2016 year in review and 2017 forecast - pwc · source: s&p global market intelligence, capital...

How are aerospace and defense companies performing today?

What challenges and opportunities do they face?

PwC takes a look.

Aerospace and defense2016 year in review and 2017 forecast

PwC Aerospace and defense 2

Methodology

Our data is drawn from financial reports on fiscal year 2016 results for the largest 100 aerospace and defense (A&D) companies by revenue (see Appendix A) and other publicly available information, such as company websites and press releases. Our cut-off date for publication was April 1, 2017.

A&D companies include those that generate the majority of revenue from aerospace or defense activities or, for diversified companies, those reportable segments that derive a majority of their revenue from A&D activities. The results are reported in US dollars. Foreign currencies were translated at average exchange rates for years ending December 31, 2016 and December 31, 2015 respectively.

Our report also expresses PwC’s point of view on topics affecting the industry, developed through interactions with our clients and other industry leaders and analysts.


Aerospace and defense overview 4

Commercial aerospace 14

Defense 24

Mergers and acquisitions 32

Summary 34

Appendix 36

Additional resources 40


Aerospace and defense overview

2016 review

The aerospace and defense industry reported higher revenues and profits in 2016 compared with 2015. Revenue and profit were below the record levels set in 2014, by 1% and 3% respectively. The strong US dollar (higher by nearly 20% against the Euro compared with 2014) is largely the reason for missing a new record year, which decreased revenue and profit of non-US companies when translated to US dollars. Excluding translation impacts, revenue and profit would have set new records.

The $4.6 billion improvement in operating profit is largely attributable to Bombardier, which improved results by $4.8 billion due to the absence of large impairment charges recorded in 2015. The improvement at Bombardier was enough to offset significant profit declines at the two largest companies Boeing and Airbus of $1.6 billion and $2.0 billion respectively. Other large fluctuations in profit include a $1.1 billion improvement at United Technologies (UTC), also due to the absence of some non-recurring charges in the prior year, and a $1.5 billion unfavorable change reported by Triumph Group.

Growth in commercial aviation continued to slow in 2016, while underlying demand in revenue passenger miles remained robust at 6.3% growth in 2016 (see Figure 11), the second straight year above 6%. New aircraft deliveries increased 3%. The Top 100 A&D companies by revenue (see Appendix A) reported $709 billion in revenue and $69 billion in operating profit in 2016 (see Figure 1).

Aerospace and defense industry reports higher revenue and profit

Revenue increases 3%; profit increases 7%

GE Aviation becomes most profitable A&D company


Revenue increased by 3% compared with 2015, while operating profit increased 7% from 2015. Operating margin improved by 40 basis points to 9.7%. Industry operating margin has reached double digits only once, in 2014. The improvement in operating margin was in part a result of the lower impairment and restructuring charges.

Figure 1: Key industry metrics (US$ billions)

2016 2015 Change

Revenue $709 $689 3%

Operating profit $69 $64 7%

Operating margin 9.7% 9.3% 40 bps

Source: PwC analysis

Revenue, operating profit, and operating margin improvements were broad based. Only the second quartile reported a decrease in operating profit, which was mostly attributable to Triumph Group’s $1.5 billion decrease in profit. The improvement in the top quartile profitability is largely attributable to Bombardier and the absence of large charges reported in 2015. Operating margin for Boeing and Airbus both decreased for the second consecutive year to 6.2% and 3.4% respectively, which is below the overall industry average.

Figure 2: Key metrics by quartile

RevenueOperating

profitOperating

marginChange

Top quartile 2.5% 9.9% 9.7% +70 bps

Second quartile 4.5% -14.8% 8.6% -200 bps

Third quartile 1.6% 21% 11.4% 180 bps

Fourth quartile 5.6% 17.3% 11.9% 120 bps



Prospects continue to be bright for commercial aerospace. However, there are some mixed signals. On one hand, underlying demand has never been stronger, with revenue passenger miles growing above 6% for two consecutive years, which drives new equipment demand in the long term and is driving aftermarket demand in the near term, although the aftermarket effect is tempered by growing retirement and replacement of aircraft. Also, the industry set a new record of 1,436 large aircraft deliveries in 2016 (see Figure 10), a 44% increase since 2011, and further production increases are planned for narrowbodies. On the other hand, the industry reported its first, although modest, decline in unit backlog since 2009, the year of the Great Recession, and backlog remains above 12,000 aircraft (see Figure 10) and approximately nine years of production at current rates. Widebody jet demand is softening and Boeing’s deliveries were lower than the prior year. In fact, Boeing reported its first overall revenue decline since 2010.

Figure 3: Analysis highlights

Largest increase in revenue (dollars) Lockheed Martin $6,712 M

Largest increase in revenue (percentage)

Harris 47%

Largest increase in profit (dollars) Bombardier $4,819 M

Largest increase in profit (percentage) Oshkosh Defense 1267%

Highest operating margin TransDigm 40%

Largest increase in Top 100 list BBA Aviation, Jamco Corp +10

Largest decrease in revenue (dollars) BAE Systems -$1,681 M

Largest decrease in revenue (percentage)

Cobham -17%

Largest decrease in profit (dollars) Airbus -$2,010 M

Largest decrease in profit (percentage) Triumph Group -351%

Largest decrease in Top 100 list Dassault Aviation / Cobham -6



The defense industry reported modest revenue growth in 2016 as well as margin improvement. The results of the 2016 US elections is expected to bring about an end to sequestration, and President Trump is calling for a 10% increase in the US defense budget. While these goals are not yet realized, it seems promising for the defense industry, which has been dealing with considerable uncertainty in defense spending since the initial Budget Control Act (sequestration law) of 2011.

During 2015 and into early 2016 the global threat environment continued to evolve. Coalition forces made significant progress toward defeating ISIS, while the President considered sending additional troops to Afghanistan to combat a resurgence of the Taliban. However, there were numerous ISIS-inspired terror attacks during the year. The US-Russian relationship showed some potential for improvement following the US election, but then deteriorated over the conflict in Syria. There is growing tension over the implementation of the Iranian nuclear agreement, and North Korea is escalating its nuclear missile program, causing the US to bolster its presence in the region. Furthermore, China’s military modernization is causing tension, particularly in the South China Sea. All these events underscore the growing threats and need for global security, which could cause rapid changes in US defense priorities.

There were few changes to the Top 100 list in 2016. Austal was added to the list and Ducommun was deleted. There were also no acquisitions of Top 100 companies; however, Leidos’ acquisition of Lockheed Martin’s IS&GS business was a $5.9 billion transaction. The year’s largest deal was announced in October: the $8.2 billion acquisition of B/E Aerospace by Rockwell Collins. That deal closed in April 2017.

