August 19, 2020 | International, Aerospace, Naval, Land, C4ISR, Security
By: Doug Berenson and Chris Higgins
This year's Defense News Top 100 list of global defense companies coincides with a steep economic downturn created by COVID-19. Although the defense sector has faced pandemic-related business disruptions, it remains a safe haven, with most defense-oriented firms reporting only modest impact on revenues and profits. Seeing how diversified players rely on their defense units is of particular interest at a time when the commercial aviation market has all but collapsed. While many defense firms are bracing for stagnation in defense-spending growth, other markets could experience an extended downturn.
Avascent drew on the Top 100 list to examine the broader mix of market exposure among firms comprising the global defense industrial base. We segmented company revenues across more than two dozen defense and commercial end markets. This analysis provides insight into how companies with defense business leverage exposure to other markets, either as a complement or as a hedge to their defense activities.
One can think of defense companies in three categories:
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Defense/government pure-plays: Companies that focus overwhelmingly on military markets generate about 23 percent of the defense-oriented revenue on this year's list. To the extent these companies have revenue outside defense, it comes from close adjacencies in intelligence, civil space or others. Indeed, the top ranks of the Defense News Top 100 list includes numerous firms for whom defense and government comprise 85 percent or more of total revenue. Lockheed Martin, Northrop Grumman, BAE Systems, LIG Nex1, and Huntington Ingalls Industries and many others fall in this category. BAE Systems and L3Harris maintain significant positions in the commercial aviation supply chain, but these activities represent a small portion of their total revenues.
The unique demands of military and government markets — complex acquisition processes, challenging sales channels, burdensome regulatory compliance — has led many leading defense players to maximize their position across the defense product range. These frustratingly unique features of government customers have deterred many commercial technology firms from pursuing this space, a fact that the U.S. Department of Defense is struggling to reverse. Firms in this category have optimized their financial management, business development and other processes to the particular demands of government customers.
Within government markets, the different economics that characterize the sale of products and services has increasingly led to the separation between these two distinct segments. Many of the market leaders in U.S. government services, including Leidos, Booz Allen Hamilton, CACI International, SAIC and others, feature a near-exclusive focus on government customers. A range of firms providing such services continue to find business with both the government and commercial clients, to be sure, including Bechtel, Jacobs, Babcock International and KBR, to list just a few on this year's Top 100 list. But companies with a significant focus on mission-oriented requirements have increasingly focused solely on government customers.
Commercial and defense sectors: Nearly 60 percent of the defense revenue tracked in the Top 100 list comes from firms that compete in sectors that cross the defense-commercial divide. These include shipbuilders and automotive manufacturers, but the vast majority of firms serving both defense and commercial customers are focused on commercial aerospace. A range of firms recognize the unique complementarity between military and commercial aerospace technology in their business mix. Airframe primes like Boeing and Airbus are chief among these, sitting atop vast aerospace supply chains. But many other household names have sought opportunity in commercial aviation, either as airframe primes (General Dynamics via Gulfstream, Textron via Cessna) or as suppliers of avionics, structures, and other content.
Because it calculates 2019 revenue, this year's Defense News list does not count Raytheon Technologies, which was created with the merger of Raytheon Company and United Technologies Corp. in April 2020. The new “RTX” would have pro forma 2019 revenue of about $43.4 billion in defense and $33.7 billion in commercial markets; this excludes Otis (elevators) and Carrier (air conditioners), which were spun off concomitant with the Raytheon-UTC merger.
Many firms with heavy commercial market exposure now face unprecedented economic headwinds. Between March 1 and Aug. 1, 2020, stock prices for firms spanning defense and commercial aerospace declined by 33 percent, as global air travel nearly ground to a halt amid the coronavirus pandemic. By contrast, an index representing defense/government pure-plays has dropped by just 5 percent over the same period. Conglomerates were in the middle, declining about 16 percent.
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The silver lining, however, may be the ability of some companies to draw on defense-related cash flows to sustain commercial aerospace investment in preparation for an eventual upturn.
Industrial conglomerates: Finally, there are firms with a foot squarely in defense but which also pursue markets far afield, in terms of customer types and market economics.
About 18 percent of the defense revenue tracked in the Top 100 list is earned by firms with interests that have almost no technical or customer link with defense. Large Asian conglomerates — including China North Industries Group Corporation Limited, also known as NORINCO; Japan's Mitsubishi Heavy Industries; and South Korea's Hanwha — top this category in total revenue.
