

Debt Issuance Costs - (15.0) - - - - - - - N/A

Debt Financing Fees - - (20.2) (2.6) - - - - - (100.0%)

Repurchases and Redemptions of Long-Term Debt (91.9) (764.4) (326.9) - - - - - - N/A

Repurchase of Common Stock - - - (99.5) - - - - - (100.0%)

Payments on Long-Term Debt (106.0) (90.5) (245.4) (89.6) (111.2) (582.5) (111.2) (111.2) (111.2) 4.4%

Dividend Payments - - (32.8) (73.6) (88.5) (88.5) (88.5) (88.5) (88.5) 3.8%

Issuance of Common Stock - - 29.0 33.5 - - - - - (100.0%)

Payments on Notes Payable - - (2.5) - - - - - - N/A

Excess Tax Benefit from Stock-Based Compensation - - 5.3 9.3 10.6 10.6 10.6 10.6 10.6 2.6%

Net Cash Used for Financing Activities (197.9) (369.9) (593.5) (222.5) (189.2) (660.5) (189.2) (189.2) (189.2) (3.2%)

Effect of Exchange Rate Changes on Cash 3.4 18.4 0.9 - - - - - - N/A

Net (Decrease) Increase in Cash and Cash Equivalents 99.1 61.8 (233.8) 117.5 198.5 (333.8) 286.8 273.1 361.4 25.2%

Cash and Cash Equivalents at Beginning of Period 153.1 252.2 314.0 80.2 197.7 396.2 62.3 349.1 622.2 50.6%

Cash and Cash Equivalents at End of Period 252.2 314.0 80.2 197.7 396.2 62.3 349.1 622.2 983.6 37.8%

Allison Transmission Holdings, Inc.

Valuation Summary

($mm, except as noted)

Current Capitalization Summary: Current Valuation Metrics:

Stock Price as of November 8, 2013 $24.07 2014E Adjusted EBITDA $680.0

Enterprise Value / 2014E Adjusted EBITDA 10.5x

Common Stock Outstanding 182.4

Non-Voting Common Stock Outstanding 0.0 Total Debt to Total Market Capitalization 37.5%

Dilution from Options Outstanding 6.5

Diluted Shares Outstanding 188.9 Last Quarter Annualized Dividends per Share $0.48

Implied Dividend Yield 1.99%

Equity Market Capitalization $4,546.7

Plus: Current Portion of Long-Term Debt 11.4

Plus: Long-Term Debt 2,719.8

Total Market Capitalization $7,277.9

Less: Cash and Cash Equivalents (152.3)

Enterprise Value $7,125.6


2014E Adjusted EBITDA $680.0 Assumed Terminal Growth Rate 3.0%

Enterprise Value / Adjusted EBITDA 11.0x WACC (Discount Rate) 10.5%


Less: 2013E Total Debt (2,731.2) Less: 2013E Total Debt (2,731.2)


Plus: Present Value of NOLs (US Tax Shield) 825.0 Plus: Value of NOLs 825.0




Price Appreciation 27.1% Price Appreciation 22.6%

Dividends Yield 2.0% Dividends Yield 2.0%

Total Returns to Shareholders 29.1% Total Returns to Shareholders 24.6%


Price Appreciation 24.9%

Dividends Yield 2.0%

Total Returns to Shareholders 26.9%


Discounted Cash Flow Analysis

($mm, except as noted) 2013E 2014E 2015E 2016E 2017E 2018E

Operating Income (EBIT) $407.0 $464.0 $520.8 $579.3 $637.9 $702.7

Income Tax Expense (160.0) (178.7) (200.5) (223.0) (245.6) (270.5)

Effective Tax Rate 39.3% 38.5% 38.5% 38.5% 38.5% 38.5%

Depreciation of Property, Plant and Equipment 110.1 117.2 124.3 131.5 138.6 145.7

Amortization of Intangible Assets 105.4 98.8 97.1 92.4 89.7 86.2

Additions of Long-Lived Assets (72.3) (75.0) (75.0) (75.0) (75.0) (75.0)

Change in Net Working Capital (36.3) 22.9 (70.7) 18.8 (28.6) 20.9

Free Cash Flow from Continuing Operations $353.8 $449.3 $396.0 $523.9 $517.0 $609.9

Terminal Value (1) 8,376.0

Total Free Cash Flow $449.3 $396.0 $523.9 $517.0 $8,985.9

Discount Period 0.5 1.5 2.5 3.5 4.5

Discount Rate 10.5% 10.5% 10.5% 10.5% 10.5%

Discount Factor 0.951 0.861 0.779 0.705 0.638

Discounted Free Cash Flow $427.4 $340.9 $408.2 $364.5 $5,733.6

Sum of Discounted FCFs (Implied Enterprise Value) $7,274.6

Less: 2013E Total Debt (2,731.2)

Plus: 2013E Cash and Cash Equivalents 197.7

Plus: Value of NOLs (US Tax Shield) 825.0

Implied Equity Value $5,566.1

2013E Diluted Shares Outstanding 188.6


(1) Based on assumed terminal growth rate of 3.0% and assumed WACC of 10.5%.


Income Statement

CAGR


Net Sales $1,926.3 $2,162.8 $2,141.8 $1,927.5 $2,062.4 $2,240.1 $2,413.7 $2,577.4 $2,755.6 7.4%

Cost of Sales 1,098.1 1,208.3 1,187.5 1,077.2 1,134.3 1,226.5 1,315.5 1,398.3 1,488.0 6.7%

Gross Profit 828.2 954.5 954.3 850.3 928.1 1,013.6 1,098.2 1,179.2 1,267.6 8.3%

Selling, General and Administrative Expenses 384.9 409.1 419.0 347.0 366.1 392.0 416.4 438.2 461.6 5.9%

Engineering – Research and Development 101.5 116.4 115.1 96.4 98.0 100.8 102.6 103.1 103.3 1.4%

Operating Income 341.8 429.0 420.2 407.0 464.0 520.8 579.3 637.9 702.7 11.5%

Interest Income 3.5 0.9 0.9 0.8 0.8 0.8 0.8 0.8 0.8 0.0%

Interest Expense (281.0) (218.2) (152.1) (140.1) (112.1) (111.7) (86.8) (100.4) (106.8) (5.3%)

Premiums and Expenses on Tender Offer for Long-Term Debt - (56.9) - - - - - - - N/A

Other (Expense) Income, Net 19.0 (4.2) (52.8) (9.6) - - - - - (100.0%)

Income before Income Taxes 83.3 150.6 216.2 258.1 352.8 410.0 493.3 538.4 596.6 18.2%

Income Tax Benefit (Expense) (53.7) (47.6) 298.0 (101.5) (135.8) (157.8) (189.9) (207.3) (229.7) 17.8%

Net Income $29.6 $103.0 $514.2 $156.6 $217.0 $252.1 $303.4 $331.1 $366.9 18.6%

Diluted EPS Attributable to Common Stockholders $0.16 $0.56 $2.76 $0.83 $1.15 $1.34 $1.61 $1.76 $1.95 18.6%

Dividends per Common Share $0.00 $0.00 $0.18 $0.42 $0.48 $0.53 $0.55 $0.58 $0.61 7.8%

Weighted Average Shares of Common Stock Outstanding 181.4 181.4 182.0 185.0 184.4 184.4 184.4 184.4 184.4 (0.1%)

Dilutive Effect Stock-Based Awards - 1.9 4.2 3.6 3.6 3.6 3.6 3.6 3.6 0.0%

Diluted Weighted Average Shares of Common Stock Outstanding 181.4 183.3 186.2 188.6 188.0 188.0 188.0 188.0 188.0 (0.1%)

Adjusted Metrics:

Net Income $29.6 $103.0 $514.2 $156.6 $217.0 $252.1 $303.4 $331.1 $366.9

Interest Expense, Net 277.5 217.3 151.2 139.3 111.3 110.9 86.0 99.6 106.0 (5.3%)

Income Tax (Benefit) Expense 53.7 47.6 (298.0) 101.5 135.8 157.8 189.9 207.3 229.7 17.8%




Others 2.4 31.4 85.2 22.1 - - - - - (100.0%)