Figure 4: Addition and deletion to the Top 100 A&D companies list


Austal#86

DucommunDue to lower revenue


Revenue

Boeing was again the industry’s largest company in 2016. It reported $95 billion in revenue, which reflects a 2% decrease driven partly by lower commercial aircraft deliveries. Airbus increased revenue to €66.6 billion from €64.5 billion, which reflects a 3% increase. Lockheed Martin reported the largest revenue growth, $6.7 billion, attributable mostly to the first full year of the Sikorsky acquisition. Harris reported the largest percentage growth in revenue, 47%, as a result of its acquisition of Exelis.

Profitability

• GE Aviation became the industry’s most profitable company in 2016, with $6.1 billion in operating profit, the second best all-time for the industry, after Boeing’s 2015 performance of $7.4 billion.

• Bombardier reported the largest increase in profit of $4.8 billion, due to the absence of impairment charges reported in 2015.

• Airbus reported the largest decline in profit of $2.0 billion. Boeing reported the second largest decrease in profit of $1.6 billion.


Operating margin

Industry operating margin improved 40 basis points to 9.7% (see Figure 1) after achieving double digits for the only time in 2014. Transdigm had the industry’s best operating margin at 40.0%, while GE Aviation improved 100 basis points to an operating margin of 23.3% after achieving 20% for the first time in 2014.

Figure 5: Companies with operating margin > 20%

Top 100 rank # Operating margin

GE Aviation 6 23.3%

Honeywell Aerospace 13 20.3%

Transdigm 44 40.0%

SES 52 35.8%

Aselsan 79 21.2%

Bharat Electronics 83 22.5%

Crane Aerospace & Electronics 92 20.1%Source: PwC analysis


Figure 6: A&D industry vs. S&P 500 total shareholder returns (2011–2016)

Source: S&P Global Market Intelligence, Capital IQ; PwC leadership information console

Total shareholder returns

The A&D industry delivered strong total shareholder returns (TSR)—defined as the annualized change in share value + dividends / buybacks—of 14.5% in 2016. These returns outperformed the S&P 500 TSR of 11.6% in 2016, continuing the sector’s outperformance over the last five years with the A&D index delivering 21.4% vs. the S&P 500’s 11.9%. Within the A&D index, the performance was led by the A&D Primes, which have delivered a 1 Year TSR of 19.6%, followed by the A&D Suppliers’ 17.6% and Airframers’ 6.2%.

Figure 7: A&D historical total shareholder returns

Index 1 year TSR 5 year TSR

A&D Prime 19.6% 28.4%

A&D Index 14.5% 21.4%

A&D Suppliers 13.8% 17.5%

S&P 500 11.9% 14.6%

A&D Airframers 6.2% 19.2%


100%Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

A&D peers

S&P 500

150%

200%

250%

300%


Shareholder returns are a factor of operating performance, and the market’s reaction to this operating performance in terms of future expectations and capital distribution (dividends and buy backs). Over the past year the overall A&D index TSR have been driven by capital distribution of 7.7%, followed by an increase in market expectations of 5.9%; profit growth had a smaller contribution of 1.0%. This reliance on capital distribution and higher market expectations for the 2016 TSR is true for each of the A&D segments, with the exception of A&D Prime, which demonstrated strong 2016 profit growth that drove 8.5% of its TSR.

Figure 8: 1 Year total shareholder return disaggregation

IndexTSR impact of

profit growth

TSR impact of change in market

expectations

TSR impact of capital

distributionTSR

(2015–2016)

A&D Prime 8.5% 2.4% 8.7% 19.6%

A&D Index 1.0% 5.9% 7.7% 14.5%

A&D Suppliers -0.1% 6.6% 7.4% 13.8%

S&P 500 -0.1% 4.9% 7.2% 11.9%

A&D Airframers -5.1% 6.5% 4.8% 6.2%


The A&D index TSR driven by market expectations was 5.9%, roughly 1.0% higher than the S&P 500’s market expectations of 4.9%. This is consistent with capital distributions as the A&D index TSR driven by capital distributions was 7.7% vs. 7.2% for the S&P 500. Higher market expectations implies that investors anticipate A&D’s future performance to exceed its historical performance faster than the market. This will likely increase pressure on management to deliver improved operating performance in 2017 and beyond in order to maintain and increase its valuation. At the same time, high levels of capital distribution as a driver of TSR means that management will likely need to sustain this growth while still instituting a disciplined capital allocation process that returns excess cash to shareholders in the form of dividends or buybacks. A reduction in current levels of dividend and distributions could have a negative impact on TSRs going forward.


2017 forecastCommercial aviation original equipment manufacturers (OEMs) and the defense sector are expected to report modest improvement in 2017. Commercial aviation aftermarket revenue may see some modest growth, which has lagged overall growth in revenue passenger miles. It is difficult to predict any future impairment or restructuring charges. In the absence of such charges, operating profit should likely return to around 10% of revenue. Accordingly, we expect a modest improvement in revenue and operating profit, which may be enough to set new records.


Commercial aerospace

2016 review

Airbus delivered 688 aircraft in 2016, an increase of 53 over the prior year, making this its fifteenth consecutive year of record production. That was enough to offset a decline of 14 aircraft by Boeing, such that the industry achieved record output. Net orders were 1,399, 37 less than deliveries, such that unit backlog decreased for the first time since 2009, the year of the Great Recession. However, the book-to-bill was barely below 1:1, and backlog remains at nearly nine years of production at current rates.

First unit backlog decline since 2009

Figure 9: Aircraft backlog (US $billions)

12/31/16 12/31/15 12/31/14 12/31/13

Boeing $473 $432 $440 $374

Airbus* $1,060 $1,001 $919 $809

Sources: The Boeing Company 2016 annual report; Airbus Group 2016 annual report*at list price

Figure 10: Aircraft backlog (units)

Boeing Airbus Total

Backlog on Dec. 31, 2015 5,795 6,831 12,626

Net orders 668 731 1,399

Deliveries 748 688 1,436

Backlog on Dec. 31, 2016 5,715 6,874 12,589

Sources: The Boeing Company 2016 annual report; Airbus Group 2016 annual report


For 2016, the International Air Transportation Association (IATA) reported revenue passenger miles growth of 6.3%, the second consecutive year above 6% growth and marking the sixth consecutive year that air travel demand grew by more than 5%. This level of demand supports Boeing’s 20-year forecast of approximately 39,000 new planes at a value of $5.9 trillion.1 Passenger load hit 80% for the full year for the second consecutive year, after achieving that milestone for the first time in 2015.

Figure 11: Key aerospace metrics

2016 2015 2014 2013

Revenue passenger miles 6.3% 6.5% 5.9% 5.2%

Load factor 80.5% 80.3% 79.7% 78.7%

Cargo freight ton miles 3.8% 2.7% 4.5% 1.4%

Load 43.0% 44.1% 45.7% 46.3%

Sources: IATA press release, “Another Strong Year for Air Travel Demand in 2016,” February 2, 2017; IATA press release, “Air Cargo Ends 2016 on a Positive Note,” February 1, 2017

1 The Boeing Company, Current Market Outlook 2016–2035.2 Aditi Shah, “Airbus says engine issues will not affect A320 NEO deliveries,”

Reuters, March 17, 2017.

