AEROSPACE SUPPLY CHANNEL

Christopher D. Olin
Heavy Materials Analyst colin@cleveland-research.com (216) 649-7212

Kevin L. Money
Research Associate kmoney@cleveland-research.com (216) 649-7254

Curt A. Siegmeyer
Research Associate csiegmeyer@cleveland-research.com (216) 649-7208

Important Disclosures Found In Appendix

8/27/2013
Aerospace Supply Chain Update The Seven Most Interesting Take-Aways From Our Introductory Aerospace Fasteners Update; The 2014 Expectations Are Moving Higher On Confidence In Aircraft Delivery Schedules (Cleveland Research) Key Points 1. We estimate the underlying growth rate for aerospace fasteners has improved to +8-10% versus the average 1H comp of +79%. The incremental volume contribution has been generated by OEM demand and the supplier preparation for future aircraft deliveries. 2. Industry professionals are starting to see a small pull from the Boeing 787 supply chain. The current fastener shipment levels reflect a monthly shipment rate of 5-7, which has been somewhat disappointing for distributors. However, commentary suggests there has been a pickup in new orders from Japanese suppliers which is a positive leading indicator for future 787 production. 3. The 2014 outlook is bullish and expectations look to be moving higher. Current planning now incorporates +10-15% growth (moving toward the higher end of the range). The more positive producers, who are levered to commercial aerospace, have said out-year growth could hit up to 20%+ on favorable inventory contributions. 4. The supply chain is starting to prepare for another BA737 rate increase based on communications with the OEM and the tier1 suppliers. Current speculation has the production rates moving up to 47 units per month (564 annualized). Interestingly, BA recently increased the monthly production rate to 42.5 by 2014 (up from 38 units) which is driving the peak 2016 delivery outlook of 510 Conclusion We came away from our 3Q aerospace fasteners market update with a generally favorable view on underlying market fundamentals. The data points surrounding demand, full-year expectations, lead times, and inventory all suggests the industry will likely benefit from an accelerated period of demand in 2H13 and 2014, with increasing pricing power. In general, we believe the suppliers into the channel are better positioned over the next 2-3 years due to the shortage of inventory/parts and downstream desire to build warehouse holdings. Over the near-term, distribution seem to be benefiting from better growth rates as the channel is going through a mild inventory adjustment. We have listed the seven most interesting take-aways from the August channel discussions (within the body of the note). We will build upon our early analysis going forward. We have formal coverage on CRS. The data points with our 3Q update continued to support a positive outlook for the companys downstream PEP segment. We believe Dynamet can generate another $50 million of revenues (from the $140-150 base) based on the strong demand for titanium wire feedstock (a positive mix shift is visible for aero fasteners) and the upside from recent capacity expansion. We do not have formal coverage of the other companies in the channel. We have no formal opinion on the shares or estimates for Precision Castparts (PCP), Alcoa (AA), Wesco Aircraft (WAIR), and B/E Aerospace (BEAV).

AEROSPACE SUPPLY CHANNEL

Christopher D. Olin
Heavy Materials Analyst colin@cleveland-research.com (216) 649-7212

Kevin L. Money
Research Associate kmoney@cleveland-research.com (216) 649-7254

Curt A. Siegmeyer
Research Associate csiegmeyer@cleveland-research.com (216) 649-7208

