28 August 2015
This year's annual Teal Defense and Aerospace Companies Overview shows the state of U.S. aerospace and defense industry as commercial aerospace booms and defense faces continuing budgetary pressures.
Revenues continued to grow modestly, up 2.1%, but profitability measures showed strong improvement.
Revenues are continuing to increase, reaching a combined $362 billion for the 13 companies included in the Teal Group's annual survey. The 13 companies were chosen to provide a representative sample of defense, commercial aerospace and space businesses.
The increase clearly stemmed from the booming commercial market. Textron, Rockwell Collins, The Boeing Co., United Technologies and Honeywell all achieved strong increases. Lockheed Martin was the only defense prime to achieve an agreement, most of the other major defense prime contractors (General Dynamics, Raytheon Co. and Northrop Grumman Corp.) reported a decline in revenues.
Even as sales have increased, reliance on U.S. government sales has begun to decline in recent years. With heavy spending on the wars in Iraq and Afghanistan, that reliance reached a high of 60.9% in 2009. Since then, it has been in decline, reaching 44.7% in 2012. It remained relatively stable in 2013 at 44.2% before declining again to 41% in 2014.
A total of $874 billion in backlog, a 14% percent increase over the previous year, bodes well for future sales although the booming market for commercial airliners dominates backlog growth. With the companies' high dependence on government sales, a commercial increase is important to restore balanced growth within the group. With the prospect of defense spending cuts due to large U.S. fiscal deficits, commercial growth becomes all the more important.
Boeing dominates the backlog, reporting a $487 billion backlog, more than all of the other 12 companies in the survey combined. (For United Technologies only aerospace and defense related backlog was included. Figures were excluded for Otis Elevators and Climate Controls and Security.)
Operating profits for the 13 leading defense and aerospace companies rose in 2014 to $42.8 billion, an 8% increase. The increase came on top of strong increases over all of the previous four years.
Many defense companies have dramatically increased their earnings. Lockheed Martin, Northrop Grumman and Rockwell Collins' profits are more than double the level of 2003. Harris Corp's profits increased fourteen fold.
With the increase in operating profits, there was a rise in the industry operating margin from 3.4% in 2011 to 11.1% in 2013. It declined slightly in 2014 to 10.9%.
As usual in recent years, Harris Corp. and Rockwell Collins led the group in operating margins, reporting 19.1% and 17.7% respectively. Rockwell Collins earns high margins on both its civil and military business by applying commercial practices to defense. Harris has developed radio technology on its own to be able to sell it to the military on a commercial basis, enabling it to reap higher margins than the prime contractors.
By comparison, major prime contractors earned smaller margins. Northrop Grumman achieved 13.9% margins, the highest of the major defense contractors. It was closely followed by Raytheon with a 13.3% margin.
General Dynamics followed with 12.6% margin. Lockheed Martin earned a 12.3% margin. Boeing was the lowest of all the five largest defense contractors, achieving 8.2%, in part because of the development costs of its 787 commercial airliner and other commercial airliner projects. The increased profits for the defense industry in recent years come at a time when congressional and Pentagon criticism of industry profits and performance have been growing. That has raised concerns about moves to reduce industry profitability.
Aerospace and defense companies have been increasing their long-term debt as they seek to lock in low interest rates and pay for expensive stock buy-back and dividend programs. Long-term debt has been increasing for each of the past three years, up 27% in 2012, 3% in 2013 and 2% in 2014.
Shareholder's equity increased strongly by 36% in 2013 and 11% in 2014.
Company-funded research and development rose for the first time in three years. The 13 companies spent $11 billion on company-funded research and development in 2014, up 4% from the previous year.
As Boeing winds down development work on its new 787 Dreamliner it has led the group of aerospace and defense companies in decreasing its research and development spending as a percentage of total revenues. Boeing increased research to 9.5% of revenues in 2009, up from 3.3% as recently as 2003. In 2010, it reduced that percentage to 6.4%. In 2011, it further reduced spending to 4.7% of revenue. That continued to decline in 2012 to 4.1%. In 2013, it further declined to 3.5% of revenues. In 2014, the decline continued to 3.4%.
Boeing also continued to lead all other companies in its company-funded research and development. It reported $3 billion of research and development spending compared to $2.6 billion from second-ranked United Technologies Cop.
Clearly the industry's outlook continued to improve in 2014. The strong commercial market is helping to the industry as a whole and companies with large commercial businesses to weather the pressure on defense spending.
All measures for 2014 including revenues, backlog, operating profits and net profitability continue to be good for the industry as a whole although individual companies may fare worse than the whole. After years of extremely strong growth and profitability, the industry is in good shape to handle any lean years ahead in defense.
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