Airbus’s newest narrowbody jet, the A320neo, began commercial flight in January with Lufthansa. In July, the aircraft was delivered to Turkey’s Pegasus Airlines. In September, Malaysia’s AirAsia Bhd. received its first A320neos with CFM engines. CFM (a joint venture of General Electric and Safran SA) is one of the engine companies supplying engines for the A320neo. Pratt & Whitney, the other supplier, is having manufacturing delays with its geared turbofan engine, causing output to be disrupted. Airbus has had to parcel out the CFM engine, allowing it to meet some of its delivery commitments. Airbus has stated that over time they do not expect the problems with the Pratt & Whitney engines to largely impact their delivery schedule.2


Boeing’s newest narrowbody, the 737 MAX, uses CFM’s LEAP-1B engines, which are more powerful and fuel efficient than the engines currently used on the widely popular 737s. The 737 MAX 8 first flew in January and received certification in March. Southwest Airlines was expected to take first delivery of the aircraft in May; but, in January, Norwegian Air Shuttle said it would be the 737 MAX 8’s launch operator.3 On April 13, 2017, the MAX 9, a larger version of the MAX 8, was flown for the first time. The MAX 9 is scheduled to enter service in 2018. The 737 MAX program as a whole (which includes the MAX 7, 8, and 9) has racked up more than 3,600 orders from 83 customers.4

Boeing is still in the planning stage for its 797, a middle market widebody with the capacity to carry between 225 and 260 passengers. The 797 would be a replacement for the 757, a narrowbody no longer in production, and would fill the gap between the largest 737 models and the smallest 787 Dreamliners.

3 Jon Ostrower, “Norwegian leapfrogs Southwest as first 737 Max operator,” CNN Money, January 26, 2017.

4 Cecilia Goodnow and Josh Green, “1st 737 MAX 9 debuts as employees—and world—look on,” Boeing web story, March 9, 2017.


Regional aircraft

Bombadier’s CSeries aircraft is still in its early stages of commercial flight. But on April 28, 2016, Delta signed an agreement for 75 CS100s to update its narrowbody fleet.5 To date, only Swiss International (part of Lufthansa) has had scheduled flights with the CS100. The inaugural flight took place on April 15, 2016, from Zurich to Paris. In August, Swiss launched a second scheduled flight of the aircraft between the same two airports. The first CS 300 is expected to enter service next year as part of Air Baltic’s fleet.

Mitsubishi’s Regional Jet (MRJ), Japan’s first locally made passenger jet, has flown three of its jets to the US for trials. Mitsubishi has said it is experiencing delays and higher than expected development cost. The jet was initially expected to be delivered to ANA Holdings mid-2018, but delivery has been moved back to 2020.6 The delays have caused a shakeup in leadership, with an executive VP of the parent company now in control.

Embraer, in contrast, is ahead of schedule in its rollout of the E190-E2. The jet completed its maiden flight in May, which marks the beginning of the certification process. It is scheduled to enter commercial service in 2018. Wideroe, a Norwegian regional carrier, will be the launch operator. The airline has order rights for 12 additional aircraft, in a move to replace its Bombadier turboprops and become a jet operator.7

5 Michael Thomas, “Delta orders state-of-art, fuel-efficient Bombardier C Series,” Delta news story, April 28, 2016.

6 Mavis Toh, “Mitsubishi delays MRJ deliveries by two years,” FlightGlobal, January 23, 2017.

7 GHIM-LAY YEO, “Wideroe to be E190-E2 launch operator.” FlightGlobal, February 14, 2017.


Business jets

Business jet operations showed modest but continued improvement from the big drop that occurred during the 2008–2009 financial crisis. According to the FAA, the year-over-year change in business jet operations is positive, with the average up 1.38% as of November.8 Nevertheless, there was a gradual decline in deliveries in 2016, down 4.2% from the prior year. This was the second straight year of declines since 2011.9 The near-term outlook for the sector is difficult because slow economic growth has dampened demand. However, an improving forecast for economic growth combined with the prospect of tax reform in the US (the largest market for business aviation) could energize the sector. Longer term, there is cause for optimism: the FAA’s latest report predicts an average growth rate of 1.9% through 2037. The largest segment of the fleet, the fixed-wing piston aircraft, is predicted to lose ground to the smallest segment, the light-sport-aircraft.10

Unmanned aircraft systems (UAS)

The FAA‘s online registration system for drones weighing less than 55 pounds went live at the end of 2015. According to the agency’s latest report,11 by the end of 2016, over 600,000 hobbyists (about 1.1 million units) had registered, with continued growth month over month. The report also forecasts further growth as the technology improves and becomes easier to use and prices fall, predicting a hobbyist fleet of over 3.5 million by 2021.

Online registration for commercial operators of small drones (under 55 pounds) went live on April 1, 2016. Since then, more than 44,000 UAS have been registered, with the numbers rising sharply from month to month, says the FAA report. It also anticipates strong growth in this sector, with 420,000 units in operation by 2021.

8 Federal Aviation Administration, Business Jet Report, December 2016.9 Federal Aviation Administration, FAA Aerospace Forecast: Fiscal Years 2017–

2037, March 2017.10 Ibid.11 Ibid.


On August 30, 2016, the FAA issued new regulations for small commercial drones. These rules cover UAS that require pilots, rather than UAS under development guided by autonomous technology. As commercial applications expand, the regulations are likely to evolve as well. For example, a current rule requires that pilots be able to see their drones at all times. If a pilot wants to fly a drone at night, a waiver is required. As more and more pilots apply for waivers to operate at night, the FAA is likely to issue a ruling that directly addresses the issue, rather than giving out waivers on a case-by-case basis.

On June 21, 2016, the FAA released Part 107 regulation for small UAS. The new rule governs non-hobbyist UAS operations and additionally covers a broad spectrum of commercial uses for drones weighing less than 55 pounds. In 2016, the Section 333 exemption process remained the primary means of UAS integration. It will be interesting to see if the FAA grants Section 333 petitions with beyond-visual-line-of-sight (BVLOS) or night-time operations in the near future, with many commercial UAS operators poised to take advantage of this capability.


In October 2016, NASA and the FAA announced completion of the second phase of testing for the UAS Transportation Management (UTM) system. NASA envisions concepts for two types of possible UTM systems.12 The first type would be a Portable UTM system, which would move between geographical areas and support operations such as precision agriculture and disaster relief. The second type would be a Persistent UTM system, which would support low-altitude operations and provide continuous coverage for a geographical area. NASA and the FAA envision that both systems will require persistent communication, navigation, and surveillance (CNS) coverage to track, ensure, and monitor conformance to air traffic regulations. NASA’s UTM technologies research and development is taking place in collaboration with the FAA. NASA expects research results of research in the form of airspace integration requirements to transfer to the FAA in 2019 for further testing and utilization.