Important Disclosures Found In Appendix

8/27/2013
We are introducing the CRC quarterly aerospace fasteners survey. We spoke with a number of private manufacturers of fastener products as well as the independent distributors within the channel for a view into current demand trends and updated industry expectations. This update provides insight into aero fasteners market fundamentals. It also offers an indirect read into: (1) aerospace OEM production & delivery expectations; (2) the aircraft & jet engine aftermarket; and (3) specialty materials demand. The main players within the fasteners channel include: Precision Castparts (PCP); Alcoa (AA); LISI Aerospace (FII-FR); Wesco Aircraft (WAIR); B/E Aerospace (BEAV); and Carpenter Technology (CRS). We currently have formal coverage on the shares of CRS. o PCP One of the largest producers of fastener products through its SPS Fasteners Division (includes PB Fasteners & Cherry Aerospace). We estimate this business represents approximately 50-60% of the Airframe Products segment, and 10-15% of total sales. o AA Alcoa represents the largest direct competitor to PCP in North America. The company makes fastener products through its integrated Huck and Fairchild operations, complementing the Engineered Products (EPG) segment. We estimate the aero fasteners operations represent $1.3 billion of net sales or 25% of EPG sales and 5-6% of the total portfolio. o FII The largest aerospace fasteners producer in Europe with greater leverage toward the Airbus channel. LISI Aerospace represents 50-55% of total sales. A #3 global market position. o WAIR -- One of the two major publicly traded distributors of aerospace components. At roughly $800 million in sales, WAIR distribution market share is estimated @ 21-22%. The fasteners segment represents about 80-85% of the total revenue stream. The company offers 525K SKUs to 7,400 customers worldwide. o BEAV-- Is the other main aerospace structure components distributor, having roughly 23-24% market share. The fasteners & consumables distribution segment represents approximately 35-40% of total revenues @ $1.2 billion. o CRS -- The specialty materials company makes titanium wire feedstock used for the production of premium fasteners & rivets (a main supplier to PCP & AA). Titanium fasteners are seeing accelerated growth rates based on the increase use within the next-generation aircraft like the BA787 and Airbus A350. Titanium fabrication represents 40-45% of the PEP Segment and 5-10% total sales and has a majority market share (competing with a private company called Perryman). CRS recently expanded its wire & bar production capacity in Florida in order to accommodate LT demand outlook. The total aerospace fasteners market is estimated @ $5 billion in global revenues it makes up about 13-15% of the total fasteners industry. The geographic breakout is: Europe @ 28-30% of total demand, followed by the United States @ 27-29%, Asia-Pacific @ 18-19%, and Japan @ 8-10%. The Class-C aerospace parts market is estimated to be $6.5 billion in revenues, with approximately 65% of volume directed through the distribution channel. The distribution market is divided into four major sub-categories: hardware (45-50%), bearings (25-27%), electronic components (15-16%), and machined parts (12-13%). Fasteners make up about 80% of the hardware category and the area of focus for our channel analysis. There are two primary public players within the distribution channel, BEAV and WAIR which maintain a 50% market share (a combined $2 billion in revenues). The remaining supply base is highly fragmented and controlled by independents. Bottom-line, we came away from our 3Q aerospace fasteners market update with a generally favorable view on underlying market fundamentals. The data points surrounding demand, full-year expectations, lead times, and inventory all suggests the industry will likely benefit from an accelerated period of demand in 2H13 and 2014, with increasing pricing power. In general, we believe the suppliers into the channel are better positioned due to the shortage of inventory and downstream desire to build. Over the near-term the distributors seem to be benefiting from slightly better growth rates relative to the manufacturers as the channel is going through a mild inventory adjustment. We have listed the seven most interesting take-aways from the August channel discussions. We will build upon our early analysis going forward. 1. 3Q demand improved versus the strong 1H run-rate. We estimate the underlying growth rate for aerospace fasteners has improved to +8-10% versus the average 1H comp of +7-9%. The incremental volume contribution has been generated by OEM demand and the supplier preparation for future aircraft deliveries. The aftermarket and military/defense markets remain the laggards over the past 3-4 months, partially offset by demand pull from the BA pipeline. Fastener shipments have surpassed aircraft delivery growth, which is running @ +6-7% for 2013. This suggests the supply chain is staring to prepare for a strong 2014, with new jet deliveries expected to hit 1,500 units (+11-12% versus 2013).
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AEROSPACE SUPPLY CHANNEL

Christopher D. Olin
Heavy Materials Analyst colin@cleveland-research.com (216) 649-7212

Kevin L. Money
Research Associate kmoney@cleveland-research.com (216) 649-7254

Curt A. Siegmeyer
Research Associate csiegmeyer@cleveland-research.com (216) 649-7208