Adjusted EBITDA $617.0 $711.9 $705.1 $635.0 $680.0 $742.2 $803.1 $866.2 $934.5 8.0%

Net Cash Provided by Operating Activities $388.9 $469.2 $497.5 $416.3 $462.7 $401.6 $550.9 $537.3 $625.5 8.5%


Fee to Terminate Services Agreement with the Sponsors - - 16.0 - - - - - - N/A

Technology-Related License Expenses - - 12.0 6.0 6.0 6.0 6.0 6.0 6.0 0.0%

Adjusted Free Cash Flow $315.1 $372.3 $401.6 $350.0 $393.7 $332.6 $481.9 $468.3 $556.5 9.7%

Key Metrics:

Gross Profit 43.0% 44.1% 44.6% 44.1% 45.0% 45.3% 45.5% 45.8% 46.0%

SG&A as % of Net Sales 20.0% 18.9% 19.6% 18.0% 17.8% 17.5% 17.3% 17.0% 16.8%

R&D as % of Net Sales 5.3% 5.4% 5.4% 5.0% 4.8% 4.5% 4.3% 4.0% 3.8%

Depreciation as % of Total PP&E 10.2% 9.2% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5%

Adjusted EBITDA Margin 32.0% 32.9% 32.9% 32.9% 33.0% 33.1% 33.3% 33.6% 33.9%

Net Debt to Adjusted EBITDA 4.3x 3.9x 4.0x 3.3x 2.7x 2.0x 1.4x 0.8x

Effective Tax Rate 64.5% 31.6% (137.8%) 39.3% 38.5% 38.5% 38.5% 38.5% 38.5%


Balance Sheet

CAGR


Assets

Current Assets

Cash and Cash Equivalents $314.0 $80.2 $197.7 $396.2 $62.3 $349.1 $622.2 $983.6 37.8%

Accounts Receivable 194.7 165.0 198.7 162.9 229.9 193.4 258.6 224.6 2.5%

Inventories 155.9 157.1 165.9 157.3 192.1 182.7 215.7 208.2 4.7%

Deferred Income Taxes, Net 3.4 55.3 56.9 58.3 53.6 54.8 57.5 59.5 0.9%

Other Current Assets 34.7 32.7 33.2 34.0 31.3 31.9 33.5 34.7 0.9%

Total Current Assets 702.7 490.3 652.4 808.8 569.2 811.8 1,187.5 1,510.6 18.3%

Total Property, Plant and Equipment 1,015.6 1,111.7 1,158.7 1,233.7 1,308.7 1,383.7 1,458.7 1,533.7 5.8%

Accumulated Depreciation and Amortization (433.8) (515.5) (625.6) (742.8) (867.1) (998.6) (1,137.1) (1,282.8) 15.4%

Property, Plant and Equipment, Net 581.8 596.2 533.1 490.9 441.6 385.1 321.6 250.9 (14.0%)

Total Intangible Assets 2,551.0 2,551.0 2,576.3 2,576.3 2,576.3 2,576.3 2,576.3 2,576.3 0.0%

Accumulated Amortization (684.9) (834.9) (940.3) (1,039.1) (1,136.2) (1,228.6) (1,318.3) (1,404.5) 8.4%

Intangible Assets, Net 1,866.1 1,716.1 1,636.0 1,537.2 1,440.1 1,347.7 1,258.0 1,171.8 (6.5%)

Goodwill 1,941.0 1,941.0 1,941.0 1,941.0 1,941.0 1,941.0 1,941.0 1,941.0 0.0%

Deferred Income Taxes, Net 0.8 32.3 1.1 - - - - - (100.0%)

Other Non-Current Assets 100.2 90.1 73.0 82.6 76.0 77.6 81.4 84.3 2.9%

Total Assets $5,192.6 $4,866.0 $4,836.6 $4,860.5 $4,467.9 $4,563.3 $4,789.5 $4,958.6 0.5%

Liabilities

Current Liabilities

Accounts Payable $162.6 $133.1 $163.9 $131.3 $187.9 $154.5 $209.4 $177.9 1.6%


Current Portion of Long-Term Debt 31.0 19.5 11.4 - - - - - (100.0%)

Notes Payable 2.6 - - - - - - - N/A


Other Current Liabilities 199.9 167.4 162.8 165.3 151.9 155.2 162.8 168.6 0.7%

Total Current Liabilities 449.9 377.8 398.3 357.1 397.1 367.8 432.2 407.7 0.5%



Long-Term Debt 3,345.0 2,801.3 2,719.8 2,620.0 2,037.5 1,926.3 1,815.1 1,703.9 (8.9%)

Deferred Income Taxes 214.2 0.1 37.0 38.9 35.7 36.5 38.3 39.7 1.4%

Other Non-Current Liabilities 239.5 213.8 193.5 204.1 187.7 191.7 201.2 208.3 1.5%

Total Liabilities 4,370.9 3,509.1 3,443.4 3,324.6 2,754.1 2,620.3 2,589.7 2,466.2 (6.5%)


Common Stock 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 0.0%

Non-Voting Common Stock - - - - - - - - N/A

Treasury Stock (0.2) (0.2) (99.7) (99.7) (99.7) (99.7) (99.7) (99.7) 0.0%

Paid In Capital 1,560.8 1,601.5 1,645.2 1,659.5 1,673.8 1,688.0 1,702.3 1,716.6 0.9%

Accumulated Deficit (683.7) (202.3) (119.3) 9.1 172.8 387.6 630.2 908.6 N/A

Accumulated Other Comprehensive Loss, Net of Tax (57.0) (43.9) (34.8) (34.8) (34.8) (34.8) (34.8) (34.8) 0.0%

Total Stockholders' Equity 821.7 1,356.9 1,393.2 1,535.9 1,713.8 1,942.9 2,199.8 2,492.5 12.3%

Total Liabilities & Stockholders' Equity $5,192.6 $4,866.0 $4,836.6 $4,860.5 $4,467.9 $4,563.3 $4,789.5 $4,958.6 0.5%

Key Metrics:

Days Sales Outstanding 30.6 34.4 32.0 32.0 32.0 32.0 32.0

Days Inventories Outstanding 48.1 54.7 52.0 52.0 52.0 52.0 52.0

Days Payable Outstanding 45.4 50.3 47.5 47.5 47.5 47.5 47.5

Cash Conversion Cycle 33.3 38.8 36.5 36.5 36.5 36.5 36.5

Deferred Income Taxes (Current Asset) as % of Total Assets 0.1% 1.1% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2%

Other Current Assets as % of Total Assets 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7%

Deferred Income Taxes (Asset) as % of Total Assets 0.0% 0.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Other Non-Current Assets as % of Total Assets 1.9% 1.9% 1.5% 1.7% 1.7% 1.7% 1.7% 1.7%

Product Warranty Liability (Current Asset) as % of Total Assets 0.7% 0.7% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%

Other Current Liabilities as % of Total Assets 3.8% 3.4% 3.4% 3.4% 3.4% 3.4% 3.4% 3.4%

Product Warranty Liability as % of Total Assets 1.6% 1.5% 1.1% 1.3% 1.3% 1.3% 1.3% 1.3%

Deferred Revenue as % of Total Assets 0.8% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%

Deferred Income Taxes (Liability) as % of Total Assets 4.1% 0.0% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%

Other Non-Current Liabilities as % of Total Assets 4.6% 4.4% 4.0% 4.2% 4.2% 4.2% 4.2% 4.2%


Cash Flow Statement

CAGR



Net Income $29.6 $103.0 $514.2 $156.6 $217.0 $252.1 $303.4 $331.1 $366.9 18.6%

Add (Deduct) Items:




Deferred Income Taxes 51.5 39.8 (303.8) 68.1 3.0 (3.1) 0.8 1.8 1.4 (54.3%)

Unrealized (Gain) Loss on Derivatives 28.8 13.9 (26.2) (2.7) - - - - - (100.0%)

Amortization of Deferred Financing Costs 11.6 12.1 14.5 11.2 - - - - - (100.0%)

Impairment Loss on Investments in Technology-Related Initiatives - - 14.4 2.5 - - - - - (100.0%)