Space-related services

The contracts for commercial resupply services 2 (CRS2) for the International Space Station (ISS), covering deliveries from 2017 until 2024, were awarded to Orbital ATK, SpaceX, and Sierra Nevada. Each provider will have a minimum of six cargo resupply missions.

Blue Origin submitted a permit application to construct a large warehouse and office complex near its current Seattle-based operation. The company has also increased its workforce from about 600 to 1,000. A 750,000 square foot factory is currently under construction at the Kennedy Space Center in Florida, where Blue Origin will manufacture New Glenn orbital rockets by the end of 2017.

At the 33rd annual Space Symposium in April 2017, Jeff Bezos, the head of Amazon.com and Blue Origin, said he is funding his space ventures through his yearly sale of $1 billion of Amazon stock. Bezos is planning to start short commercial flights into space as early as 2018.

12 National Aeronautics and Space Administration, UTM web article, “Unmanned Aircraft System (UAS) Traffic Management (UTM).”


13 Mike Gruss, “ULA Targets 2018 for Delta 4 Phase-out, Seeks Relaxation of RD-180 Ban,” Space News, March 3, 2017.

In March, Blue Origin completed assembly of its first full-scale BE-4 rocket engine, which uses liquid natural gas. Seven BE-4s will be used as the main engines for the New Glenn rockets. The United Launch Alliance (ULA) also plans to use the BE-4 in a new, semi-reusable rocket the company is building, the Vulcan, scheduled for flight-testing in 2019. ULA is phasing out the expensive Delta IV in an attempt to compete more effectively with lower-cost rivals and will use the Atlas V until the BE-4 is available.13 The BE-4 engine is competing against Aerojet Rocketdyne’s AR1 engine.

SpaceX landed one of its reusable Falcon 9 rockets on a drone ship in the water in April 2017. It was the company’s first successful water landing. This was the first launch of a previously recovered rocket, marking a major milestone for orbital rockets, and it’s critical to the company’s stated business strategy of reusing rockets as a way to curb the costs of space flight. The launch carried the Bigelow Expandable Activity Module (BEAM) to the ISS. The BEAM is an expandable habitat technology that may provide a comfortable living and workspace for astronauts.

The European Spatial Agency (ESA) launched four satellites that completed the Galileo constellation. Galileo, a competitor of the US GPS system, is now operational.


2017 forecastFor 2017, Boeing expects to deliver between 760 and 765 aircraft,14 which reflects a 1.6% increase. Airbus is forecasting more than 700 deliveries in 2017,15 an increase of at least 1.7%, which would represent its sixteenth consecutive year of record production.

In January 2016, Airbus delivered the first A320neo to Lufthansa, powered by Pratt & Whitney PurePower PW1100G-JM. The 737 MAX had its first flight in January 2016, powered by CFM International LEAP-1B, and is scheduled to begin deliveries in 2017. Boeing has not yet provided a delivery target for 2017 nor said how many planes it expects to deliver this year.

Industry production of large commercial aircraft is projected to be less than 2% higher in 2017. This will likely be regarded as positive news for many in the supply chain, which has experienced challenges, and continues to experience challenges, given the significant production ramp up of 40% since 2011—a remarkable feat for an industry with a very complex supply chain and significant lead times. But more production increases are on the horizon. In 2015, Airbus announced an A320 production increase to 60 per month by the first quarter of 2019. Boeing plans to produce 52 737s per month by 2018, and has indicated that it could deliver as many as 60 each month. Some customers and suppliers have expressed concern about future production increases being unsustainable. However, the industry forecast predicts long-term demand of nearly 2,000 new aircraft per year, indicating that further production increases of around 40% are sustainable. Furthermore, with nine years of backlog, it seems that production increases are warranted, at least for the foreseeable future.

New competitors are entering the market, seeking to take advantage of growing demand. On May 5, 2017, Commercial Aircraft Corporation of China (COMAC) conducted its maiden flight of the C919. While the C919 is full of Western suppliers, the Chinese government has plans to leverage the C919 to develop an indigenous aerospace industry. The C919 narrowbody is intended to compete with the Airbus A320 and Boeing 737. However, major avionics systems are still incomplete and final design reviews are pending, pushing any deliveries to 2020. The aircraft has more than 500 orders, mostly from Chinese airlines, and expects to sell more than 2,000 planes. In addition, United Aircraft Corporation of Russia is working on a narrowbody medium range aircraft, the MC-21, which is undergoing static and endurance testing. No delivery date has been announced.

14 “Boeing expects to deliver more planes in 2017,” Reuters, January 25, 2017.15 “Airbus sees over 700 deliveries in 2017,” Reuters, January 11, 2017.


Long-term forecastThe long-term forecast for commercial OEM aircraft is about 39,000 deliveries over the next 20 years, at a value of approximately $5.9 trillion. Significant efficiency improvements in new planes have accelerated demand for replacement aircraft, but low fuel prices could negatively impact that demand. Market growth accounts for about 60% of deliveries; the remaining 40% is estimated to come from replacement aircraft. However, the backlog at risk from lower oil prices may be closer to 20% of forecasted demand because of the need to replace large numbers of aging aircraft. Furthermore, oil has been at depressed prices for about three years, and many believe current prices may not be sustainable because of the severe reduction of investment in oil infrastructure. With long-term demand at nearly 2,000 aircraft per year, and current production rates at 1,400 per year, the industry could potentially support an additional 40% growth in OEM production, providing a considerable cushion for any softening in demand.


Defense

2016 review

The top dozen defense contractors (six from the US and six from Europe) reported that revenues were higher by 1% and profits were higher by 2% compared with 2015. US companies’ revenue was higher by 5%, and operating profit was higher by 8%. European companies’ revenue was lower by 7%, and operating profit was lower by 13%.

Lockheed Martin reported the best revenue improvement of $6,712 million, or 17%, which was primarily related to its first full year of the acquisition of Sikorsky. Airbus reported the largest revenue decline of $3,543 million, or 16%.

Sector profit increased 2%, while operating margin increased 10 basis points to 10.3%. Improvements were broad based, with nine of the 12 companies reporting profit improvements and five reporting double-digit increases or better. US companies’ operating margin increased from 11.5% to 11.7%, while European companies’ margin decreased 50 basis points to 7.4%. Lockheed Martin reported the best profit improvement of $571 million, or 11%; Airbus’ operating profit decreased by $1,086 million, or 83%. Rolls Royce Defense had the best operating margin at 17.4%; down 190 basis points, and L-3 Communications reported the largest profit improvement of 112%.