But several Western firms also follow this approach to varying degrees: Textron, Ball Corporation, Diehl Group and others combine widely disparate product lines in a holding company structure.
With defense versus commercial valuations relatively high, there may be competing instincts in the boardrooms of these giants. On one hand, these companies may decide to reorient their portfolio more toward defense activities by exiting underperforming industrial businesses. On the other hand, firms could elect to use defense cashflows to support the broader corporation and position the company for an economic rebound.
Trends to monitor
While defense budgets could face downward pressure in much of the world, many U.S. contractors have good predictability through 2021 because of DoD outlays already in process. It is the wider commercial economy where the real uncertainty lies.
This makes it hard to predict how many firms active in defense markets will fare over the next year, given the variety of other markets they serve.
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Over half the revenue earned by the Defense News Top 100 is generated from commercial sectors. Commercial aviation markets are likely to languish at pre-2019 levels through 2022 or later.
The outlook for other commercial markets is more heterogeneous, but challenges exist across areas like shipbuilding, automotive, industrial equipment and energy. To the extent that countries pursue infrastructure-led stimulus, some of the more diversified companies may find pockets of sunshine amid the gloom.
Doug Berenson is a managing director at Avascent, where Chris Higgins is a principal.
May 4, 2021 | International, Aerospace, Naval
PLANO, Texas — The Navy selected Martin UAV’s V-BAT for a VTOL UAS prototyping and development effort in order to fulfill new technological requirements driven by the changing nature of threats in austere operating environments, Martin UAV said in an...
November 18, 2020 | International, Aerospace, Naval, Land, C4ISR, Security
NAVY General Dynamics, Bath Iron Works, Bath, Maine, is awarded a $146,118,867 cost-plus-award-fee modification against previously awarded contract N00024-19-C-4452 for DDG planning yard services. Work will be performed in Bath, Maine, and is expected to be completed by January 2022. Fiscal 2020 other procurement (Navy) (80%); and fiscal 2021 operation and maintenance (Navy) (20%), funding in the amount of $1,016,645 will be obligated at time of award, of which $200,866 will expire at the end of the current fiscal year. The Supervisor of Shipbuilding, Conversion and Repair, Bath, Maine, is the contracting activity. Lockheed Martin Corp., Liverpool, New York, is awarded a $22,827,962 modification (P00003) to a firm-fixed-price order N00019-20-F-0535 against previously issued basic ordering agreement N00019-19-G-0029. This modification exercises an option to procure 12 retrofit advanced radar processor systems for the E-2D Advanced Hawkeye aircraft. Work will be performed in Liverpool, New York (54%); and Andover, Massachusetts (46%), and is expected to be completed in April 2025. Fiscal 2021 aircraft procurement (Navy) funds in the amount of $22,827,962 will be obligated at time of award, none of which will expire at the end of the current fiscal year. The Naval Air Systems Command, Patuxent River, Maryland, is the contracting activity. Lockheed Martin Corp., Lockheed Martin Aeronautics Co., Fort Worth, Texas, is awarded an $11,977,622 modification (P00003) to previously awarded cost-plus-fixed-fee contract N00019-20-C-0026. This modification provides continued support required to establish the common reprogramming tool development network and selection of a service-oriented architecture for the development of enhanced reprogramming tools, which is essential for all standing labs in support of the F-35 aircraft for the Navy, Air Force, Marine Corps, and the governments of Australia and Great Britain. Work will be performed in Fort Worth, Texas (90%); and Eglin Air Force Base, Florida (10%), and is expected to be completed in December 2021. Fiscal 2021 research, development, test and evaluation (Navy) funds in the amount of $711,406; fiscal 2021 research, development, test and evaluation (Air Force) funds in the amount of $711,406; and non-Department of Defense funds in the amount of $2,800,000, will be obligated at time of award, none of which will expire at the end of the current fiscal year. The Naval Air Systems Command, Patuxent River, Maryland, is the contracting activity. Northrop Grumman Systems Corp., Rolling Meadows, Illinois, is awarded an $8,456,902 modification (P00010) to cost-plus-fixed-fee delivery order N00019-19-F-0453 against previously issued basic ordering agreement N00019-15-G-0026. This