EFTA01177252

UBS Global Equity Research Americas UBS Investment Research Aerospace UBS Business Jet Update Sector Comment Business jet inventory slightly lower 15 May 2012 ■ Available inventories slightly lower in April mviv.ubs.cominvestmentnasearcii Available for sale business jet inventories moved I% lower in April and are now 18% below the peak from May 2009. We estimate available inventories represent 13% of the installed base of business jets, in-line with the historical average and below recent peak at 18%. Young available aircraft inventories (0.10 years old) David E. Strauss moved I% lower this month leaving them 32% below the peak, but at 9% of the Analyst installed base are still above the 5.6% level seen during the last upcycle. david.strauss@ubs.com +1-212.7136185 ■ Embraer, Europe most for sale; North America relatively low Darryl Genovesi Of the major manufacturers, Embraer has 15% of its in-service fleet available for Analyst sale, followed by Bombardier/Cessna at (4%, Dassault/Hawker at 13% and darryl.genovesi@ubs.com Gulfstream at 11%. At the end of April, Europe had the largest percentage of its +1-212-713 4016 installed base available for sale at 17%, followed by North America at (4%, Matthew Akers LatAm/Middle East both at 11% and Asia/Pacific at 9%. However, when Associate Analyst considering only young aircraft (0-10 years old), North America has only 7% of its malthew.akers@ubs.com installed base available for sale as compared to Europe at 13%. +1.212.7134881 ■ See positive risk-rewards for stocks We believe North America bizjet is improving, driven by replacement demand postponed during the downturn. While the bizjet stocks have moved higher, we still see positive risk-rewards as we don't think stocks incorporate much for bizjets at current levels including Buy rated TXT/COUGD. Chart 1: Available Aircraft Listings - Total and Young (0.10 years in-age) 3.600 18% 3,200 16% 2.800 14% % of Installed Base 2400 12% 2000 10% 1.600 8% a 1.200 6% 800 4% 400 2% 0 0% 78 8 8 & 8 0 8 8 4 8 4 4 4 8 2 0-10 Years 11111 10. Years —% of Fleet Available for Sale Source: JETNET and UBS estimates This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 13. 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. EFTA01177252 UBS Business Jet Update 15 May 2012 Investment Summary We believe the used business jet market serves as a leading indicator of the new business jet market. We closely monitor several key indicators of activity in the secondary market, including: 1) inventory of available for sale aircraft including new delivery positions listed for sale, 2) age distribution of available aircraft and 3) pricing of available for sale aircraft. Available for sale business jet inventories were 1% lower sequentially in April and remain roughly 18% below the peak from May 2009. We estimate available inventories represent 13% of the installed base of business jets, in-line with the historical average and below recent peak at 18%. Chart 2: Sequential Change in Available Aircraft Listings Chart 3: yly Change in Available Aircraft Listings 10% 75% 50% 5% 25% Cri Iiislp lit ill wino Siif( III! II .5% 25% 01 e O.) el et IS) CO N. CO Of IN- CO 01 OJ .3. CO 15'C0 I.-- CO Of e 0 1 0) 0) 01 0 0 0 0 0 0 0 0 0 01 01 01 O O I? *2 C<C<CCCCCCCCCC Source: JETNET and UBS estimates Source: JETNET and UBS estimates Young available aircraft inventories (0-10 years old) moved 1% lower this month leaving them 32% below peak, but at 9% of the installed base are still above the 5-6% level seen during the last upcycle. Chart 4: Sequential Change in Young Aircraft Listings Chart 5: yly Change in Young Aircraft Listings 150% - 125% - 100% - 75% - 5% 50% - 25% - 0% 0% I~,lllil 1 it III .5% -25% - le% - •50% $ 1.“?$$ ?3$4g;$ :“+' '&3888 a 88888ra 8 .