Top global defense companies reported higher revenue and profit

Revenue increases 1%; profit increases 2%

During 2016 and into early 2017, we saw a continuation of M&A activity focused on portfolio realignment and consolidation of government services companies. The multi-year trend is summarized as follows:

• KEYW acquires Sotera

• Leidos acquires IS&GS from Lockheed Martin

• SAIC acquires Scitor

• CACI acquires L-3 Stratis

• Vencore acquires Qinetiq North America

• Engility acquires Dynamic Research Corporation

• CSC spins off government services business

• CSC government services acquires SRA

• Engility acquires TASC

• L-3 spins off Engility

2017 2016 2015 2014 2012


Since 2009, European governments had made austerity-driven decisions resulting in a decline in military spending. However, recent growing threat perceptions marked a turning point, and European countries started to reshape their views on military expenditures.

Military budgets in Western Europe grew for the second consecutive year and were up 2.6% in 2016. In Central and Eastern Europe, it is the perception of growing threat from Russia that triggered the growth in military expenditures.

The impact of the UK’s withdrawal from the EU on European defense is unclear, but Brexit definitely changes the game for the European Commission’s Common Security and Defense Policy (CSDP). The UK will remain a key member of NATO, and will likely abide by the 2014 European Council call on member states to deepen bilateral cooperation on improving defense. The UK / France agreement for the development of a future Unmanned Combat Air Vehicle (UCAV) is an example of such a collaboration. However, Brexit is a defining moment for the CSDP, and will require redefining a governance model and a new core.

Exports

The US government has been overhauling its primary export control regime for authorizing the export of defense articles, technical data, and defense services, known as the International Traffic in Arms Regulations (ITAR). This effort has included reviewing and moving items from the US Munitions List (USML) to the Commerce Control List (CCL) under the Export Administration Regulations (EAR).

In 2016, amendments were finalized to USML Categories VIII—Aircraft; XII—Fire Control, Laser, Imaging, and Guidance Equipment; XIV—Toxicological Agents and Associated Equipment; XVIII—Directed Energy Weapons; and XIX— Gas Turbine Engines. Amendments were also proposed to Category XV—Spacecraft and finalized in early 2017.


In addition to the movement of defense articles from the USML to the CCL, key regulatory changes include the harmonization of definitions and sections between the USML and CCL. The Directorate of Defense Trade Controls (DDTC), which regulates the ITAR, and the Bureau of Industry and Security (BIS), which regulates the EAR, harmonized the definitions of export, reexport, and release as well as the sections on the destination control statement and the scope of licenses. Companies also continue to face challenges in correctly determining the commodity jurisdiction and classification of items, managing structured and unstructured technical data, and automating export controls compliance processes.

DDTC enters into Consent Agreements from time to time with companies that have been found to have committed ITAR violations. Historically, such agreements have been with large- and medium-sized A&D companies. In 2015, DDTC did not issue any Consent Agreements, and in 2016, DDTC entered into two Consent Agreements and an Oversight Agreement with a smaller A&D company. The DDTC also announced its intention to renew the company visit program. In May 2016, the US lifted its arms embargo against Vietnam.

In late 2016, the US government imposed new economic sanctions targeting Russia and North Korea, including new designations for the Treasury Department’s Specially Designated Nationals (SDNs) and Blocked Persons List. The sanctions were imposed in response, respectively, to Russia’s interference with the US election and North Korea’s violations of United Nations Security Council resolutions concerning nuclear testing and weapons of mass destruction development. The Office of Foreign Assets Control’s (OFAC) enforcement activities included the designation of Air Koryo, North Korea’s national flag carrier airline, and listed 16 aircraft as property of the designated entity. US and foreign companies continue to be challenged by fast-changing regulatory developments, including not only an increase in sanctions as described above, but also the termination of sanctions such as those against Côte D’Ivoire and Burma.


Figure 12: Backlog of defense orders (US$ billions)

12/31/16 12/31/15

Lockheed Martin $96 $100

Boeing Defense, Space & Security $57 $58

BAE Systems $57 $56

Airbus Defense & Space and Helicopters $53 $61

General Dynamics (excl. Gulfstream) $50 $53

Northrop Grumman $45 $36

Leonardo $39 $32

Thales $38 $36

Raytheon $37 $35

Total $472 $467

Source: Company reports

The growth in defense exports has helped mitigate the impact of domestic cuts on backlogs. As seen in Figure 12, backlogs have increased moderately in the last year. In 2015, the most recent year for which data is available, defense export authorizations were $115 billion, higher than the prior year, but still the second lowest level in a decade (see Figure 13). However, authorizations above $100 billion are still quite robust compared with more than a decade ago, and the industry is still delivering on prior authorizations, particularly the surge in 2011 and 2012 when authorizations exceeded $200 billion. On May 20, 2017, President Trump signed a $110 billion defense deal with Saudi Arabia—a single agreement that is worth nearly as much as the annual export authorizations in each of the last three years.


Figure 13: US foreign military sales (FMS) agreements and direct commercial sales authorizations

Sources: US Department of Defense, “Fiscal Year Series”; US Department of State, “Section 655 Annual Military Assistance Reports”

1999

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Significant developments in 2016

F-35 In August, the US Air Force said the F-35A was ready for limited combat operations. The previous year, the Marines deployed the first squadron of F-35B fighters. However, the Pentagon subsequently announced delays in testing until 2019. In February 2017, the Pentagon and Lockheed Martin agreed on pricing for the next batch of F-35s, where F-35A will cost $94.6 million per aircraft, the first drop below $100 per copy. In April 2017, the Pentagon announced that it will deploy F-35s to Estonia, along the Russian border. In May 2017, the first F-35B assembled outside of the US, rolled off the line in Italy.

B-21 The US Air Force’s new B-21 bomber completed its preliminary design review in March 2017. The Air Force awarded Northrop Grumman the contract to develop and produce the bomber in October 2015. On January 31, 2017, the company was awarded a $35.8 million contract modification from the US Air Force to construct a large, new coatings facility at Air Force Plant 42, located at a facility in California that has been tied to the bomber program for years.

T-X Trainer With Northrop Grumman dropping out of the competition to build the T-X Trainer, Boeing and Lockheed Martin-Korean Aerospace Industries become the two primary competitors. Boeing, collaborating with Saab, is offering a brand-new design, while Lockheed is proposing to modify an existing fighter, the T-50.

US nuclear modernization program In the 2016 federal budget, President Obama laid the groundwork for modernizing the nation’s nuclear arsenal, including warheads, missiles, bombers, submarines, and targeting systems. The estimate for the 30-year program could reach $1 trillion.


2017 forecastThe outlook for defense contractors has definitely improved in the last year, related in large part to the Trump administration’s defense priorities, including an end to sequestration. In May 2017, the President signed a budget, which includes an increase in defense spending of about $25 billion. The administration is seeking a 10% increase in US defense spending for 2018, while, at the same time, strongly encouraging allies to also increase defense spending, particularly NATO allies currently spending less than 2% of GDP on defense. However, the administration still faces political opposition to its defense priorities. Furthermore, Western governments have long-term budget challenges, attributable largely to megatrends, such as an aging population and demands on social spending, which will likely constrain defense spending.

