“The industry is holding its own with flat performance so far this year. There is reason for cautious optimism on the commercial side and concern in the defense segment due to a decreasing spending outlook.” — Tom Captain, Global Aerospace & Defense Sector Leader, Deloitte Touche Tohmatsu (DTT) Global Manufacturing Industry Group
2010 is expected to be flat After a record-setting five-year run ended in 2008, last year’s sector performance was off its peak. Sales in 2009 were essentially flat with a small 1.3% increase, while earnings were down 15.3% from 2008.1 If not for the large program related write-offs, asset impairments, or regulatory fines2 at a few of the largest firms, industry profits would have been essentially flat as well. This financial performance could be viewed as positive when compared to the significant negative economic impact of the global recession. The industry continues to demonstrate its resiliency in the face of uncertain economic conditions. 1
“2009 Global Aerospace & Defense Industry Performance Wrap-up,” Deloitte Development LLC, 11 May 2010. “Managing cross-border legal and regulatory risks in aerospace and defense,” Lexology, 7 April 2010. 1
The global aerospace and defense (A&D) industry as of midyear 2010 is experiencing the same “flat” financial performance that was seen in 2009, although results varied widely by individual companies. For the top 25 global A&D firms that have issued quarterly financial statements thus far in calendar 2010 as a group, sales revenue growth was -1.01%, operating profits were -1.94%, and operating margins were -0.94% (see Figure 1). Holding steady on these key financial performance metrics indicates that the global industry has largely held up to the continued downward pressure on defense spending, managed its way through difficult and largescale product introductions, and experienced continued slow sales in the commercial aircraft and business jet segments. Military equipment spending, led by the U.S. Department of Defense (DoD), is declining with several significant weapon system programs terminated in 2009 and an expectation that more cuts will be forthcoming. The Pentagon has requested a US$549 billion base budget for fiscal year (FY)2011, only a 1.8% increase over FY2010, in which the budget grew by 2.1%. These budgets may appear paltry to defense contractors after eight years of robust 4% average annual growth and probably not enough to keep up with inflation.3 On the upside, air traffic growth has slowly returned and business jet sales forecasts are looking more optimistic.4 Commercial aircraft production rate increases announced thus far in 2010 are a positive signal especially for suppliers going forward. At the midpoint of 2010, key questions on the minds of many industry executives and shareholders include: 1. How will the commercial aircraft segment sustain profitable growth in a flat production environment? 2. How will defense companies deal with the expected slowdown in military research and development (R&D) and large platform program starts? Commercial aircraft
Figure 1: Top 25 global A&D companies’ first quarter 2010 versus first quarter 2009 Quarterly revenue yearover-year (YoY) % change -7.79% 5.70% 2.55% 8.51% -6.22% 2.87% 3.27% 9.10% -13.54% -0.33% 7.64% -2.45% 1.36% -9.17% -12.51% -4.17% -12.80% -0.04% -3.85% 10.32% -30.12% -0.64% 0.35% 50.44% -14.21% -1.01% Quarterly operating profit YoY % change 14.54% -64.22% -7.10% 23.59% 1.44% -0.42% 5.56% 35.99% -26.02% 9.04% NA NA 1.47% -15.37% -73.17% -25.00% -19.09% -17.48% -11.14% 24.33% -45.88% 203.04% -18.33% NA 110.26% -1.94% Quarterly operating margin YoY % change 24.22% -66.15% -9.40% 13.90% 8.16% -3.20% 2.21% 24.65% -14.44% 9.40% NA NA 0.11% -6.82% -69.33% -30.43% -7.22% -17.44% -7.58% 12.70% -22.56% 204.97% -18.62% NA 145.08% -0.94%
Company Boeing EADS Lockheed Martin Northrop Grumman...