Stock-Based Compensation 8.5 8.0 6.4 14.3 14.3 14.3 14.3 14.3 14.3 0.0%

Loss (Gain) on Repurchases and Redemptions of Long-Term Debt (3.3) 16.0 22.1 0.7 - - - - - (100.0%)

Loss on Re-Measurement of Employee Benefit Plans - - 2.3 - - - - - - N/A

Excess Tax Benefit from Stock-Based Compensation - - (5.3) (9.3) (10.6) (10.6) (10.6) (10.6) (10.6) 2.6%

Other 2.1 (1.4) (0.2) (4.2) 0.1 (1.8) 0.4 1.0 0.8 N/A


Accounts Receivable 23.7 (25.0) 29.9 (33.7) 35.8 (66.9) 36.5 (65.2) 34.0 N/A

Inventories (11.8) (11.0) (1.8) (8.8) 8.6 (34.8) 9.5 (33.1) 7.5 N/A

Accounts Payable 3.2 24.9 (29.4) 30.8 (32.6) 56.5 (33.4) 54.9 (31.6) N/A

Other Assets and Liabilities (8.8) (23.7) 7.9 (24.6) 11.1 (25.5) 6.2 14.7 11.0 N/A

Net Cash Provided by Operating Activities 388.9 469.2 497.5 416.3 462.7 401.6 550.9 537.3 625.5 8.5%



Investments in Technology-Related Initiatives - - (14.4) (6.3) - - - - - (100.0%)

Collateral for Interest Rate Derivatives (21.8) 38.6 (1.0) 1.7 - - - - - (100.0%)

Proceeds from Disposal of Assets 0.3 2.4 0.6 0.5 - - - - - (100.0%)

Net Cash Used for Investing Activities (95.3) (55.9) (138.7) (76.3) (75.0) (75.0) (75.0) (75.0) (75.0) (0.4%)


Issuance of Long-Term Debt - 500.0 - - - - - - - N/A

Debt Issuance Costs - (15.0) - - - - - - - N/A

Debt Financing Fees - - (20.2) (2.6) - - - - - (100.0%)

Repurchases and Redemptions of Long-Term Debt (91.9) (764.4) (326.9) - - - - - - N/A

Repurchase of Common Stock - - - (99.5) - - - - - (100.0%)

Payments on Long-Term Debt (106.0) (90.5) (245.4) (89.6) (111.2) (582.5) (111.2) (111.2) (111.2) 4.4%

Dividend Payments - - (32.8) (73.6) (88.5) (88.5) (88.5) (88.5) (88.5) 3.8%

Issuance of Common Stock - - 29.0 33.5 - - - - - (100.0%)

Payments on Notes Payable - - (2.5) - - - - - - N/A

Excess Tax Benefit from Stock-Based Compensation - - 5.3 9.3 10.6 10.6 10.6 10.6 10.6 2.6%

Net Cash Used for Financing Activities (197.9) (369.9) (593.5) (222.5) (189.2) (660.5) (189.2) (189.2) (189.2) (3.2%)

Effect of Exchange Rate Changes on Cash 3.4 18.4 0.9 - - - - - - N/A

Net (Decrease) Increase in Cash and Cash Equivalents 99.1 61.8 (233.8) 117.5 198.5 (333.8) 286.8 273.1 361.4 25.2%

Cash and Cash Equivalents at Beginning of Period 153.1 252.2 314.0 80.2 197.7 396.2 62.3 349.1 622.2 50.6%

Cash and Cash Equivalents at End of Period 252.2 314.0 80.2 197.7 396.2 62.3 349.1 622.2 983.6 37.8%


Net Sales

CAGR



North America On-Highway $727 $813 $848 $933 $1,003 $1,078 $1,132 $1,189 7.0%

North America Hybrid Propulsion Systems for Transit Bus 134 115 96 82 70 63 58 55 (10.6%)

North America Off-Highway 280 157 39 52 62 69 74 78 15.0%

Military 304 305 212 159 143 143 143 143 (7.6%)

Outside North America On-Highway 277 290 289 332 382 421 463 509 12.0%

Outside North America Off-Highway 87 114 96 101 116 131 147 166 11.4%

Service, Parts, Support Equipment & Other 354 348 366 403 463 510 561 617 11.0%

Total Net Sales $2,163 $2,142 $1,928 $2,062 $2,240 $2,414 $2,577 $2,756 7.4%


North America On-Highway 34% 38% 44% 45% 45% 45% 44% 43%

North America Hybrid Propulsion Systems for Transit Bus 6% 5% 5% 4% 3% 3% 2% 2%

North America Off-Highway 13% 7% 2% 3% 3% 3% 3% 3%

Military 14% 14% 11% 8% 6% 6% 6% 5%

Outside North America On-Highway 13% 14% 15% 16% 17% 17% 18% 18%

Outside North America Off-Highway 4% 5% 5% 5% 5% 5% 6% 6%

Service, Parts, Support Equipment & Other 16% 16% 19% 20% 21% 21% 22% 22%

Total Net Sales 100% 100% 100% 100% 100% 100% 100% 100%

Net Sales by Country

United States $1,411.0 $1,532.7 $1,509.6

China 67.3 93.3 136.4

Canada 133.1 165.6 123.0

United Kingdom 49.0 58.2 74.1

Japan 33.7 46.5 52.0

Germany 33.9 42.9 39.1

India 24.6 7.9 6.9

Other 173.7 215.7 200.7

Total Net Sales $1,926.3 $2,162.8 $2,141.8

Net Sales by Country

United States 73% 71% 70%

China 3% 4% 6%

Canada 7% 8% 6%

United Kingdom 3% 3% 3%

Japan 2% 2% 2%

Germany 2% 2% 2%

India 1% 0% 0%

Other 9% 10% 9%

Total Net Sales 100% 100% 100%


Debt

CAGR


Long-Term Debt:

Senior Secured Credit Facility Term B-1 Loan, Variable, Due 2014 $2,594.9 $411.4 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 N/A

Senior Secured Credit Facility Term B-2 Loan, Variable, Due 2017 - 793.1 1,123.5 1,023.5 923.5 823.5 723.5 623.5 (11.1%)

Senior Secured Credit Facility Term B-3 Loan, Variable, Due 2019 - 1,145.0 1,136.4 1,125.2 1,114.0 1,102.8 1,091.6 1,080.4 (1.0%)

Senior Cash Pay Notes, Fixed 7.125%, Due 2019 471.3 471.3 471.3 471.3 - - - - (100.0%)

Senior Cash Pay Notes, Fixed 11.0%, Due 2015 309.8 - - - - - - - N/A

Total Long-Term Debt $3,376.0 $2,820.8 $2,731.2 $2,620.0 $2,037.5 $1,926.3 $1,815.1 $1,703.9 (9.0%)

Less: Current Maturities of Long-Term Debt 31.0 19.5 11.4 - - - - - (100.0%)

Total Long-Term Debt Less Current Portion $3,345.0 $2,801.3 $2,719.8 $2,620.0 $2,037.5 $1,926.3 $1,815.1 $1,703.9 (8.9%)

Interest Expense:

Senior Secured Credit Facility Term B-2 Loan, Variable, Due 2017

Beginning Balance $1,123.5 $1,023.5 $923.5 $823.5 $723.5 N/A

Retirement (Assumes Refinancing in 2017E) (100.0) (100.0) (100.0) (100.0) (100.0) N/A

Ending Balance $1,123.5 $1,023.5 $923.5 $823.5 $723.5 $623.5 (11.1%)

Average Balance $1,073.5 $973.5 $873.5 $773.5 $673.5

Interest Rate (LIBOR + 3.00%) 3.00% 3.36% 3.71% 4.52% 5.51% 6.23%

Interest Expense $36.1 $36.1 $39.5 $42.6 $41.9

Senior Secured Credit Facility Term B-3 Loan, Variable, Due 2019

Beginning Balance $1,136.4 $1,125.2 $1,114.0 $1,102.8 $1,091.6 N/A

Principal Payment (11.2) (11.2) (11.2) (11.2) (11.2) N/A

Retirement - - - - - N/A

Ending Balance $1,136.4 $1,125.2 $1,114.0 $1,102.8 $1,091.6 $1,080.4 (1.0%)