The global security environment continues to be dynamic, with increasing tension between the US and Russia, North Korea, and Iran, as well as continued terror attacks in 2016. The coming year is likely to have additional repercussions on defense policies, given the continuing crises around the world.

Defense revenue is expected to remain flat in 2017, as potential budget increases will not be effective until future years. US defense companies have generally been improving margin in recent years, a trend which may continue modestly in 2017. The industry is also experiencing some favorable pension cost trends as a result of market conditions and the “pension harmonization” rules for cost allowability. Therefore, operating margin may be modestly higher in 2017.

Over the past several years, we have seen market contraction, coupled with more certainty about defense budgets, become a catalyst for industry consolidation and portfolio realignments. During 2015, Lockheed Martin acquired Sikorsky from UTC and, in 2016, completed the sale of its government services business to Leidos. Other transactions in recent years include the merger of Orbital Sciences and ATK, the acquisition of Exelis by Harris, the acquisition of TASC by Engility, the acquisition of Qinetiq North America by Vencore, SAIC’s acquisition of Scitor, KEYW’s acquisition of Sotera, and Harris’ sale of its government services business to Veritas.

Perhaps the improved outlook for defense will now be the catalyst for further M&A activity. We believe that defense M&A activity will likely continue to be robust in 2017, particularly as the government services segment continues to evolve. Our analysis indicates that most companies in government services have experienced revenue declines of 20% to 40% since the beginning of the downturn in defense spending several years ago. We believe that we are in the middle of a wave of portfolio realignment and consolidation among services companies, which are likely to continue, to replace lost scale, and even grow scale to improve cost competitiveness.

16 Aaron Mehta, “New Northrop facility deal likely meant for B-21 stealth coating,” Defense News, February 1, 2017.


The defense products industry is already highly concentrated, resulting from consolidations during the post-Cold War era. The US Department of Defense (DoD) has opposed any further consolidation among major prime contractors. That position could soften or become resolute, depending on market conditions. Regardless of whether the major prime contractors consolidate further, there may be some consolidation in the supply base.

Affordability continues to be a point of focus in the industry; the DoD lists affordability among its procurement criteria. While the industry is entering a period of fewer new platforms, it also needs to recapitalize equipment. As a result, there will likely be a continuing shift from new platforms to platform upgrades and sustainment. Expected areas of growth are electronics and Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) solutions, including unmanned and autonomous vehicles of varied types, and cybersecurity.

In Europe, the elevated levels of terror threat and continuing tensions with Russia marked a turning point, and we expect defense budgets to grow modestly in 2017 and beyond. The UK, Germany, and France all confirmed their intention to reinforce their defense capabilities. However, this may not result in a large number of new programs due to the asymmetric nature of the threat. Instead, European defense contractors will need to develop new intelligence and cyber capabilities rapidly, while facing competition from non-traditional technology companies.

In response to the budget declines in recent years, European contractors, along with their US counterparts, are continuing to look to increase exports, making the global defense industry fiercely competitive in growth markets. In this environment, companies and governments may have to rethink their operating models, leading to more cooperative programs, niche market specialization, and industry consolidation.


Mergers and acquisitions

The global A&D industry closed 2016 with 51 deals with disclosed value greater than $50 million. While both deal volume and value declined compared with 2015, there was a 73% increase in deal activity in Q4 2016 vs. Q3 2016. This upswing can be an indication of positive momentum in the industry after significant political and economic changes at the end of 2016.

The Aircraft and Parts category continued to drive deal value in the A&D industry, with key deals like Rockwell Collins’s acquisition of B/E Aerospace, which accounted for 21% of the total announced deal value in 2016, and Zhonghang Heibao’s acquisition of Shenyang Aircraft Industry Group.

The Software and Security Systems and Electronic Equipment categories reflect growing interest, as companies seek to address increasing opportunities and threats related to the industry’s technological advances. Meanwhile, the Raw Materials and Supplies category saw a decrease in interest, contributing to only 2% of deal value in 2016, down from 48% in 2015. Additionally, there was a notable presence of transactions in the Asia and Oceania region, as financial investors sought to address the problematic cash position of the shipbuilding industry.

While the first three quarters of 2016 were restrained in terms of deal making for the sector, the uptick in Q4 2016 appears to reflect positive deal momentum and potential pent-up demand, as financial and strategic investors began to take advantage of opportunities and address threats in the US and global marketplaces.

A strong end to 2016 Aerospace & Defense M&A bodes well for 2017 activity and beyond


Figure 14: Top 10 aerospace and defense deals in 2016

Target Acquirer Status Deal value* Category

B/E Aerospace Inc.Rockwell Collins Inc.

Completed $8,201Aircraft & Parts

Lockheed Martin Corp.—Government IT & Technical Services Businesses

Leidos Holdings Inc.

Completed $5,930Software & Security

STX Offshore & Shipbuilding Co. Ltd.

Creditors Pending $3,597Arms & Vehicles

Jiangsu Guoxin Investment Group Ltd.—Assets

Sainty Marine Corp. Ltd.

Completed $3,188Software & Security

Safran Identity & Security SAS

Investor Group Pending $2,720Software & Security

Shenyang Aircraft Industry (Group) Co. Ltd.

Zhonghang Heibao Co. Ltd.

Pending $1,283Aircraft & Parts

Airbus Group SE—Defence Electronics Business

KKR & Co. LO Completed $1,244Electronic Equipment

ILC Holdings Inc.TransDigm Group Inc.

Completed $1,000Electronic Equipment

Daewoo Shipbuilding & Marine Engineering Co. Ltd.

The Export-Import Bank of Korea {KEXIM}

Pending $830Arms & Vehicles

Industria de Turbo Propulsores SA

Rolls-Royce Holdings PLC

Intended $796Aircraft & Parts

Source: “Global Aerospace and Defense M&A Deals Insights.” PwC. April 27, 2017.*In $US millions


In summary

The performance of the Top 100 A&D companies is a barometer for the health of the industry. The industry continues to perform at near record levels.

Commercial aviation has become a critical part of our global infrastructure. Revenue passenger miles increased above 6% for the second year in a row and are projected to achieve similar results in 2017. Demand for aviation-related services has become increasingly inelastic, as witnessed by its resiliency during the last recession and subsequent recovery. Globalization and an increasing reliance on intellectual capital have resulted in businesses relying more on the global deployment of human capital. Furthermore, an improving economic outlook, coupled with proposed corporate tax reductions, may be the catalyst to finally get business aviation growing at a faster pace again.

The outlook for defense has definitely improved as the Trump administration plans to end sequestration and request a 10% increase in the US defense budget. At the same time, the administration is strongly encouraging allies to also increase defense spending, particularly NATO allies currently spending less than 2% of GDP on defense. However, there remain some political challenges to these priorities. There is also increasing tension between the West and Russia, North Korea, and Iran, which could result in new defense priorities.