= Source: JETNET and UN estimates Source: JETNET and UBS OSIAMOS UBS 2 EFTA01177253 UBS Business Jet Update 15 May 2912 Average asking prices for the 39 newer used models we track continue to bounce along bottom, roughly unchanged in April and still 30-40% below peak levels. Average asking prices moved higher for large cabin this month with midsize lower and small cabin pricing roughly unchanged. Chart 6: Sequential Change in Average "Newer" Used Jet Asking Prices .5% Of Of Of 0 0 0 0 • N 8 O 11* 8 O e S. Small Cabin Midsize Cabin Large Cabin —Total Source: JETNET and UBS estimates We believe North America bizjet demand is improving, driven by replacements postponed during the downturn. While the bizjet stocks have moved higher, we still see positive risk-rewards as we don't think stocks incorporate much for bizjets at current levels including Buy rated TXT/COL/GD. Chart 7: GD and TXT Forward PIE Multiples 35x- 30x- Forward PE Multiple/ 20x - 15x 10x 5x Ox 5 sssssssssssssssssss —GD — TXT Source: UBS estimates UBS 3 EFTA01177254 UBS Business Jet Update 15 May 2012 Available Inventory Levels We count 2,512 business jets available for sale at the end of April (2,464 used aircraft and 48 new delivery positions), 1% lower from the prior month. We estimate available inventories represent 13% of the installed base of business jets, in-line with the historical average and below recent peak at 18%. Chart 8: Business Jets Available for Sale and as a Percentage of the Installed Base Available business jet inventories are coming off record highs 3.600 - 18% 3.200 - 16% 2.800 - 14% 0 4 to 2,400 - 12% a a- 2,000 10% 1.600 - I{IAlr 1~1rm,.. -8% -g 8 1.200 - 6% -1 800 - fifTPI111 - 4% am 400 - - 2% 0 0% 6: 4'3 4 '43 !• , Source: JETNET and UBS estimates We have grouped available-for-sale business jets into 5-year age classes. We estimate the 0-5 and 6-10 year classes now have 8% (479) and 10% (329) of their respective fleets available for sale compared with the 7-8% historical average. Meanwhile, business jets 20-30 years old have roughly 21% of their fleets available for sale, roughly in line with average historical levels. Chart 9: Available Inventory by Age Class and as % of Fleet in Age Class 600 531 33% 479 I of Available Inventory 500 25% N N 400 300- co 200- aE too - 0 0.5 6-10 11.15 16-20 21.25 26-30 304. Age Class (Yrs.) Available Aircraft —% of Age Class Source: JETNET and UBS estimates Young aircraft (0-10 years) constitute 32% of total available inventory, above the historical average at 20-25%, but lower than the in-service fleet at 49%. UBS 4 EFTA01177255 UBS Business Jet Update 15 May 2012 Chart 10: Available for Sale Inventory by Age Class (in years) Chart 11: Installed Fleet by Age Class (in years) 30+ 30+ 0-5 14% 26.30 9% 21.25 6% 16-20 7% 11-15 18% 14% Source: JETNET and UBS estimates Source: JETNET and UBS estimates We estimate young available aircraft inventories (0-10 years old) moved 1% lower this month leaving them 32% below peak levels, but at 9% of the installed base are still above the 5-6% level seen during the last upcycle. Chart 12: Young Aircraft Available for Sale (0-10 years) and % of Total Available 1.400 - - 45% 1.200 - - 40% 1.000 - - 35% 800 - 30% o p 600 - 25% 400 - 20% -a 200 - 15%e 0 10% 2r, '41 .1;i1 S 0-5 Years 6-10 Years — % at Total Available Source: JETNET and UBS estimates Of 479 0-5 year old aircraft available for sale, 48 are new delivery slots, 8% Table 1: New Delivery Positions Listed lower from the prior month, and 74% below the 2009 peak (ex Eclipse). By for Sale at Apr 30 and Mar 30 manufacturer, we count 26 Embraer delivery slots available for sale, along with Model Mar-12 six Cessna slots, ten Bombardier slots and six Boeing/Airbus bizliner slots. hence, 3t0 13 16 Legacy 