Important Disclosures Found In Appendix

8/27/2013

Our contacts are starting to see a small pull from the Boeing 787 supply chain. The current fastener shipment levels reflect a monthly shipment rate of 5-7, which has been somewhat disappointing for distributors. However, there has been a strong uptick in new orders from Japanese suppliers which is a positive leading indicator for future 787 production. BA has targeted 10 per month by year-end. 2. Expectations are moving higher for 2014 based on the confidence in aerospace build schedules. The 2014 outlook is bullish and expectations are moving higher. Current planning now incorporates +10-15% growth (moving toward the higher end of the range). The more positive producers, who are levered to commercial aerospace, have said out-year growth could hit up to +20-30% on favorable inventory contributions (distributors are not building at this point). Our contacts are starting to prepare for another 737 production increase. The supply chain is starting to prepare for another BA737 rate increase based on communications with the OEM and the tier-1 suppliers. Current speculation has the production rates moving up to 47 units per month (564 annualized). Interestingly, BA recently increased the monthly production rate to 42.5 by 2014 (up from 38 units) which is driving the peak 2016 delivery outlook of 510 (versus a 450 runrate this year). A 47 per month production run rate would be an all-time high for BA, but it remains to be seen if the channel can sustain this level of production. Regardless, our channel work suggests the suppliers are getting ready for a formal announcement. We do not believe the current discussion for 47 per month is reflected in the numbers. The military & defense markets are showing slight negative comps, but underlying demand is still running above expectations. The fastener channel is experiencing the negative demand effects from Sequestration. Total military & defense volume growth appears to be trending down in the low-single-digit range. However, this is slightly better versus plan with orders from Bell Helicopter (TXT) and Lockheed Martin (LMT) relatively stable. We estimate the defense market to represent approximately 15-20% of aero fastener industry demand. Lead times are extending; pricing power beginning to improve. We estimate the average lead time @ 25-30 weeks. This is up significantly since the beginning of the year. The producers with greater leverage to BA are quoting out 40 weeks. Distributors typically see improved pricing power as shortages increase, which also allows suppliers to increase price. The outlook for pricing is to show notable improvement through 2014. Distributor commentary suggests average prices in 2013 are flat/up slightly vs. 2012. Boeing is trying to bring more fastener work in-house. One of the drivers behind BAs new Partnering For Success Program is bringing fastener production in-house. BA is currently working with New Breed Logistics to better maintain control of its internal fastener supply which includes the increased internal fabrication, better inventory management, and concerted effort to reduce the number of SKUs. At this point, we have not seen the BA strategy impact the distribution channel or supplier base. There are multiple contacts who do not believe BA is likely to be successful in controlling the fastener volume due to past failures at other companies who have attempted similar strategies like SPR. The titanium mix shift continues to move toward greater use of titanium and stainless components, CRS is wellpositioned. Our contacts are seeing greater use of premium fasteners made from specialty materials. These high-value rivets and fastener components are used in airframe structures made from composite materials as the materials have similar physical characteristic (the materials expand at similar stress levels) and compatible chemical properties (reduced risk of galvanic reactions). As the mix shift continues, titanium wire feedstock demand growth is expected to outpace fastener demand. Accordingly, we see good underlying demand drivers for the Dynamet operations. The CRS fasteners segment is running @ $150-160 million in sales, with upside to the $200 million range, supported by the new capacity in place.

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AEROSPACE SUPPLY CHANNEL

Christopher D. Olin
Heavy Materials Analyst colin@cleveland-research.com (216) 649-7212

Kevin L. Money
Research Associate kmoney@cleveland-research.com (216) 649-7254

Curt A. Siegmeyer
Research Associate csiegmeyer@cleveland-research.com (216) 649-7208

Important Disclosures Found In Appendix

8/27/2013

Commercial Aerospace Industry Analysis

Total Jet Deliveries (Through 2020) -- Includes Regional Builds
2,400 2,300 2,200 2,100 2,000 1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0

Source: CRC and Airline Monitor

AEROSPACE SUPPLY CHANNEL

Christopher D. Olin
Heavy Materials Analyst colin@cleveland-research.com (216) 649-7212

Kevin L. Money
Research Associate kmoney@cleveland-research.com (216) 649-7254

Curt A. Siegmeyer
Research Associate csiegmeyer@cleveland-research.com (216) 649-7208

Important Disclosures Found In Appendix

8/27/2013

APPENDIX Important Disclosures Companies Mentioned

Carpenter Technology Corporation - (CRS: $55.18 - BUY) Precision Castparts Corp. - (PCP: $216.94 - NOT RATED) Alcoa Inc. - (AA: $8.12 - NOT RATED) LISI SA - (FII-FR: $99.00 - NOT RATED) Wesco Aircraft Holdings, Inc - (WAIR: $19.10 - NOT RATED) B/E Aerospace Inc. - (BEAV: $69.24 - NOT RATED) The Boeing Company - (BA: $103.47 - NOT RATED) Spirit AeroSystems Holdings, Inc. Class A - (SPR: $23.46 - NOT RATED) European Aeronautic Defence & Space NV - (EAD-FR: $45.21 - NOT RATED) Textron Inc. - (TXT: $27.60 - NOT RATED) Lockheed Martin Corporation - (LMT: $122.20 - NOT RATED)

Buy: The stocks return is expected to exceed the market due to superior fundamentals and positive catalysts. Underperform: The stocks total return is expected to underperform the market due to weak fundamentals and a lack of catalysts. Neutral: The stock is expected to be in line with the market due to full valuation and/or a lack of catalysts. Valuation and Risk: Price targets are established under various valuation methods including P/E, P/S, EV/EBITDA on financial estimates based on forward earnings. Price targets are not established for every stock. The price targets effectiveness may be affected by various outside factors. Risk assessments can be found in the most recent research on these stocks. Other Disclosures: We, Christopher D. Olin, Kevin L. Money, and Curt A. Siegmeyer, certify that the views expressed in the research report(s) accurately reflect our personal views about the subject security(s). Further we certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report(s). The analysts responsible for the preparation of this report have no ownership stake in this company. Cleveland Research Company provides no investment banking services of any type on this or any company. Proprietary research and Information contained herein which forms the basis for findings or opinions expressed by Cleveland Research Company may be used by Cleveland Research for other purposes in the course of compensated consulting and other services rendered to third parties. The information transmitted is intended only for the person or entity to which it is addressed. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this in error, please contact the sender and delete the material from any computer. Member FINRA/SIPC