The near-term and long-term forecasts for commercial aerospace are full of optimistic predictions for growth. Aviation is expected to continue to grow faster than the overall economy because of its critical role in the global economic infrastructure, bolstered by economic growth in Asia, the Middle East, Eastern Europe, and Latin America. Meanwhile, defense is likely to see a flat to modest improvement in 2017, until such time as defense priorities are funded, which will not be realized until future years. Overall, the industry performed at near record levels in 2016 and is poised for moderate growth in 2017, which may be enough to set new records for revenue and profitability.

Moderate growth expected for the A&D industry in 2017


Appendix: A&D Top 100 companies

US1 Boeing3 Lockheed Martin4 General Dynamics5 United Technologies6 GE Aviation8 Northrop Grumman9 Raytheon13 Honeywell Aerospace15 L-3 Technologies16 Textron19 Harris Corp20 Huntington Ingals21 Leidos22 Spirit AeroSystems26 Booz Allen Hamilton27 Rockwell Collins31 Orbital ATK32 SAIC33 CSRA36 Triumph Group39 CACI44 TransDigm Group45 BE Aerospace50 MOOG51 Trimble53 Parker Hannifin Aerospace

55 Teledyne Technologies56 Curtiss-Wright57 Engility58 Hexcel 59 Esterline Technologies60 Allegheny Technologies High Performance Metals 63 Delta Tucker Holdings/DynCorp International66 Aerojet Rocketdyne67 Eaton Aerospace68 AAR69 FLIR Systems70 ManTech International72 Wesco Aircraft Holdings73 ViaSat74 Cubic Corporation76 KLX77 Heico Corporation78 Oshkosh Defense80 Woodward Governor Aerospace81 Vectrus89 Ball Aerospace93 Crane Aerospace & Electronics95 DigitalGlobe97 Kaman Aerospace98 Kratos Defense & Security Solutions

Canada17 Bombardier Aerospace64 CAE Aviation Defense and Security71 MDA92 Magellan Aerospace Corp

Brazil24 Embraer


China37 AVIC Aircraft Company

Australia86 Austal

France11 Safran12 Thales25 Zodiac35 Dassault Aviation94 Latecoere

Spain99 Indra Security & Defense

Japan18 Mitsubishi Aerospace and

Integrated Defense34 IHI Aero Engines and

Space Operations43 Kawasaki Aerospace75 Fuji Aerospace88 Jamco Corp

Hong Kong65 HAECO

Singapore29 Singapore Technologies82 SIA Engineering

India49 Hindustan Aeronautics Limited (HAL)83 Bharat Electronics

Israel38 Israeli Aerospace Industries41 Elbit Systems

Turkey79 Aselsan

Italy14 Leonardo

South Korea48 Korea Aerospace Industries

Germany28 MTU Aero Engines42 Rheinmetall Defence90 OHB Technology

Netherlands2 Airbus

Norway91 Kongsberg Gruppen Defence and Protech

Sweden40 Saab

Austria100 FACC

Luxembourg52 SES

Switzerland61 RUAG

UK7 BAE Systems10 Rolls Royce23 Babcock International Group30 GKN Aerospace46 Meggitt47 Cobham54 BBA Aviation

62 Serco UK Central Government and Americas

84 Ultra Electronics85 Qinetiq87 Senior Aerospace96 Smiths Detection


Revenue (US $ millions)

Operating Profit (US $ millions)

# Company 2016 2015 Change 2016 2015 Change1 Boeing 94,571 96,114 -2% 5,834 7,443 -22%2 Airbus 73,652 71,516 3% 2,498 4,507 -45%3 Lockheed Martin 47,248 40,536 17% 5,549 4,978 11%4 General Dynamics 31,353 31,469 0% 4,309 4,178 3%5 United Technologies 29,359 28,176 4% 3,843 2,749 40%6 GE Aviation 26,261 24,660 6% 6,115 5,507 11%7 BAE Systems 25,687 27,368 -6% 2,353 2,296 2%8 Northrop Grumman 24,508 23,526 4% 3,193 3,076 4%9 Raytheon 24,069 23,247 4% 3,240 3,013 8%

10 Rolls Royce 20,197 20,980 -4% 1,236 2,281 -46%11 Safran 17,457 17,239 1% 2,639 1,777 49%12 Thales 16,466 15,605 6% 1,498 1,349 11%13 Honeywell Aerospace 14,751 15,237 -3% 2,991 3,218 -7%14 Leonardo 13,277 14,420 -8% 1,086 981 11%15 L-3 Technologies 10,511 10,466 0% 1,008 475 112%16 Textron 9,994 9,796 2% 961 929 3%17 Bombardier Aerospace 9,907 11,188 -11% (298) (5,117) 94%18 Mitsubishi Aviation and Integrated Defense 9,505 8,434 13% 737 433 70%19 Harris Corp 7,467 5,083 47% 792 605 31%20 Huntington Ingals 7,068 7,020 1% 858 769 12%21 Leidos 7,043 5,086 38% 417 298 40%22 Spirit AeroSystems 6,793 6,644 2% 725 863 -16%23 Babcock International Group 6,539 6,883 -5% 729 793 -8%24 Embraer 6,218 5,928 5% 206 332 -38%25 Zodiac 5,761 5,473 5% 299 348 -14%26 Booz Allen Hamilton 5,406 5,275 2% 445 459 -3%27 Rockwell Collins 5,259 5,244 0% 935 962 -3%28 MTU Aero Engines 5,236 4,921 6% 501 428 17%29 Singapore Technologies 4,838 4,610 5% 341 371 -8%30 GKN Aerospace 4,623 3,821 21% 458 417 10%31 Orbital ATK 4,455 4,363 2% 474 336 41%32 SAIC 4,284 3,835 12% 227 240 -5%33 CSRA 4,246 4,062 5% 187 457 -59%34 IHI Aero Engines and Space Operations 4,137 3,593 15% 331 327 1%35 Dassault Aviation 3,967 4,634 -14% 241 401 -40%36 Triumph Group 3,886 3,889 0% (1,091) 435 -351%37 AVIC Aircraft Company 3,762 3,714 1% 45 52 -13%38 Israeli Aerospace Industries 3,671 3,708 -1% 106 72 47%39 CACI 3,744 3,313 13% 265 236 12%40 Saab 3,342 3,225 4% 210 225 -7%41 Elbit Systems 3,260 3,108 5% 299 269 11%42 Rheinmetall Defence 3,259 2,875 13% 163 100 63%43 Kawasaki Aerospace 3,234 2,685 20% 420 300 40%44 TransDigm Group 3,171 2,707 17% 1,268 1,074 18%45 BE Aerospace 2,933 2,730 7% 507 452 12%46 Meggitt 2,690 2,518 7% 513 498 3%47 Cobham 2,625 3,167 -17% 304 507 -40%48 Korea Aerospace Industries 2,663 2,567 4% 270 253 7%49 Hindustan Aeronautics Limited (HAL) 2,515 2,456 2% 489 495 -1%50 MOOG 2,412 2,526 -5% 207 213 -3%