Average Balance $1,130.8 $1,119.6 $1,108.4 $1,097.2 $1,086.0

Interest Rate (LIBOR + 2.75%) 2.75% LIBOR has a floor of 1.00% 3.75% 3.75% 4.27% 5.26% 5.98%


Senior Cash Pay Notes, Fixed 7.125%, Due 2019

Beginning Balance $471.3 $471.3 $0.0 $0.0 $0.0 N/A

Retirement - (471.3) - - - N/A

Ending Balance $471.3 $471.3 $0.0 $0.0 $0.0 $0.0 (100.0%)

Average Balance $471.3 $471.3 $0.0 $0.0 $0.0

Interest Rate 7.125% 7.125% 7.125% 7.125% 7.125% 7.125%


Key Metrics:

Interst Expense $112.1 $111.7 $86.8 $100.4 $106.8

Debt Principal Payment + Debt Retirement 111.2 582.5 111.2 111.2 111.2

Short Recommendation DigitalGlobe, Inc. (NYSE: DGI)

Company Overview

Global Provider of Earth Imagery Solutions


US market leader in Earth Observation (“EO”)

image services

Actively integrating GeoEye, its recently acquired

primary competitor

Exclusive commercial provider of satellite imaging to

US government

US Government

59%

Commercial 41%

2013 YTD Net Revenues

US 69%

International 31%

By Customer Type By Customer Domicile

Diversifying into high margin services opportunities

Investment Rationale

Competition is Overlooked

Highly Concentrated

Customer Base

Growing Pains

• International competition is underappreciated by the market • Imaging is a commodity and can be accomplished by non-satellite

technology • DGI’s best commercial customers (e.g. Google) are also its competition in

information services

• The US government accounts for over half of DGI’s revenue • National Geospatial-Intelligence Agency (“NGA”) is the price setter and

holds all the power in customer relationship • NGA has option to renegotiate contract annually

• Consensus revenue growth expectations for government-related revenue is optimistic given current budget situation

• Multi-year satellite build time and massive CapEx requirements make CapEx/Revenue matching extremely challenging: New satellite sidelined

• Significant operating leverage will create margin pressure if revenue continues to miss growth targets

• Asset light segments must drive revenue and margin growth, but DGI’s customers are increasingly able to insource these services

#1

#2

#3

Current Valuation Implies Perfect Execution by Management

Investment Rationale (#1): Overlooked Competition

Competitors and Customers Can Compete for EO Demand

Source: Company website, Company filings, Equity research

Established Competitors are Well Positioned

Post- Integration

Pricing Concerns

• Aside from US government contracts, EO industry is a globally competitive business

• Astrium and RapidEye have a larger constellation of satellites and daily collection capabilities than DGI

• Competitors also have satellites in production comparable to GeoEye-2 and WorldView-3

• Before the GeoEye acquisition, the market mistakenly characterized and labeled the EO market as a duopoly

“The earth observation industry is a duopoly and the market is largely divided between DigitalGlobe and its biggest competitor GeoEye.”

– Macquarie (4/27/11)

• Recent equity research has not reflected this inaccuracy, but the current environment is hardly a land grab with public and private competitors

• With potential increased competition for commercial sales, there is no certainty that DGI can maintain high margins or its dominant market share

“Multiple Growth Drivers and High Barriers to Entry: DigitalGlobe and GeoEye represent a domestic duopoly serving the need for high-resolution Earth imagery from space.”

– Morgan Stanley (8/17/09)

Investment Rationale (#1): Overlooked Competition (cont’d)

Competitors and Customers Can Compete for EO Demand

Location Based Services is Old News

DGI’s Customers Can Capture

Value

• DGI management cites Location Based Services (“LBS”) as a key growth area, but LBS is not a new commercial technology

• Value chain includes image processors, analysts, resellers and end users including Google, Apple and Garmin

• There is nothing special about satellite images taken by DGI. The value of LBS is tying GPS to the user’s location, which can be represented by a map, satellite imagery or aerial imagery

• Images need context, which is ultimately provided by end users • GeoEye’s information analytics capabilities touted by DGI as growth driver,

but DGI’s information-focused customers are increasingly able to insource these services

Investment Rationale (#1): Overlooked Competition (cont’d)

Aerial Imagery is Vastly Superior to Satellite Imagery for LBS

Source: Google (accessed 11/7/2013)

• Unrestricted image resolution • Easily tailored to customer’s needs

Where do you think the growth in LBS is more likely to be?

Why hasn’t Google updated its satellite image of One World Trade Center?

Aerial Imagery Satellite Imagery

• Governments prohibits satellite image resolution below 50cm

Why is management making broad generalizations about LBS rather than talking in specifics?

Invest. Rationale (#2): Highly Concentrated Customer Base

NGA’s Renegotiation Power and Budget Limitations Reduce Revenue Visibility

Source: DGI and GEOY financial disclosures, Washington Post

NGA can Renegotiate

Each Year

• The 10 year contract with NGA includes a series of one-year options for NGA to continue at the current terms

• Precedent for NGA not renewing its EnhancedView SLA • NGA previously cited budget reasons in choosing to

discontinue its involvement with GeoEye • Equity research analysts are not cautious enough about NGA

revenue growth forecasts

• Value-added services has driven recent growth but sustaining this trend is uncertain

• Information leaked by Edward Snowden indicates that the NGA’s budget for 2013 was $4.9bn and grew at an annual rate of 8.5% since 2004. However, the Street continues to forecast 16% US government revenue growth for the foreseeable future

• We believe there is significant downside risk to this revenue source, because DGI is likely to be a budget casualty before the National Reconnaissance Office loses resources

Street’s Bull Case Ignores

Budget Realities

Investment Rationale (#3): Growing Pains

DGI Must Ramp Up Its High Margin Services and Meet or Exceed Expectations

Operating Leverage Cuts

Both Ways

• The high fixed costs and long build times for satellites makes DGI’s constellation of satellites difficult to forecast and budget

• While operating leverage enables margin improvement if new opportunities are available, incorrectly forecasting the need for new satellites can create significant challenges: • Newest satellite in storage indefinitely • Downside case reflects 300bps reduction in EBITDA margin to reflect

adverse affect from high operating leverage

Market is Receptive to

Management’s Mixed Message

• DGI must grow into its current valuation, but is struggling to meet management’s revenue guidance

• Management is currently targeting the “low end” of their original 2013 revenue guidance of $635mm-$660mm, and on October 31 warned they may not even get to the guidance range

• Commercial revenue growth missed analysts estimates in 3Q’13 • The market reacted positively to the Oct. 31 earnings announcement and the

price has increased 14% since

“2 out of 3 ain’t bad. […] Better than expected government revenue growth (up 53% y/y vs. our 37%E), but a miss on commercial revenues (up 47% vs. our 87%E). […] we acknowledge that better growth here will be key to demonstrating to investors that DGI is truly evolving from an aerospace/defense firm into an information services business.”

– Piper Jaffray (10/31/13)

Source: Company earnings call transcripts, Company filings, Equity research

Investment Rationale (#3): Growing Pains (cont’d)

DGI Must Successfully Execute GEOY Integration Plan

GeoEye Acquisition

• DGI acquired GeoEye in 2012 for $1.3bn to consolidate the domestic industry, get access to GeoEye-2, and improve IT infrastructure

• Management estimates NPV of synergies (revenues and cost savings) to be $1.8bn

• Integration is ahead of schedule and DGI management expects EBITDA margins to normalize by 2H14

• GeoEye-2 is scheduled to go into storage after completion

Source: Company earnings call transcripts, Company filings, Equity research, Citi

“I know we used to badmouth GeoEye a lot but there’s a lot of good things -- now that we’re on the same team -- that they do [sic], but we’re benefitting from that”

– Yancey Spruill, CFO (Citi Investor Conference, 11/5/13)

How credible is DGI management at assessing the industry?

Will mothballing GeoEye-2 prevent value creation?