500 4 Chart 13: Historical New Aircraft Delivery Positions Listed for Sale hence, MO 5 5 Altus AGJ3I9 4 4 Global 5000 3 4 240 Delivery Slots for Sale Eclipse Ch. 7 Liquidation Comm Mustang 3 3 200 - Comm CH 2 160 - Been° BEM 2 2 Global Express %AS 2 2 120 Chace, G.G. 80 Global 6000 2 40 Lineage 1000 0 milpillfilliffill111111, Chaim XLS. <0 CO CO II, n t••• IN• CO CO CO CO OI Of co Of c..,i c..4 Legacy 450 99 0 999 0 999 0 999 49 V a S V aass 4 .M t; 42.M 15 sT, '45.M V a‘m Challenger COS Glynn C.J2 • Global 7000 ETobl Ex Eclipse Eclipse 500 Challenger 300 Tots 48 47 Source: JETNET and UBS estimates Source: JETNET and UBS estimates UBS S EFTA01177256 UBS Business Jet Update 15 May 2012 Of the major manufacturers, Embraer has 15% of its in-service fleet available for sale, followed by Bombardier/Cessna at 14%, Dassault/Hawker at 13% and Gulfstream at 11%. Chart 14: Available Inventory by Manufacturer 18% Used Inventory as %of Fleet 16% 14% 12% 10% 8% 16% 6% 13% 4% 2% 0% Bombardier Cessna Dassault Embraer Gulfsteam Hawker Other Beechcrall Inventory by Manufacturer — — Industy Average Source: JETNET and UBS estimates When considering only young available aircraft inventories (0-10 years old), Embraer had the largest percentage of its installed base available for sale at 15%, followed by Bombardier at 11%, Hawker at 9%, and Cessna/Dassault at 8%. Chart 15: Available young (0-10) inventory by manufacturer 18% 16% LL 14% - z 12% 10% 8% - 6% 4% 8% 05f - r- Bombardier Cessna Dassault Embraer Gultsteam Hawker Otter Beechcrat kw entry by Manulackser — — Indust, Average Source: JETNET and UBS estimates UBS 6 EFTA01177257 UBS Business Jet Update 15 May 2012 By Geography At end of April, Europe had the largest percentage of its installed base available for sale at 17%, followed by North America at 14%, LatAm/Middle East both at 11% and Asia/Pacific at 9%. Chart 16: Total Inventory as % of Installed Base 17% 14% Europe Nadi America Mille East Lain America Asia/Paciic Mica Source: JETNET and UBS emanates When considering only young available aircraft inventories (0-10 years old), Europe again had the largest percentage of its installed base available for sale at 13%, followed by the Middle East and Latin America at 10%, North America at 7% and Asia/Pacific at 6%. Chart 17: Young (0.10) Inventory as % of Young Installed Base Europe Not America Mitle East Lain America Asia/Paciic Mica Source: JETNET and UBS estimates By Range Class At the end of April, the short and mid-range classes both had 14% of their respective fleets available for sale, followed by long-range at 10%. During April, we estimate available-for-sale long-range aircraft inventories moved 3% higher, while available mid-range aircraft moved 4% lower and available short- range inventories were roughly unchanged. UBS 7 EFTA01177258 UBS Business Jet Update IS May 2012 Young short-range aircraft represent 31% of total short-range available aircraft. Chart 18: Age Distribution of Available Short-Range Aircraft Chart 19: Available Short Range Aircraft Listings • Total and Young (0-10 years in age) 1,600 20% % of Installed Base Inventory Level 1,200 15% 800 10% 400 5% 0 `73 O `73 O O O 01 al 1 8 A 2 C 18 A' 2 Source: JETNET and UBS estimates 0.10 Years 10+ Years — of Installed Base Note: Includes available aircraft with range below 2.000 nmi. Source: JETNET and UBS estimates Young mid-range aircraft represent 29% of total mid -range available aircraft. Chart 20: Age Distribution of Available Medium-Range Aircraft Chart 21: Available Medium Range Aircraft Listings • Total and Young (0.10 years in age) 0.5 30+ 17% - cy, 19% 610 % of Installed Base 15° 12% 900 - 109 2630 600 21% 300 - - S% 21-25 rat. 10% Oj Q c. cr. O 0 0 • O4 eig. ;272.11am ,1 ," .