deloitte -- defensecontinuestoshrink

8/22/2019 Deloitte -- DefenseContinuesToShrink

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Defense continues to shrink, ascommercial aerospace is taking off

Mid-year 2012 top 20 global aerospace and deense companynancial perormance analysis


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Summary

A continued slowdown in national security spending inmajor countries continues to aect deense contractors.

Based on mid-year 2012 nancial results, deense

companies in the top 20 global aerospace and deense

(A&D) companies, experienced a decline in their global

revenues o $1.3 billion, or a 1 percent decrease, ater a

3.3 percent decline in 2011. However, the overall

commercial aerospace and deense industry posted an

overall revenue increase o $7.2 billion, or 5.5 percent over

the rst hal 2011, all and more driven by record setting

production o commercial aircrat and its related supply

chain, which accounted or $13.4 billion in revenue growth

or the sector.

Overall, the global industry posted increased operating

earnings o 8.8 percent to $20.0 billion in 1H 2012,

largely due to the benecial impact o higher deliveries o

commercial aircrat, company cost cutting and eciency

initiatives in advance o expected continued declines in

deense budgets, and the virtual absence o one time

charges. For the same reason, operating margins

increased 3.0 percent in 1H 2012 to 8.4 percent.

Commercial aerospace companies enjoyed a signicant

jump o 29.2 percent in earnings, while the deense

segment stayed fat at a nominal increase o 1.5 percent

in earnings. Similarly, commercial aerospace operating

margins increased 12.4 percent, while deensecompanies increased 2.6 percent in this important

nancial metric.

U.S. commercial aerospace rms continued to

outperorm European counterparts with commercial

rms posting 18.0 percent and 14.2 percent revenue

increases respectively. Similarly, U.S. and European

commercial rms posted increases in operating earnings

o 24.4 percent and 50.5 percent respectively, although

the latter made more signicant improvements over last

year starting rom a lower base. Operating margins

continued to dier signicantly with U.S. commercial

rms posting 10.6 percent, while European commercial

rms turned in 5.6 percent operating margins.

The gap narrowed when comparing U.S. and European

deense rms. U.S. deense rms eked out fat growth inrevenues, operating earnings growth and margin

growth. European deense rms revenue declined 4.5

percent, but managed to grow operating earnings and

margins. U.S. deense rms continue to outperorm their

European counterparts in operating margins, at 10.1

percent and 7.5 percent respectively, in this key

perormance indicator.

Due to continued instability in deense spending orecasts

or major global economies, share price perormance was

mostly down, with aggregate market capitalization

decreasing 0.6 percent in the rst six months o 2012.

While companies associated with the boom in commercialaircrat production saw stock valuations rise in 1H 2012,

share prices o other companies ell principally due to

lower revenues and the expectations or cuts to various

deense programs. Further, global economic uncertainty

pushed A&D stocks lower with only 8 rms o the top 20

rms posting a positive gain during the rst hal o the

year. This ollows a decline in A&D shares in 2011, where

aggregate market capitalization ell 6.3 percent.1

1 2011 Global Aerospace & Deense Industry perormance wrap-up, DTTL

This Financial Perormance Analysis is provided or general inormational purposes only and is not intended to be, nor should it be relied upon as, arecommendation to purchase or sell the securities o any company identied in this document. It does not provide inormation reasonably sucientupon which to base any investment decision and must not be used or that purpose. This Financial Perormance Analysis is not to be construed as legal,accounting, nancial or investment advice. This Financial Perormance Analysis is neither an oer to sell nor a solicitation o an oer to buy, any security.

Deloitte may provide, or may seek to provide, services to one or more o the companies identied in this Financial Perormance Analysis.


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Mid-year 2012 top 20 global aerospace and deense company fnancial perormance analysis 3

Global Top 20 aerospace & deense companies/divisions in the analysis

Boeing Northrop Grumman Rolls-Royce Textron

EADS United Technologies* Saran Bombardier Aerospace*

Lockheed Martin Raytheon Thales HuntingtonIngalls Industries

General Dynamics Finmeccanica L-3 Communications Harris

BAE Systems GE Aviation* Honeywell Aerospace* Exelis**

Figure 1 Companies included in the analysis

Source: 2011 Global Aerospace & Deense Industry perormance wrap-up, DTTL

*Partial company results based on business unit A&D activity. See methodology section.** Exelis became a separate company on October 31, 2011