Valuation – Downside Case

Based on EBITDA Multiple and DCF Analysis

Larger expected stock price decline as prolonged effect of decline in business prospects

weighs on intrinsic (DCF) valuation

Weighting two methodologies equally

Assumes current market multiple contracts upon

poor performance

(1) Does not include the cost of borrowing


2014E EBITDA $332.3 Assumed Terminal Growth Rate 3.0%

Enterprise Value / 2014E EBITDA 9.0x WACC (Discount Rate) 9.0%


Less: 2013E Debt (1,142.2) Less: 2013E Debt (1,142.2)





Price Appreciation/(Depreciation) (15.0%) Price Appreciation/(Depreciation) (27.6%)

Projected Total Returns(1) 15.0% Projected Total Returns(1) 27.6%


Price Appreciation/(Depreciation) (21.3%)

Projected Total Returns(1) 21.3%

Risks to Our Thesis

Risks to Valuation

Competition Stumbles

Miscellaneous

• Short squeeze could occur if results exceed expectations and the resulting operating leverage boosts DGI stock price

• Lifting the ban on commercial satellite image resolution better than 50 cm would give DGI a decisive advantage over competition

• DGI would benefit from its competitors failing to execute their strategies given long lead times

• US federal budget issues are permanently resolved and there is more clarity into long-term contracts

• DGI may use CapEx holiday if GeoEye-2 continues to be mothballed and uses free cash flow to de-lever or pursue bolt-on acquisitions

• If value-added services grows faster than current estimates, DGI has excess capacity to meet demand by launching GeoEye-2

Appendix DigitalGlobe, Inc. (NYSE: DGI)

Historical Price

Source: Bloomberg

Ownership Summary

Source: Bloomberg

Short Interest

Source: Bloomberg

Management

Source: Company website

Jeffrey Tarr President and CEO

• Joined DGI in 2011 • Between 2008 and 2010, served as President and Chief Operating Officer of IHS Inc. • Between 2004 and 2008, served at IHS as Co-President and Co-COO, and President and

COO of one of the company’s two operating divisions • Between 2001 and 2004, served as CEO and President of Hoover’s

Yancey Spruill EVP, CFO and

Treasurer

• Joined DGI in 2004 • Between 2000 and 2004, served as a Principal in the Investment Banking group at

Thomas Weisel Partners • Prior investment banking positions at Lehman Brothers and JPMorgan

Timothy Hascall EVP Operations and

Customer Experience

• Joined DGI in 2011 • Between 2004 and 2011, served as a senior executive at TriZetto Corporation • Prior positions at Equitant, Andersen Consulting and Accenture • Former Major in United States Marine Corps, serving as an imagery intelligence officer

Walter Scott EVP Chief Technical Officer and Founder

• Founded DGI in 1992 • Between 1986 and 1992, held technical, program and department management

positions at Lawrence Livermore National Laboratory • Currently serves on Board of Directors of The Open Geospatial Consortium

Comparable Company Analysis

Source: Capital IQ (as of November 8, 2013)

Market Enterprise % 52-Wk. Debt/ EBITDA/ EV/EBITDA P/E LT EPS Div.

Company Ticker Price Cap Value High Cap EBITDA Interest 2013E 2014E 2013E 2014E Growth PEG Yield

Satellite Communication

Intelsat I $19.01 $2,006 $17,263 71% 107% 8.0x 1.6x 8.7x 8.5x nm 6.7x 2% na 0.0%

Macdonald Dettwiler TSX:MDA 75.30 2,713 3,291 93% 52% 3.0 5.9x 11.2 9.5 15.3 13.0 6% 2.5 0.8%

Satellite Mean 82% 80% 5.5x 3.8x 10.0x 9.0x 15.3x 9.9x 4% 2.5x 0.4%

Communication Median 82% 80% 5.5 3.8 10.0 9.0 15.3 9.9 4% 2.5 0.4%

Other Defense & Communication

Lockheed Martin LMT $138.11 $43,989 $47,484 100% 83% 1.2x 14.7x 8.3x 7.9x 14.2x 13.6x 7% 2.2x 3.3%

Raytheon RTN 85.36 27,270 28,276 100% 34% 1.4 15.8x 8.5 8.2 14.7 13.8 8% 1.8 2.5%

Northrop Grumman NOC 110.73 24,581 25,565 100% 39% 1.6 15.5x 7.2 7.4 13.6 13.3 6% 2.3 2.1%

ViaSat VSAT 64.92 2,950 3,464 88% 39% 3.9 3.6x 16.5 11.7 nm 50.0 32% na 0.0%

Orbital Sciences ORB 22.72 1,374 1,277 95% 16% 0.9 nm 8.3 8.0 20.1 19.5 13% 1.6 0.0%

Iridium Communications IRDM 5.45 418 1,084 59% 50% 5.0 nm 5.3 5.0 7.5 5.8 12% 0.6 0.0%

Other Defense & Mean 90% 43% 2.3x 12.4x 9.0x 8.0x 14.0x 19.3x 13% 1.7x 1.3%

Communication Median 97% 39% 1.5 15.1 8.3 8.0 14.2 13.7 10% 1.8 1.0%

Total Comparable Mean 88% 53% 3.1x 9.5x 9.2x 8.3x 14.2x 17.0x 11% 1.8x 1.1%

Universe Median 94% 45% 2.3 10.3 8.4 8.1 14.5 13.4 7% 2.0 0.4%

DigitalGlobal - Base Case DGI $34.70 $2,610 $3,498 95% 46% 4.7x nm 18.5x 10.5x nm 56.2x 16% na 0.0%

DigitalGlobal - Street Case 18.5x 9.9x nm 43.0x

WACC Analysis

Source: Capital IQ (as of November 8, 2013), Ibbotson, Company filings

$ in millions, except per share amounts

Assumptions: Levered Total Market Debt / Unlevered

Tax Rate 35.0% Company Beta Debt Equity Mkt. Equity Beta

Risk Free Rate 2.75% Lockheed Martin 0.88 $6,156 $43,989 14.0% 0.80

Equity Risk Premium 6.62% Raytheon 0.80 $4,733 $27,270 17.4% 0.72

Market Cap. Size Premium 1.17% Northrop Grumman 1.10 $5,928 $24,581 24.1% 0.95

ViaSat 1.07 $588 $2,950 19.9% 0.99

Orbital Sciences 1.32 $145 $1,374 10.6% 1.23

Pre-Tax Cost of Debt 3.25% 4.25% 5.25% 6.25% 7.25%

After-Tax Cost of Debt 2.11% 2.76% 3.41% 4.06% 4.71%

Historical

Debt/ Debt/ Unlevered Levered Cost of

Capital Mkt Equity Beta Beta Equity WEIGHTED AVERAGE COST OF CAPITAL

25.0% 33.3% 0.94 1.14 11.5% 9.13% 9.30% 9.46% 9.62% 9.78%

30.0% 42.9% 0.94 1.20 11.9% 8.93% 9.13% 9.32% 9.52% 9.71%

35.0% 53.8% 0.94 1.27 12.3% 8.74% 8.96% 9.19% 9.42% 9.65%

40.0% 66.7% 0.94 1.34 12.8% 8.54% 8.80% 9.06% 9.32% 9.58%

45.0% 81.8% 0.94 1.44 13.4% 8.34% 8.63% 8.92% 9.22% 9.51%

50.0% 100.0% 0.94 1.55 14.2% 8.14% 8.46% 8.79% 9.11% 9.44%

55.0% 122.2% 0.94 1.68 15.1% 7.94% 8.30% 8.65% 9.01% 9.37%

60.0% 150.0% 0.94 1.85 16.2% 7.74% 8.13% 8.52% 8.91% 9.30%

65.0% 185.7% 0.94 2.07 17.6% 7.54% 7.96% 8.39% 8.81% 9.23%

Financial Projections: Income Statement – Base Case

CAGR

($mm, except as noted) 2013E 2014E 2015E 2016E 2017E 2018E '13E – '18E

Net Sales $631.4 $722.4 $814.1 $880.1 $955.0 $1,040.1 10.5%

Cost of Sales 189.4 183.5 202.7 217.4 234.0 252.7 5.9%

Gross Profit 442.0 538.9 611.4 662.7 721.0 787.4 12.2%

Selling, General and Administrative Expenses 252.6 206.6 228.8 245.5 264.5 286.0 2.5%