$' O AI U.ct Source: JETNET and WS estimates 010 Years 10+ Years — °I of fristaled Base Note: Includes available aircraft with range below 2.000 nmi. Source: JETNET and UBS estimates Young long-range aircraft represent 46% of total long-range available aircraft. Chart 22: Age Distribution of Available Long-Range Aircraft Chart 23: Available Long Range Aircraft Listings • Total and Young (0.10 years in age) 30+ 26-30 500 16% 11% 0.5 % of Installed Base 400 28% 12% 21.25 300 15% 8% 200 16-20 6-10 100 4% 11.15 18% 0 0% 19% 0 0 04 0 2_ Source: JETNET and MS estimates 0-10 Years im 10+ Years — N of fristaled Base Note: Includes availab!e aircraft with range below 2.000 nmi. Source: JETNET and UBS estimates UBS 8 EFTA01177259 MIS Business Jet Update 15 May 2012 A Look at the Newer Models Of the 39 newer models that we track individually, 17 have at least 10% of their installed fleets available for sale. Of these 39 models, 13 showed sequential inventory increases in April, while nine were flat and 17 declined. Compared with the prior year, 24 models had higher levels of available inventory, one model was unchanged and 14 declined. Table 2: Available Aircraft Listings and Average Asking Price for Newer Models Installed Avanable Base in Airaaft% Model hst. Base Availthle Ingmar Average Used Askrig PrimIV.1) Arcrah Model Manulaceser Apr-12 Apr-12 lAar.12 Charge Apr-11 plvge Apr-12 Apr-11 Change Max Clarlge Long Range Global Express %RS Borrbarder 161 7% 11 10 10% 6 8196 $ 42.1 S 47.7 -12% $ 580 -27% Global Express BD-700 Bombardier 148 12% 18 18 0% 17 6% $ 27.7 S 26.0 7% $ 48.9 -43% Gugstream 6-550 Gullstream 340 4% 15 15 0% 14 7% $ 34.9 $ 38.1 -8% $ 59.9 -42% Falcon 7x Dassault 136 6% 8 8 0% 6 33% $ 43.5 $ 48.9 -11% 48.9 -11% Super Large Guestream G-V Gullstream 192 7% 13 12 8% 6 117% $ 24.4 $ 25.0 -2% 460 -46% Guestream G-450 Gugstream 226 4% 9 9 0% 6 50% $ 26.2 $ 27.8 -6% $ 422 -38% Guestream G.1VSP Gullstream 286 7% 20 23 -13% 12 67% $ 11.3 $ 15.0 44% $ 31.5 64% Gkba15000 Bortbarder 114 10% 11 7 67% 10 10% $ 331 $ 31.5 7% 614 -34% Lineage 1000 Emttaer 14 29% 4 4 0% 300% nh na da na nra L Falan 900E% Bass/kit 236 8% 20 19 5% 15 33% $ 22.8 $ 26.1 -1M S 39.5 -42% Large Falcon 2000 EX 1LX Dassault 233 9% 20 23 -13% 16 25% $ 21.2 $ 22.4 -5% S 33.0 -36% CteIcoger 8001 850 Borrbarder 76 14% 11 11 0% 8 38% $ 18.0 $ 15.3 18% S 18.0 0% Chalenger 605 Bombardier 177 6% 11 11 0% 10 10% $ 18.2 Na da S 31.0 41% CteIcoger 604 Bombardier 363 IS% 54 53 2% 45 20% $ 10.2 3 11.4 -10% $ 22.3 -54% Legacy 600 Emtraer 174 16% 26 31 016 25 4% $ 15.4 $ 17.3 11% $ 24.5 -37% IfeoVern Large Gugstream 6.200 Gullstream 245 9% 23 24 .4% 21 10% $ 8.5 $ 9.8 -13% $ 183 -53% Falcon 2000 Dassault 235 11% 26 28 .7% 27 .4% $ 9.7 $ 15.8 49% S 220 -56% Hawker 4000 Hawker Beechaaft 56 13% 7 40% 2 250% $ 14.2 $ 18.8 -24% S 188 -24% Ctelenger 300 Bombardier 343 7% 24 25 .4% 21 14% $ 14.2 3 152 -7% S 24 8 -43% Cheep X Cessna 307 6% 16 17 6% 24 -33% $ 8.1 3 8.8 S 188 -57% Medium Cgancn Sovereign Cessna 324 6% 19 20 .5% 29 -34% $ 11.0 $ 113 I.4% $ 166 -33% GA'Proem G-150 Guttman, 94 3% 3 5 -40% 40% Wa $ 102 $ 138 nra GAtream 6-100 Gutlneam aa 13% 10 9 11% 10 0% $ 3.3 $ 4.5 46% $ 104 -68% Learrel 60 f 60XR Barbarder 406 16% 64 66 .3% 61 6% $ 5.9 $ 6.0 3% $ 110 -47% Hawker 800XP Hawker Beechaaft 423 11% 47 61 .8% 66 -29% $ 3.7 $ 4.6 40% $ 107 -66% Hawker 750/850/900 Hawker Beechaaft 364 8% 30 27 11% 32 $ 8.0 $ 7.7 I 4% $ 121 -34% supertight Chaco XLS1XLS, Cessna 430 6% 26 29 -10% 23 4% 8.3 $ 7.9 $ 11 8 49% Citabal Ertel Cessna 369 8% 28 27 4% 30 .7% $ 4.2 $ 4.9 -14% $ 9 -56% Learjet 45 / 45XR Bombard., 426 12% 61 47 9% 44 16% 5.3 $ 5.8 $ 9.S -44% Light Learjet 40 / 40XR Bombardier 130 12% 16 16 7% 15 7% 5.3 $ 6.1 -14% $ 82 -36% Hawker 400XP Hawker Beechaaft 250 7% 17 16 6% 26 -36% 3.1 $ 32 4% SS -43% Chaco Encore !Encore. Cessna 230 4% 9 9 0% 16 -44% $ 4.1 $ 3.6 12% 8.5 -52% Chaco CJ3 Cessna 378 7% 26 29 -10% 27 -4% $ 5.6 $ 6.0 -7% 80 -33% Entry Level Hawker Premier Hawker Beectaalt 283 11% 31 33 .6% 28 -14% $ 2.7 $ 3.0 52 -48% Chaco Mustang Cessna 394 8% 32 30 7% 28 14% $ 2.2 $ 2.4 28 -20% Cita:Dal CJ2l CJ2. Cessna 433 12% 53 57 .7% 61 4% $ 4.1 $ 42 5.9 -31% Chaco CJ1 /CJI. Cessna 299 13% 33 41 .5% 48 -19% $ 2.9 $ 3A 43 -32% Pherom 100 Emtraer 241 9% 22 23 4% 31 -29% $ 3.2 $ 3.1 3.S -9% Pherom 300 Emtraer 78 24% 19 19 0% 24 -21% $ 8.0 $ 8.7 87 -8% Notes: Available inventory figures Mclode new aircraft deivery positions: geeing figures do not. Max column represents the maximum average mon0ly listed asking pica since 2005. Gullstream G-100 also includes Astra 1125SPX.: Hawker 800XP also includes 800XPi. Source: JETNET and UBS estimates UBS 9 EFTA01177260 UBS Business Jet Update IS May 2012 Pricing Trends in the Secondary Market Rather than look at average pricing for the entire population of available aircraft, which can be distorted by monthly composition changes, we monitor six models that we believe capture pricing trends in their respective categories. Light We estimate the average asking price for a Citation CD moved 2% lower in April, and is 30% below its recent peak, while available inventories are 28% below their recent peak after a 10% decrease this month. Chart 24: Citation CA Rolling Three-Month Average Asking Price 50 $8.0 R3M Avg Asking Price ($M) 40 $7.5 O so $7.0 20 $6.5 10 $6.0 0 $5.5 0.I 8 1. 8 1. 8 1. 8 1. 8 ib 8 1. 8 —Avelab* hv envy — R3M Average Asking Price (RHS) SOUICO JETNET and UBS eurnates Super Light We estimate the average asking price for a Citation Excel moved 2% lower in April, and is 56% below its recent peak, while available inventories are 40% below their recent peak including a 4% increase this month. Chart 25: Citation Excel Rolling Three-Month Average Asking Price R3M Avg Asking Price ($M) Used Inventory Level O Av delia—ehveniory — R31.1 Average Asking Price IRHS) Source: JETNET and UBS estimates UBS 10 EFTA01177261 UBS Business Jet Update 15 May 2012 Medium We estimate the average asking price for a Hawker 800XP moved 2% lower in April, and is 66% below its recent peak, while available inventories are 35% below their recent peak including an 8% decline this month. Chart 26: Hawker 800XP Rolling Three-Month Average Asking Price R3M Avg Asking Price ($M} Used Inventory Level Avaiabb hyena), — R3M Average Asking Price (RHS) Source: JETNET and UBS estimates Medium Large We estimate the average asking price for a Citation X moved 5% lower in April, and is 57% below its recent peak, while available inventories are 57% below their recent peak including a 6% decline this month. Chart 27: Citation X Rolling Three-Month Average Asking Price S' 0" co" 0 0 0 ^0 8 .=.`" C•J 4 —Avaiade hvenbry — R3M Average Asking Price (RHS) Source: JETNET and UBS estimates UBS 11 EFTA01177262 UBS Business Jet Update 15 May 2012 Large We estimate the average asking price for a G-IVSP moved 3% lower in April, and is 64% below its recent peak, while available inventories are 49% below their recent peak including a 13% decline this month. Chart 28: Gulfstream CrIVSP Rolling Three-Month Average Asking Price so $35 R3M Avg Asking Rice (SM} Used Inventory Level ao $30 30 $25 20 $20 10 $15 0 $10 1 11 4; 2 7. .1- .1- - Available hvenbry — R3M Average Asking Price (RHS) Source: JETNET and UBS estimates Ultra Long Range We estimate the average asking price for a G550 was roughly unchanged during April and is 42% below its recent peak, while available inventories are 52% below their recent peak although unchanged this month. Chart 29: Gulfstream G•550 Rolling Three•Month Average Asking Price 35 Vtli§§Vg 30 Used Inventory Level 25 2 20 15 10 5 0 /413 /413 o . . . . 