Revenue (US $ millions)

Operating Profit (US $ millions)

# Company 2016 2015 Change 2016 2015 Change51 Trimble 2,362 2,290 3% 181 154 18%52 SES 2,289 2,235 2% 907 993 -9%53 Parker Hannifin Aerospace 2,260 2,255 0% 338 299 13%54 BBA Aviation 2,149 1,714 25% 303 182 66%55 Teledyne Technologies 2,140 2,282 -6% 257 286 -10%56 Curtiss-Wright 2,109 2,206 -4% 308 311 -1%57 Engility 2,076 2,086 0% 122 (189) 165%58 Hexcel 2,004 1,861 8% 360 332 8%59 Esterline Technologies 1,993 2,003 0% 170 199 -15%60 Allegheny Technologies High Performance Metals 1,930 1,986 -3% 169 157 8%61 RUAG 1,886 1,813 4% 153 142 8%62 Serco UK Central Government and Americas 1,850 2,194 -16% 134 133 1%63 Delta Tucker Holdings / DynCorp International 1,836 1,923 -5% 25 (75) 133%64 CAE Aviation Defense and Security 1,810 1,683 8% 269 255 6%65 HAECO 1,773 1,560 14% 5 44 -89%66 Aerojet Rocketdyne 1,761 1,708 3% 148 83 78%67 Eaton Aerospace 1,753 1,807 -3% 335 310 8%68 AAR 1,663 1,594 4% 66 (12) 650%69 FLIR Systems 1,662 1,557 7% 296 306 -3%70 ManTech International 1,602 1,550 3% 91 85 7%71 MDA 1,557 1,656 -6% 159 173 -8%72 Wesco Aircraft Holdings 1,477 1,498 -1% 159 (206) 177%73 ViaSat 1,417 1,383 2% 41 83 -51%74 Cubic Corporation 1,462 1,431 2% 7 75 -91%75 Fuji Aerospace 1,405 1,180 19% 167 156 7%76 KLX 1,377 1,313 5% 230 212 8%77 Heico Corporation 1,376 1,189 16% 265 230 15%78 Oshkosh Defense 1,351 940 44% 123 9 1267%79 Aselsan 1,246 1,021 22% 268 75 259%80 Woodward Governor Aerospace 1,233 1,161 6% 232 188 23%81 Vectrus 1,191 1,181 1% 43 40 8%82 SIA Engineering 1,113 1,121 -1% 104 84 24%83 Bharat Electronics 1,098 1,143 -4% 246 229 8%84 Ultra Electronics 1,062 1,110 -4% 177 183 -4%85 Qinetiq 1,021 1,168 -13% 147 170 -13%86 Austal 993 1,064 -5% (99) 65 -238%87 Senior Aerospace 898 879 2% 86 104 -17%88 Jamco Corp 841 640 31% 81 56 44%89 Ball Aerospace 818 810 1% 88 83 6%90 OHB Technology 805 810 -1% 48 45 7%91 Kongsberg Gruppen Defense and Protech 765 735 4% 110 114 -4%92 Magellan Aerospace Corp 757 744 2% 93 84 11%93 Crane Aerospace & Electronics 746 691 8% 150 145 3%94 Latecoere 725 690 5% 53 42 26%95 DigitalGlobe 725 702 3% 102 61 67%96 Smiths Detection 710 714 0% 93 84 11%97 Kaman Aerospace 702 598 17% 115 110 5%98 Kratos Defense & Security Solutions 669 657 2% (19) (5) 280%99 Indra Security & Defense 663 617 7% 44 (10) -533%

100 FACC 650 587 11% 25 (6) -559%

Total 709,039 689,379 2.9% 68,909 64,330 7.1%


Additional resources

Aerospace manufacturing attractiveness ranking

The analysis looks at how various countries, as well as states in the US, compare in terms of their attractiveness as locations for commercial aircraft manufacturing.

Workforce initiative

The Aviation Week data on workforce and compensation represents a comprehensive strategic view about the people who make up the industry. PwC is proud to be a sponsor of this initiative.

2017 aerospace and defense industry trends

After decades of being the big players in a global pond, defense contractors must reinvent themselves as local businesses around the world. This is an annual publication that addresses major trends, challenges, and opportunities for companies to consider in 2017 and beyond.

Industrial Insights blog

The PwC industrial insights blog features perspectives on critical business issues facing A&D companies today.

Global A&D deals insights

A quarterly analysis of global merger and acquisition (M&A) activity in the A&D industry provides an overview of the most recent M&A results and our expectations for future deal activity.

Leadership Information Console

PwC’s award-winning Leadership Information Console for SAP’s Digital Boardroom provides A&D boards of directors and the c-suite a unified view of key financial and operational metrics that support strategic decision-making. Utilizing data from public, proprietary, and PwC’s own extensive curated data catalog, the Leadership Information Console combines with our client’s internal data to cover these metrics:• Economic value• Mergers and acquisitions• Enterprise risk• Contract status and risk• Worldwide fleet dynamics• Contract opportunities• Supply chain• Sustainability• Innovation• Employee engagement and retention• PwC CEO insights

https://www.pwc.com/us/en/industrial-products/publications/2015-aerospace-manufacturing-attractiveness-rankings.html

https://www.pwc.com/us/en/industrial-products/publications/2015-aerospace-manufacturing-attractiveness-rankings.html

http://aviationweek.com/aviation-week-workforce-initiative

https://www.strategyand.pwc.com/trends/2016-aerospace-and-defense-industry-trends

https://www.strategyand.pwc.com/trends/2016-aerospace-and-defense-industry-trends

http://usblogs.pwc.com/industrialinsights

http://www.pwc.com/us/en/industrial-products/publications/mission-control.html

https://ideas.sap.com/ct/getfile.bix?a=OD5268&f=2721E0F2-7EA2-491B-A808-7C17B762DA3B

https://ideas.sap.com/ct/getfile.bix?a=OD5268&f=2721E0F2-7EA2-491B-A808-7C17B762DA3B

DISCLAIMER: This paper makes a number of predictions and presents PwC’s vision of the future environment for the aerospace and defense industry. These predictions are, of course, just that—predictions. These predictions of the future environment for the A&D industry address matters that are, to different degrees, uncertain and may turn out to be materially different from what is expressed in this paper. The information provided in this paper is not a substitute for legal, investment, or any other professional advice. If any reader requires legal advice or other professional assistance, each such reader should consult his or her own legal or other professional advisors and discuss the specific facts and circumstances that apply to the reader.

© 2017 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 337429-2017 LL

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