Defense Daily Open Stories Oct 9 2012 #2

October 3, 2012

At Mid-Term, Global Defense Industry Continues To Shrink, Study Says

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Halfway through 2012, the global defense industry is reporting fewer revenues than it did a year ago with European-based firms feeling the worst of defense spending cutbacks while companies based in the United States are holding level, according to a new study by the accounting firm Deloitte.

Despite weakness in defense spending worldwide, the commercial aerospace business continues to trend upward, driven by increased aircraft deliveries by Boeing [BA] and Airbus, a division of the European Aeronautic Defence and Space Co., says the study, Defense Continues to Shrink as Commercial Aerospace is Taking Off. The report examines the financial performance of the top 20 publicly listed aerospace and defense companies worldwide, which make up 71 percent of global industry revenues.

Defense revenues in the first half of 2012 fell a percent to $127.5 billion from a year ago, with the top European-based firms posting a 4.5 percent decline to $33.7 billion while their U.S.-based counterparts managed slightly better than flat growth at $93.7 billion, the study shows.

Troop withdrawals from Iraq and Afghanistan combined with defense budget cuts are the culprits in defense-related sales being down, Deloitte says.

While defense spending is constrained, companies overall are managing to boost their bottom lines, the report shows. Operating earnings for the companies included in the report edged up nearly 2 percent to $12 billion led by a 5 percent gain at European-based firms and less than a percent increase at U.S. firms.

The weakening outlook for defense spending in Europe and the United States will increase competition and lead to mergers, Deloitte says.

“As U.S. and European military budgets decline over the next several years, there is revenue growth pressure on major defense contractors as competition over major programs intensifies,” says the report. “Companies with heavier exposure to the defense sector will compete for a smaller share of total market and thus be challenged to fill the revenue gap. Thus, acquisitions are expected to increase in order to access new technical capabilities, to access new customers as well as to build scale economies of production.”

The report says there will be opportunities for foreign military sales in Asia and the Middle East, where defense budgets are expected to grow.

But the driver behind growth and earnings in the aerospace and defense sector as a whole is commercial aerospace, which was responsible for $103.2 billion in revenues for the firms in the report, an increase of 15 percent. Here, U.S.-based companies led the way with 18 percent growth to $55.4 billion while European firms posted 14 percent growth to $44.1 billion.

On the commercial aerospace earnings front, the sector saw a 29 percent improvement overall to $8.6 billion, led by European firms, which posted $2.5 billion in operating earnings, a nearly 51 percent increase. U.S. firms increased their operating earnings more than 24 percent to $5.9 billion.

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