Deloitte Analysis: U.S. Defense Sector Declined 2.6 Percent in 2013

Sector profitability increased nearly 18 percent despite falling revenues

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Apr 28, 2014, 09:00 ET

NEW YORK, April 28, 2014 /PRNewswire/ -- U.S. defense contractors posted a decline of 2.6 percent in revenues in 2013, mostly due to U.S. Department of Defense (DOD) and related agency outlay reductions during the fiscal year, according to Deloitte's analysis of the top 20 U.S. defense sector companies. These budget reductions resulted from the drawdown of forces in the Middle East as well as spending reductions mandated by the Budget Control Act of 2011.

Of the top 20 U.S. defense contractors, 17 had decreases in revenues – an indication of how widespread the impact of budget reductions has been on the industry. Companies producing ground equipment, including armored vehicles, and those that provided onsite services in conflict zones, experienced the highest reductions in revenues, due to the drawdown of troops. Generally, companies involved in military aircraft and naval ships experienced flat revenues.

"We expect this trend and shift in spending to continue, due to the strategy requirements of air-sea power," said Tom Captain, vice chairman, Deloitte LLP and U.S. and Global Aerospace and Defense (A&D) leader.

While revenues were down, profitability for U.S. defense contractors increased 17.9 percent, although about half of that increase was due to the absence of large one-time charges. The increase in profitability reflects actions taken in anticipation of sequestration related budget cuts. These profit improvements were enabled generally through personnel cuts and plant closures. Several companies implemented overhead cost and headquarters staff reduction programs.

"With U.S. defense budgets being cut, defense contractors are likely to experience continued revenue declines," continued Captain. "We anticipate that U.S. defense contractors will aggressively address this revenue shortfall with foreign military sales, acquisitions, new product introductions and growth in adjacent markets."

Methodology

Deloitte analyzed the financial performance of 100 major global and U.S. aerospace and defense companies in 2013. The key financial indicators analyzed include sales revenue, operating earnings and operating margins, obtained through company filings and press releases.

About Deloitte's Aerospace & Defense Group

Deloitte's A&D sector focuses on top issues facing the industry. Deloitte A&D practitioners have deep industry experience and are actively involved in various segments of the industry, including: M&A, advanced technology programs, airplane program launches, and acquisition reform and economic assistance packages. For more information about Deloitte's A&D group, please visit: www.deloitte.com/us/a&d.

As used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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SOURCE Deloitte