Impairment Charges - - - - - - N/A

Total Expenses 252.6 206.6 228.8 245.5 264.5 286.0 2.5%

EBITDA 189.4 332.3 382.6 417.2 456.5 501.3 21.5%

Depreciation and Amortization 215.4 293.1 337.0 308.2 313.3 277.9 5.2%

EBIT (25.9) 39.2 45.6 109.0 143.2 223.5 N/A

Interest Expense, Net 29.7 33.3 37.1 48.4 61.2 66.3 17.4%

Other (Expense) Income, Net - - - - - - N/A

Income before Income Taxes 3.8 72.5 82.7 157.4 204.4 289.8 138.2%

Income Tax Benefit (Expense) (1.2) (25.4) (28.9) (55.1) (71.5) (101.4) 141.0%

Net Income to all Stockholders 2.5 47.1 53.7 102.3 132.8 188.3 136.7%

Diluted EPS Attributable to Common Stockholders $0.03 $0.62 $0.70 $1.34 $1.74 $2.47 41.3%

Shares of Common Stock Outstanding 75.2 75.2 75.2 75.2 75.2 75.2

Dilutive Effect Options Outstanding 1.2 1.2 1.2 1.2 1.2 1.2

Diluted Shares of Common Stock Outstanding 76.4 76.4 76.4 76.4 76.4 76.4

% Net Sales

COGS 30.0% 25.4% 24.9% 24.7% 24.5% 24.3%

SG&A 40.0% 28.6% 28.1% 27.9% 27.7% 27.5%

EBITDA 30.0% 46.0% 47.0% 47.4% 47.8% 48.2%

Margin

Gross Profit 70.0% 74.6% 75.1% 75.3% 75.5% 75.7%

EBITDA 30.0% 46.0% 47.0% 47.4% 47.8% 48.2%

Net 0.4% 6.5% 6.6% 11.6% 13.9% 18.1%

Other

Tax Rate 33.0% 35.0% 35.0% 35.0% 35.0% 35.0%

Financial Projections: Net Sales – Base Case

CAGR


Net Sales

US Government NGA (contractual) $266.4 $300.0 $300.0 $300.0 $300.0 $300.0 2.4%

Other US Government 158.3 171.8 186.4 202.2 219.4 238.0 8.5%

Total US Government $424.7 $471.8 $486.4 $502.2 $519.4 $538.0 4.8%

Commercial 297.7 342.4 393.7 452.8 520.7 598.8 15.0%

Net Sales $722.4 $814.1 $880.1 $955.0 $1,040.1 $1,136.9 9.5%

Net Sales Growth

US Government NGA (contractual) na 12.6% 0.0% 0.0% 0.0% 0.0%

Other US Government na 8.5% 8.5% 8.5% 8.5% 8.5%

Total US Government na 11.1% 3.1% 3.3% 3.4% 3.6%

Commercial na 15.0% 15.0% 15.0% 15.0% 15.0%

Net Sales na 12.7% 8.1% 8.5% 8.9% 9.3%

Financial Projections: Balance Sheet – Base Case

CAGR


Assets

Current Assets

Cash and Cash Equivalents $404.1 $626.4 $987.9 $1,370.5 $1,571.3 $1,787.3 34.6%

Accounts Receivable 118.0 135.0 152.2 164.5 178.5 194.4 10.5%

Deferred Income Taxes 50.8 50.8 50.8 50.8 50.8 50.8 0.0%

Prepaid and Other Current Assets 30.3 34.7 39.1 42.3 45.9 49.9 10.5%

Total Current Assets 603.3 846.9 1,230.0 1,628.1 1,846.5 2,082.4 28.1%

Total Property, Plant and Equipment 3,156.6 3,285.2 3,432.6 3,690.0 3,951.1 4,216.4 6.0%

Accumulated Depreciation and Amortization (945.0) (1,229.0) (1,557.8) (1,859.8) (2,167.0) (2,438.3) 20.9%

Property, Plant and Equipment, Net 2,211.7 2,056.3 1,874.8 1,830.2 1,784.1 1,778.1 (4.3%)

Total Intangible Assets 83.3 83.3 83.3 83.3 83.3 83.3 0.0%

Accumulated Amortization (41.0) (50.1) (58.3) (64.5) (70.6) (77.2) 13.5%

Intangible Assets, Net 42.3 33.2 25.0 18.8 12.7 6.1 (32.1%)

Goodwill 382.6 382.6 382.6 382.6 382.6 382.6 0.0%

Other Non-Current Assets 98.4 112.5 126.8 137.1 148.8 162.0 10.5%

Total Assets $3,338.2 $3,431.6 $3,639.3 $3,996.8 $4,174.6 $4,411.3 5.7%

Financial Projections: Balance Sheet – Base Case (cont’d)

CAGR


Liabilities

Current Liabilities

Accounts Payable $23.2 $22.4 $24.8 $26.6 $28.6 $30.9 5.9%

Current Portion of Long-Term Debt 5.5 5.5 5.5 5.5 5.5 5.5 0.0%

Deferred Revenue 60.8 68.5 74.0 80.3 87.5 95.6 9.5%

Other Current Liabilities 134.2 153.6 173.1 187.1 203.0 221.1 10.5%

Total Current Liabilities 223.7 250.0 277.4 299.5 324.6 353.1 9.6%


Long-Term Debt 1,136.7 1,131.1 1,232.3 1,440.1 1,434.6 1,429.0 4.7%

Deferred Tax Liability 189.0 189.0 189.0 189.0 189.0 189.0 0.0%

Other Non-Current Liabilities 3.0 3.5 3.9 4.2 4.6 5.0 10.5%

Total Liabilities 1,941.2 1,962.4 2,091.4 2,321.6 2,341.6 2,365.0 4.0%


Common Stock 0.2 0.2 0.2 0.2 0.2 0.2 0.0%

Treasury Stock (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) 0.0%

Additional Paid In Capital 1,426.9 1,451.9 1,476.9 1,501.9 1,526.9 1,551.9 1.7%

Retained Earnings (Accumulated Deficit) (28.1) 19.0 72.8 175.1 307.9 496.3 N/A

Total Stockholders' Equity 1,397.0 1,469.1 1,547.9 1,675.2 1,833.0 2,046.4 7.9%

Total Liabilities & Stockholders' Equity $3,338.2 $3,431.6 $3,639.3 $3,996.8 $4,174.6 $4,411.3 5.7%

Financial Projections: Cash Flow Statement – Base Case

CAGR



Net Income $2.5 $47.1 $53.7 $102.3 $132.8 $188.3 136.7%

Add (Deduct) Items:

Amortization of Intangible Assets 7.6 9.1 8.2 6.2 6.1 6.6 (2.7%)

Depreciation of Long-Lived Assets 207.8 284.0 328.8 302.0 307.2 271.3 5.5%

Stock-Based Compensation 25.0 25.0 25.0 25.0 25.0 25.0 0.0%

Other (7.9) (14.2) (14.3) (10.3) (11.7) (13.3) 11.0%


Accounts Receivable (9.4) (17.0) (17.1) (12.3) (14.0) (15.9) 11.0%

Accounts Payable 7.9 (0.7) 2.4 1.8 2.0 2.3 (21.8%)

Other Assets and Liabilities 16.2 23.1 21.1 17.5 19.8 22.6 6.8%

Net Cash Provided by Operating Activities 249.7 356.5 407.8 432.1 467.4 486.9 14.3%


Capital Expenditures for Satellites (185.0) (92.5) (106.7) (213.4) (213.4) (213.4) 2.9%

Additions of Long-Lived Assets (31.6) (36.1) (40.7) (44.0) (47.7) (52.0) 10.5%

Net Cash Used for Investing Activities (216.6) (128.6) (147.4) (257.4) (261.1) (265.4) 4.1%


Adjustment to Debt, net of discounts 1.0 - - - - - NA

Mandatory Payments on Long-Term Debt (5.1) (5.5) 101.1 207.8 (5.5) (5.5) 1.8%

Net Cash Used for Financing Activities (4.1) (5.5) 101.1 207.8 (5.5) (5.5) 6.3%

Net (Decrease) Increase in Cash and Cash Equivalents $29.0 $222.3 $361.5 $382.6 $200.8 $216.0 49.4%

