U.S. Aerospace & Defense Executives Eye M&A, Foreign Markets to Fuel Growth: KPMG Survey

NEW YORK, July 22, 2011 /PRNewswire/ -- Armed with significant cash on their balance sheets, and faced with tightened federal defense budgets, stiffer competition, and a struggling economy, U.S. aerospace and defense (A&D) executives cite strategic acquisitions and expansion into new markets as the highest-priority investment areas to spur company growth, according to a recent survey by KPMG LLP, the audit, tax, and advisory firm.  

In the KPMG survey, nearly two-thirds (62 percent) of A&D executives say their companies will be involved in a merger or acquisition as a buyer in the next two years.  In addition, 70 percent of A&D executives indicate that their companies have significant cash on their balance sheets, with 41 percent saying the highest-priority use for that cash will be a strategic acquisition for their company, followed by 19 percent who say they will use the cash assets for expansion into new markets.

"A&D executives are telling us that the business outlook will not be brightening anytime soon.  They are  rethinking their strategies and becoming more aggressive to drive growth," said Martin Phillips, U.S. and global leader of KPMG's aerospace and defense practice.  

Phillips adds that U.S. contracts are dwindling and three-year cumulative sales on average have remained flat.  "All of these factors set the stage for more aggressive expansion, M&A, and product strategies," he said.  "As a result, some companies have deployed a 'grow or die' philosophy, and the results of this survey show that more will adopt that mindset."

When asked about the biggest drivers of revenue growth over the next three years, A&D executives most frequently cited international expansion, followed by new product development, acquisitions/joint ventures, and adjacent products.  To support that growth, executives noted that they expect to increase spending next year in the areas of research and development (38 percent) and new product development (35 percent).   Looking ahead three years, nearly half (49 percent) of executives surveyed by KPMG say that non-U.S. operations or customers will account for more than a quarter of their companies' revenues, compared with just 37 percent who currently derive more than a quarter of their revenue from foreign operations.

To help drive their international growth, A&D executives expect their companies' main strategies to focus on foreign military sales and partnerships/joint ventures.  According to the A&D executives surveyed by KPMG, the highest priority foreign markets are Europe, Asia (other than China), and the Middle East.

However, according to KPMG's Phillips, "Most of the foreign opportunities these companies are pursuing take several years to materialize, which could explain why they don't expect much improvement for business performance in the short-term."

When asked what gives their company a competitive advantage in today's marketplace, executives most frequently cited quality of product and service, customer relationships, and innovation/new products.  The greatest constraints to achieving competitive advantage, according to KPMG survey respondents, are total product costs, innovation and the ability to keep ahead of market trends, and supplier base/capabilities.

"In the current budgetary and economic environment, A&D leaders clearly have their work cut out for them," added Phillips.  "They've indicated to us that a lack of customer demand, pricing pressures, and foreign competition are significant barriers to growth over the next year.  Despite the  challenges they face, companies must find a way to break through to new customers and markets."

Revenue, Hiring, Economy Will Remain Flat Short-term

At least half of A&D executives in the KPMG survey expect revenue and employment levels to remain flat or decline next year.  In fact, 30 percent say revenues will be about the same next year, while 20 percent expect revenue will drop.  

Likewise, 24 percent say headcount will remain the same, while 32 percent predict a decrease. In addition, when asked to predict when their company's U.S. headcount would return to pre-recession levels, 63 percent said 2013 or later, and six percent said "never."

Executive views on the economy mirror those on revenue and hiring, with 35 percent expecting the U.S. economy to be about the same next year and 16 percent expecting it to get worse.  In addition, when asked when they expected a full recovery, 64 percent of the respondents say the end of 2013, 2014 or later. Only nine percent believe it will happen a year from now, while 27 percent said the end of 2012.

THE KPMG AEROSPACE & DEFENSE INDUSTRY PULSE SURVEY

The KPMG survey was conducted in June 2011 and reflects the responses of 100 senior executives in the A&D industry.  Based on revenue in the most recent fiscal year, 43 percent of respondents work for institutions with annual revenues exceeding $10 billion, 30 percent with annual revenues in the $1 billion to $10 billion range, and 27 percent with revenues in the $100 million to $1 billion range.

About KPMG LLP

KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International Cooperative ("KPMG International").  KPMG International's member firms have 138,000 professionals, including more than 7,900 partners, in 150 countries.

SOURCE KPMG LLP