modification adds scope to provide non-recurring engineering to upgrade the current large aircraft infrared countermeasures system processor replacement in support of efforts to resolve advanced threat warning processor and control indicator unit diminishing manufacturing source issues, and exercises an option to provide expanded growth capability for the AN/AAQ-24 system for the Navy and the Air Force. Work will be performed in Rolling Meadows, Illinois, and is expected to be completed in April 2023. Fiscal 2019 aircraft procurement (Navy) funds in the amount of $5,075,661; fiscal 2020 aircraft procurement (Navy) funds in the amount of $2,961,241; and fiscal 2020 aircraft procurement (Air Force) funds in the amount of $420,000, will be obligated at time of award; $5,075,661 of which will expire at the end of the current fiscal year. The Naval Air Systems Command, Patuxent River, Maryland, is the contracting activity. ARMY BAE Systems, Nashua, New Hampshire, was awarded a $49,937,097 firm-fixed-price contract for the Common Missile Warning System. Bids were solicited via the internet with one received. Work locations and funding will be determined with each order, with an estimated completion date of Nov. 15, 2025. The U.S. Army Contracting Command, Redstone Arsenal, Alabama, is the contracting activity (W58RGZ-21-D-0010). General Dynamics Land Systems, Sterling Heights, Michigan, was awarded a $25,982,972 modification (P00004) to contract W56HZV-20-C-0031 to provide maintenance training and procedural technical assistance to the Kuwait Land Force. Work will be performed in Kuwait City, Kuwait, with an estimated completion date of Dec. 5, 2023. Fiscal 2010 Foreign Military Sales funds in the amount of $25,982,972 were obligated at the time of the award. The U.S. Army Contracting Command, Detroit Arsenal, Michigan, is the contracting activity. MISSILE DEFENSE AGENCY ARES Technical Services Corp.,* Burlingame, California, is being awarded a $51,962,387 competitive cost-plus-fixed-fee, level-of-effort contract with a three-year base value of $21,651,531 and two one-year options for Technical, Engineering, Advisory, and Management Support (TEAMS) - Next Safety advisory and assistance services. The work will be performed in Fort Belvoir, Virginia; Dahlgren, Virginia; Huntsville, Alabama; Fort Greely, Alaska; Vandenberg Air Force Base, California; Kirkland AFB, New Mexico; Pacific Missile Range Facility, Hawaii; and White Sands Missile Range, New Mexico, with an estimated completion date of Dec. 13, 2025. This contract was competitively procured via publication on the beta.SAM.gov website with three proposals received. Fiscal 2021 research, development, test and evaluation; and Foreign Military Sales funds in the amount of $2,599,751 are being obligated at time of award. The Missile Defense Agency, Huntsville, Alabama, is the contracting activity (HQ0858-21-C-0011). AIR FORCE L‐3 Communications Vertex Aerospace LLC, Madison, Mississippi, has been awarded a $38,000,000 firm-fixed‐price, indefinite‐delivery/indefinite‐quantity modification (P00021) to contract FA8106‐17‐D‐0001 for contractor logistic support of the Air Force C‐12 fleet. Work will be performed in Madison, Mississippi; San Angelo, Texas; Okmulgee, Oklahoma; Buenos Ares, Argentina; Gaborone, Botswana; Brasilia, Brazil; Bogota, Colombia; Cairo, Egypt; Accra, Ghana; Tegucigalpa, Honduras; Budapest, Hungary; Joint Base Andrews, Maryland; Nairobi, Kenya; Rabat, Morocco; Manila, Philippines; Riyadh, Saudi Arabia; Bangkok, Thailand; Ankara, Turkey; Edwards Air Force Base, California; Holloman AFB, New Mexico; Joint Base Elmendorf‐Richardson, Alaska; Oslo, Norway; and Yokota Air Base, Japan. Work is expected to be completed by Dec. 31, 2021. The estimated cumulative face value of the contract is $158,000,000. Fiscal 2021 operation and maintenance in the amount of $6,648,772 will be obligated at the time of award. The Air Force Life Cycle Management Center, Tinker AFB, Oklahoma, is the contracting activity. Engineering Arresting Systems Corp., Ashton, Pennsylvania, has been awarded a $15,691,772 requirements-indefinite-delivery type, firm‐fixed-price production contract for the Mobile Runway Edge Sheave (MRES). Work will be performed in Ashton, Pennsylvania, and is expected to be completed Nov. 15, 2028. This contract is the result of a sole-source acquisition. The Air Force Life Cycle Management Center, Robins Air Force Base, Georgia, is the contracting activity (FA8534-21-D-0001). DEFENSE LOGISTICS AGENCY Burlington Apparel Fabrics, Greensboro, North Carolina, has been awarded a maximum $9,602,250 modification (P00010) exercising the second one-year option period of a one-year base contract (SPE1C1-19-D-1113) with four one-year option periods for cloth. This is a firm-fixed-price with economic-price-adjustment, indefinite-delivery/indefinite-quantity contract. Location of performance is North Carolina, with a Nov. 18, 2021, ordering period end date. Using military service is Army. Type of appropriation is fiscal 2021 through 2022 defense working capital funds. The contracting activity is the Defense Logistics Agency Troop Support, Philadelphia, Pennsylvania. *Small business https://www.defense.gov/Newsroom/Contracts/Contract/Article/2416815/source/GovDelivery/