Cash and Cash Equivalents at Beginning of Period 375.1 404.1 626.4 987.9 1,370.5 1,571.3 33.2%

Cash and Cash Equivalents at End of Period 404.1 626.4 987.9 1,370.5 1,571.3 1,787.3 34.6%

Financial Projections: Income Statement – Street Case

CAGR


Net Sales $631.4 $723.7 $859.1 $973.7 $1,075.8 $1,166.1 13.1%

Cost of Sales 189.4 166.5 193.3 217.1 237.7 255.4 6.2%

Gross Profit 442.0 557.3 665.8 756.6 838.0 910.7 15.6%



Total Expenses 252.6 202.6 236.3 265.8 291.5 313.7 4.4%

EBITDA 189.4 354.6 429.6 490.8 546.5 597.0 25.8%


EBIT (25.9) 61.4 89.4 176.0 224.7 310.3 N/A










% Net Sales

COGS 30.0% 23.0% 22.5% 22.3% 22.1% 21.9%

SG&A 40.0% 28.0% 27.5% 27.3% 27.1% 26.9%

EBITDA 30.0% 49.0% 50.0% 50.4% 50.8% 51.2%

Margin

Gross Profit 70.0% 77.0% 77.5% 77.7% 77.9% 78.1%

EBITDA 30.0% 49.0% 50.0% 50.4% 50.8% 51.2%

Net 0.4% 8.5% 9.6% 15.0% 17.3% 21.0%

Other

Tax Rate 33.0% 35.0% 35.0% 35.0% 35.0% 35.0%

Financial Projections: Net Sales – Street Case

CAGR


Net Sales




Commercial 299.0 358.8 423.4 486.9 547.8 602.6 15.0%

Net Sales $723.7 $859.1 $973.7 $1,075.8 $1,166.1 $1,239.4 11.4%

Net Sales Growth




Commercial na 20.0% 18.0% 15.0% 12.5% 10.0%

Net Sales na 18.7% 13.3% 10.5% 8.4% 6.3%

Financial Projections: Balance Sheet – Street Case

CAGR


Assets

Current Assets

Cash and Cash Equivalents $404.2 $642.4 $1,030.7 $1,453.7 $1,706.1 $1,978.1 37.4%











Goodwill 382.6 382.6 382.6 382.6 382.6 382.6 0.0%


Total Assets $3,338.3 $3,448.0 $3,698.7 $4,113.8 $4,351.4 $4,643.6 6.8%

Financial Projections: Balance Sheet – Street Case (cont’d)

CAGR


Liabilities

Current Liabilities







Long-Term Debt 1,136.7 1,131.1 1,232.3 1,440.1 1,434.6 1,429.0 4.7%





Common Stock 0.2 0.2 0.2 0.2 0.2 0.2 0.0%

Treasury Stock (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) 0.0%





Financial Projections: Cash Flow Statement – Street Case

CAGR



Net Income $2.5 $61.6 $82.2 $145.9 $185.9 $244.8 149.5%

Add (Deduct) Items:




Other (7.9) (14.4) (21.1) (17.9) (15.9) (14.1) 12.4%















Cash and Cash Equivalents at Beginning of Period 375.1 404.2 642.4 1,030.7 1,453.7 1,706.1 35.4%

Cash and Cash Equivalents at End of Period 404.2 642.4 1,030.7 1,453.7 1,706.1 1,978.1 37.4%

DigitalGlobe, Inc.

Valuation Summary - Base Case



Stock Price as of November 8, 2013 $34.70 2014E EBITDA $332.3

Enterprise Value / 2014E EBITDA 10.2x


Dilution from Options Outstanding 1.2 Total Debt to Total Market Capitalization 30.1%

Diluted Shares Outstanding 76.4

Equity Market Capitalization $2,650

Plus: Debt 1,143.9

Total Market Capitalization 3,794.4












Price Appreciation/(Depreciation) (15.0%) Price Appreciation/(Depreciation) (27.6%)

Projected Total Returns(1) 15.0% Projected Total Returns

(1) 27.6%


Price Appreciation/(Depreciation) (21.3%)

Projected Total Returns(1) 21.3%

DigitalGlobe, Inc.


Base Case


Operating Income (EBIT) ($25.9) $39.2 $45.6 $109.0 $143.2 $223.5

Income Tax Expense 8.6 (13.7) (16.0) (38.1) (50.1) (78.2)


Depreciation of PP&E and Satellites 207.8 284.0 328.8 302.0 307.2 271.3



Change in Net Working Capital 14.6 5.4 6.3 6.9 7.9 8.9

Free Cash Flow from Continuing Operations $195.4 $225.6 $128.6 $153.2 $166.7




Discount Rate 9.0% 9.0% 9.0% 9.0% 9.0%

Discount Factor 0.958 0.879 0.806 0.740 0.679



Less: 2013E Long-Term Debt (1,142.2)






DigitalGlobe, Inc.

Income Statement

Base Case

CAGR


Net Sales $631.4 $722.4 $814.1 $880.1 $955.0 $1,040.1 10.5%

Cost of Sales 189.4 183.5 202.7 217.4 234.0 252.7 5.9%

Gross Profit 442.0 538.9 611.4 662.7 721.0 787.4 12.2%



Total Expenses 252.6 206.6 228.8 245.5 264.5 286.0 2.5%

EBITDA 189.4 332.3 382.6 417.2 456.5 501.3 21.5%


EBIT (25.9) 39.2 45.6 109.0 143.2 223.5 N/A










% Net Sales

COGS 30.0% 25.4% 24.9% 24.7% 24.5% 24.3%

SG&A 40.0% 28.6% 28.1% 27.9% 27.7% 27.5%

EBITDA 30.0% 46.0% 47.0% 47.4% 47.8% 48.2%

Margin

Gross Profit 70.0% 74.6% 75.1% 75.3% 75.5% 75.7%

EBITDA 30.0% 46.0% 47.0% 47.4% 47.8% 48.2%

Net 0.4% 6.5% 6.6% 11.6% 13.9% 18.1%

Other

Tax Rate 33.0% 35.0% 35.0% 35.0% 35.0% 35.0%

DigitalGlobe, Inc.

Balance Sheet

Base Case

CAGR


Assets

Current Assets

Cash and Cash Equivalents $404.1 $626.4 $987.9 $1,370.5 $1,571.3 $1,787.3 34.6%











Goodwill 382.6 382.6 382.6 382.6 382.6 382.6 0.0%


Total Assets $3,338.2 $3,431.6 $3,639.3 $3,996.8 $4,174.6 $4,411.3 5.7%

Liabilities

Current Liabilities







Long-Term Debt 1,136.7 1,131.1 1,232.3 1,440.1 1,434.6 1,429.0 4.7%





Common Stock 0.2 0.2 0.2 0.2 0.2 0.2 0.0%

Treasury Stock (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) 0.0%





Key Metrics:

A/R Days 68.2 68.2 68.2 68.2 68.2 68.2

Prepaid and Other Current Assets as % of Sales 4.8% 4.8% 4.8% 4.8% 4.8% 4.8%

A/P Days 44.6 44.6 44.6 44.6 44.6 44.6

Other Current Liabilities as % of Sales 21.3% 21.3% 21.3% 21.3% 21.3% 21.3%

DigitalGlobe, Inc.

Cash Flow Statement

Base Case

CAGR



Net Income $2.5 $47.1 $53.7 $102.3 $132.8 $188.3 136.7%

Add (Deduct) Items:




Other (7.9) (14.2) (14.3) (10.3) (11.7) (13.3) 11.0%















Cash and Cash Equivalents at Beginning of Period 375.1 404.1 626.4 987.9 1,370.5 1,571.3 33.2%

Cash and Cash Equivalents at End of Period 404.1 626.4 987.9 1,370.5 1,571.3 1,787.3 34.6%

DigitalGlobe, Inc.

Revenue Model

Base Case

CAGR


Net Sales




Commercial 297.7 342.4 393.7 452.8 520.7 598.8 15.0%

Net Sales $722.4 $814.1 $880.1 $955.0 $1,040.1 $1,136.9 9.5%

Net Sales Growth




Commercial na 15.0% 15.0% 15.0% 15.0% 15.0%

Net Sales na 12.7% 8.1% 8.5% 8.9% 9.3%

DigitalGlobe, Inc.