8 Av abbe) Wendy — R3M Average Askiig Price (RHS) Source: JETNET and UBS estimates UBS 12 EFTA01177263 UBS Business Jet Update 15 May 2012 ■ 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 are dependent on end-user demand, availability of customer financing, program execution and inventory management. A weak market for business jets could negatively affect General Dynamics, Textron, Bombardier, Embraer, Rockwell Collins, Honeywell, B/E Aerospace, Rolls-Royce and United Technologies. ■ 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: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, 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. UBS 13 EFTA01177264 UBS Business Jet Update IS May 2012 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 Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS Investment Research: Global Equity Rating Allocations UBS 12-Month Rating Rating Category Coverage' IB Serviced Buy Buy 51% 34% Neutral Hold/Neutral 40% 35% Sell Sell 9% 15% UBS Short-Term Rating Rating Category Coverages IB Sonia& Buy Buy less than 1% 25% Sell Sell less than 1% 17% 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 (18) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 31 March 2012. 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 Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. Sell Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. UBS 14 EFTA01177265 UBS Business Jet Update 15 May 2012 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: Darryl Genovesi: Matthew Akers. Company Disclosures Company Name Reuters 12-mo rating Short-term rating Price Price date BE Aerospace Inc. ' BEAV.O Buy N/A US$44.45 15 May 2012 General Dynamics Corp.te GD.N Buy N/A US$65.73 15 May 2012 Textron IncB°• r. 18' 1" TXT.N Buy N/A US$23.52 15 May 2012 Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 2. UBS AG. its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months. 4. Within the past 12 months. UBS AG. its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 5. UBS AG. its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 6a. This company/entity is. or within the past 12 months has been. a client of UBS Securities LLC. and investment banking services are being. or have been, provided. 6b. This company/entity is. or within the past 12 months has been. a client of UBS Securities LLC. and non-securities services are being. or have been, provided. 7. Within the past 12 months. UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity. 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 18. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Textron Inc. 22. UBS AG. its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month's end (or the prior month's end if this report is dated less than 10 working days after the most recent month's end). UBS 15 EFTA01177266 UBS Business Jet Update IS /Jay 2012 Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. BE Aerospace Inc. (US$) — Price Target {US$) — Stock Prim 013$1 60D 501) 40D 30D 20D 101) OD I I s jr, P 9 4 4 # 4 25 4 # ▪ 4 4 # I- 01 ▪ frn Buy 2 BIY Neutml No Rating I I Source: UBS; as of 15 May 2012 General Dynamics Corp. (US$) — lite Target MI Sock Rim MS/ I I I I I I 9 I 1 I I I I I r-- co co cn a o o o .— Fi 9 ?.. 9 -9 G g / o j?" G 01 4 4 •It G 01 I :b3 I # I 1 1 I 7 t 7 Buy 2 Biy Neutml No Rating Source: UBS; as of 15 May 2012 Textron Inc. (US$) — Rice Target (US$) Stock Prim CM/ OD r Buy' Eby Neutral ■ No Rating Source: UBS; as of 15 May 2012 UBS 16 EFTA01177267 UBS Badness Jet Update 15 May 2012 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 analyst's 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%. 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