January 14, 2019 | International, Aerospace
Renewed emphasis on stealth, sensor fusion, MUM-T, and active protection systems will ignite new growth opportunities, finds Frost & Sullivan LONDON, Jan. 14, 2019 /CNW/ -- The global combat aircraft market is set for rapid growth. Geographical instability, territorial and border disputes, and the need to replace ageing fleets with modern fourth-/fifth-generation multirole fighters that have longer ferry range, higher payload capacity, and better survivability against integrated air defence networks are key factors fuelling a phenomenal CAGR of 39.0% to 2026. Frost & Sullivan anticipates planned and perceived modernisation and procurement opportunities in the market to exceed $101 billion and revenues to reach $493.14 billion by 2026. "Geopolitics aside, the combat fleet in many countries such as India, Vietnam, and Malaysia are reaching obsolescence fast and replacements must be procured to ensure that power projection capabilities of these countries are maintained. There is a global renewed emphasis on stealth, sensor fusion, manned-unmanned teaming (MUM-T) capability, and active protection system upgrades," said Arjun Sreekumar, Industry Analyst, Defence at Frost & Sullivan. "To harness lucrative growth opportunities, players should offer a combination of low-cost platforms, aggressive marketing, and flexible payment mechanisms." For further information on this analysis, please visit: http://frost.ly/331 Growth opportunities from a regional perspective include: Geopolitical issues necessitate new procurement and modernisation in the Middle East in countries such as Qatar, Saudi Arabia, and the United Arab Emirates Modernisation of existing systems or procurement of second-hand aircraft rather than pursuing expensive acquisition programs in former Soviet bloc countries and other developing countries with smaller economies or low economic growth Collaborative new platforms planned in Europe (Franco-German next-generation fighter) and the Asia-Pacificregion (Japan and Indonesia) Russia and China modernising quickly and phasing out outdated inventory The United States seeking several upgrade programs for its current combat aircraft inventory to extend service lives into the 2030s, until the F-35 and new fifth-/sixth-generation multirole fighters can be procured "Older generation combat aircraft will find future air combat environments challenging in the face of new air and ground-based sensors and weapons capabilities, increased digitalisation of battlespace, and forces moving towards collaborative network-centric operations," noted Sreekumar. "The installation of new generation electronic countermeasures will be a minimum survival requirement in a rapidly evolving environment." Frost & Sullivan's recent analysis, Global Combat Aircraft Market, Forecast to 2026, covers the global market for new aircraft and upgrades specific to combat aircraft. It lists the key aircraft fielded by different countries based on their mission and types and traces their upgrade evolution. Segments such as strike, fighter, and multirole fighter across fixed-wing aircraft types are assessed with market share and the competitive environment discussed for players such as Lockheed Martin, Boeing, Dassault Aviation, Saab, Eurofighter Jadflugzeug GMBH, Mikoyan MiG, and Sukho. Revenues are broken down by new procurements, upgrades, regions, and combat aircraft types. About Frost & Sullivan For over five decades, Frost & Sullivan has become world-renowned for its role in helping investors, corporate leaders and governments navigate economic changes and identify disruptive technologies, Mega Trends, new business models and companies to action, resulting in a continuous flow of growth opportunities to drive future success. Contact us: Start the discussion. Global Combat Aircraft Market, Forecast to 2026 MD43_16 Contact: Jacqui Holmes Corporate Communications Consultant E: jacqui.holmes@frost.com Twitter: @FrostADS LinkedIn: Frost & Sullivan's Aerospace, Defence and Security Forum Website: http://www.frost.com/ADS SOURCE Frost & Sullivan https://www.newswire.ca/news-releases/modernisation-and-procurement-opportunities-in-the-global-combat-aircraft-market-to-exceed-101-billion-by-2026-855358362.html