Debt

Base Case


Long-Term Debt:

Senior Secured Term Loan Facility, Variable, Due 2020, Mand. Amort. $544.0 $540.5 $536.9 $533.4 $529.8 $526.3

Senior Secured Revolving Credit Facility, $150mm, Due 2018 (Currently Unused) - - 106.7 320.0 320.0 320.0

Senior Notes, Fixed, Due 2021, Mand. Amort. 598.2 596.2 594.2 592.2 590.3 588.3

Total Long-Term Debt $1,142.2 $1,136.7 $1,237.8 $1,445.6 $1,440.1 $1,434.6

Less: Current Maturities of Long-Term Debt 5.5 5.5 5.5 5.5 5.5 5.5

Total Long-Term Debt Less Current Portion $1,136.7 $1,131.1 $1,232.3 $1,440.1 $1,434.6 $1,429.0

Interest Expense:

Senior Secured Term Loan Facility, Variable, Due 2020, Mand. Amort.

Beginning Balance $0.0 $544.0 $540.5 $536.9 $533.4 $529.8

Issuance, net of discount $547.3 - - - - -

Mandatory Amortization 0.7% ($3.3) ($3.6) ($3.6) ($3.6) ($3.6) ($3.6)

Ending Balance $544.0 $540.5 $536.9 $533.4 $529.8 $526.3

Average Balance $545.7 $542.3 $538.7 $535.1 $531.6 $528.0

Interest Rate (LIBOR + 0.00%) 0.00% 0.17% 0.36% 0.71% 1.52% 2.51% 3.23%

Interest Expense $0.9 $2.0 $3.8 $8.1 $13.4 $17.0

Senior Secured Revolving Credit Facility, $150mm, Due 2018 (Currently Unused)


Drawdown - - 106.7 213.4 - -

Retirement - - - - - -

Ending Balance $0.0 $0.0 $106.7 $320.0 $320.0 $320.0

Average Balance $0.0 $53.3 $213.4 $320.0 $320.0

Interest Rate (LIBOR + 2.75%) 2.75% 1% LIBOR Floor, Spread decreases at leverage < 2.5 3.75% 3.75% 4.27% 5.26% 5.73%

Leverage (Debt/EBITDA) 3.4 3.2 3.5 3.2 2.9

Commitment Fee


Senior Notes, Fixed, Due 2021, Mand. Amort.


Issuance $600.0 - - - - -

Mandatory Amortization 0.3% ($1.8) ($2.0) ($2.0) ($2.0) ($2.0) ($2.0)

Ending Balance $598.2 $596.2 $594.2 $592.2 $590.3 $588.3

Average Balance $599.1 $597.2 $595.2 $593.2 $591.3 $589.3

Interest Rate (5.25%) 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25%


Key Metrics:


Implied Cost of Debt 2.60% 2.93% 2.99% 3.35% 4.25% 4.62%

Mandatory Amortization $5.1 $5.5 $5.5 $5.5 $5.5 $5.5

DigitalGlobe, Inc.

Valuation Summary - Street Case



Stock Price as of November 8, 2013 $34.70 2014E EBITDA $354.6

Enterprise Value / 2014E EBITDA 9.6x


Dilution from Options Outstanding 1.2 Total Debt to Total Market Capitalization 30.1%

Diluted Shares Outstanding 76.4

Equity Market Capitalization $2,650

Plus: Debt 1,143.9

Total Market Capitalization 3,794.4












Price Appreciation/(Depreciation) (0.7%) Price Appreciation/(Depreciation) 3.5%

Projected Total Returns(1) 0.7% Projected Total Returns

(1) (3.5%)


Price Appreciation/(Depreciation) 1.4%

Projected Total Returns(1) (1.4%)

DigitalGlobe, Inc.


Street Case


Operating Income (EBIT) ($25.9) $61.4 $89.4 $176.0 $224.7 $310.3

Income Tax Expense 8.6 (21.5) (31.3) (61.6) (78.6) (108.6)


Depreciation of PP&E and Satellites 207.8 284.1 332.0 308.5 315.7 280.1



Change in Net Working Capital 14.7 7.0 10.5 9.5 8.3 6.7

Free Cash Flow from Continuing Operations $211.4 $259.2 $176.6 $209.0 $223.5




Discount Rate 9.0% 9.0% 9.0% 9.0% 9.0%

Discount Factor 0.958 0.879 0.806 0.740 0.679



Less: 2013E Long-Term Debt (1,142.2)






DigitalGlobe, Inc.

Income Statement

Street Case

CAGR


Net Sales $631.4 $723.7 $859.1 $973.7 $1,075.8 $1,166.1 13.1%

Cost of Sales 189.4 166.5 193.3 217.1 237.7 255.4 6.2%

Gross Profit 442.0 557.3 665.8 756.6 838.0 910.7 15.6%



Total Expenses 252.6 202.6 236.3 265.8 291.5 313.7 4.4%

EBITDA 189.4 354.6 429.6 490.8 546.5 597.0 25.8%


EBIT (25.9) 61.4 89.4 176.0 224.7 310.3 N/A










% Net Sales

COGS 30.0% 23.0% 22.5% 22.3% 22.1% 21.9%

SG&A 40.0% 28.0% 27.5% 27.3% 27.1% 26.9%

EBITDA 30.0% 49.0% 50.0% 50.4% 50.8% 51.2%

Margin

Gross Profit 70.0% 77.0% 77.5% 77.7% 77.9% 78.1%

EBITDA 30.0% 49.0% 50.0% 50.4% 50.8% 51.2%

Net 0.4% 8.5% 9.6% 15.0% 17.3% 21.0%

Other

Tax Rate 33.0% 35.0% 35.0% 35.0% 35.0% 35.0%

DigitalGlobe, Inc.

Balance Sheet

Street Case

CAGR


Assets

Current Assets

Cash and Cash Equivalents $404.2 $642.4 $1,030.7 $1,453.7 $1,706.1 $1,978.1 37.4%











Goodwill 382.6 382.6 382.6 382.6 382.6 382.6 0.0%


Total Assets $3,338.3 $3,448.0 $3,698.7 $4,113.8 $4,351.4 $4,643.6 6.8%

Liabilities

Current Liabilities







Long-Term Debt 1,136.7 1,131.1 1,232.3 1,440.1 1,434.6 1,429.0 4.7%





Common Stock 0.2 0.2 0.2 0.2 0.2 0.2 0.0%

Treasury Stock (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) 0.0%





Key Metrics:

A/R Days 68.2 68.2 68.2 68.2 68.2 68.2

Prepaid and Other Current Assets as % of Sales 4.8% 4.8% 4.8% 4.8% 4.8% 4.8%

A/P Days 44.6 44.6 44.6 44.6 44.6 44.6

Other Current Liabilities as % of Sales 21.3% 21.3% 21.3% 21.3% 21.3% 21.3%

DigitalGlobe, Inc.

Cash Flow Statement

Street Case

CAGR



Net Income $2.5 $61.6 $82.2 $145.9 $185.9 $244.8 149.5%

Add (Deduct) Items:




Other (7.9) (14.4) (21.1) (17.9) (15.9) (14.1) 12.4%















Cash and Cash Equivalents at Beginning of Period 375.1 404.2 642.4 1,030.7 1,453.7 1,706.1 35.4%

Cash and Cash Equivalents at End of Period 404.2 642.4 1,030.7 1,453.7 1,706.1 1,978.1 37.4%

DigitalGlobe, Inc.

Revenue Model

Street Case

CAGR


Net Sales




Commercial 299.0 358.8 423.4 486.9 547.8 602.6 15.0%

Net Sales $723.7 $859.1 $973.7 $1,075.8 $1,166.1 $1,239.4 11.4%

Net Sales Growth




Commercial na 20.0% 18.0% 15.0% 12.5% 10.0%

Net Sales na 18.7% 13.3% 10.5% 8.4% 6.3%

Documents

Long Recommendation - Alpha Challenge