Detailed report

This report details the nancial perormance o the top 20 publically listed aerospace anddeense (A&D) global companies, based on sales revenue. The top 20 global A&D rms

represent approximately 71% o total global industry revenues according to our 2011 report,

and thus represent a reasonable proxy or the perormance o the entire industry. The data to

conduct the analysis was obtained rom company lings as well as company press reports o

unaudited nancial perormance in the last two quarters. Figure 1 below shows the

companies included in this analysis:


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The remainder o this report assesses the perormance othe commercial and the deense sectors, ollowed by a

discussion o the industry perormance, ocused on the

primary metrics o revenue growth, operating earnings

and margin, ree cash fow, ree cash margin, and

perormance o U.S. and European A&D companies. This

is ollowed by a discussion o share price perormance.

Commercial demand actors: The sector continued to

trend higher in 1H 2012, building upon its cyclical

production momentum that began in 2004. Boeing and

Airbus delivered 6582 aircrat in 1H 2012, compared to 5583

aircrat delivered in the rst hal o 2011, on pace to surpass

the record production rates in all o 2011. This increase inproduction is driving parallel production activity increases in

the commercial aircrat supply chain, rom engines and

avionics to wiring harnesses, passenger seats and wheels

and brakes. Sales orders or Boeing Commercial Aircrat and

Airbus or the rst hal o 2012 rose to 9714 aircrat, second

highest in history behind 2007. This rise in sales orders is

predominately or single-aisle aircrat newly introduced by

Boeing and Airbus that will deliver various product

improvements, including new engine technology, with

promises o signicant uel eciency.5

Through 2012, commercial aircrat production is expected to

increase while order levels will likely moderate. Over the next20 years, demand is expected to continue rom emerging

markets in Asia and the Middle East, and as airline operators

retire obsolete, less uel ecient airplanes. Fluctuating oil

prices are expected to push demand or uel-ecient planes

and engine technologies. Boeing orecasts demand or

34,000 new aircrat during the next 20 years.6

Deense demand actors: The deense sector continues toremain fat due to decreasing military budgets along with

the return o armed orces rom the Middle East. Some

deense contractors experienced fat or nominal revenue

growth compared to peers, but remained protable due to

avorable government contracts and cost cutting. Few new

programs o record were started in the 1H 2012, but since

programs are o long duration, many companies may not

experience the impacts o recent and potential additional

budget reductions or a ew more years.

The outlook or the sector remains cautionary, in light o the

recent announcement o deense budget cuts. In early 2012,

the Pentagon released a 2013 budget plan that would cut$487 billion in spending over the next decade including the

reduction o 100,000 troops, with recommendations or

additional base closures and selected reductions in unit

deliveries o conventional warare programs. U.S.

government debt reduction measures and the Presidential

and Congressional elections in November will likely delay

approval o the 2013 DoD budget, thus disrupting awards o

new deense contracts. Adding to the uncertainty is the risk

o additional reductions in U.S. deense, including $492

billion in deense cuts called or as a result o the budget

sequester, with the potential to additionally cut deense

spending starting in January 2013.

The U.S. deense strategy review calls or a shit in

strategic ocus to smaller, more agile armed orces and a

pivot to airsea power, with additional ocus on the

Asia Pacic region. The reduction in programs, less total

deense spending along with the strategic military shit

should bring new challenges and increased competition

or top U.S. deense contractors.

2 Boeing Current Year Deliveries Detail, http://active.boeing.com/commercial/orders/index.cm?content=displaystandardreport.cm&RequestTimeout=20000&optReportType=CurYrDelv&pageid=m15520 (accessed August 16, 2012).Airbus Orders and Deliveries, http://www.airbus.com/leadmin/backstage/orders_deliveries_table/July_2012_Airbus_ODs.xls(accessed August 16, 2012).

3 Boeing Orders and Deliveries Detail, http://active.boeing.com/commercial/orders/index.cm?content=displaystandardreport.cm&pageid=m25062&RequestTimeout=100000 (accessed August 23, 2012).

Airbus Orders and Deliveries, http://www.airbus.com/company/market/orders-deliveries/ (accessed August 23, 2012).4 Boeing Recent Annual Orders, http://active.boeing.com/commercial/orders/index.cm (accessed August 16, 2012).

Airbus Orders and Deliveries, http://www.airbus.com/leadmin/backstage/orders_deliveries_table/July_2012_Airbus_ODs.xls(accessed August 16, 2012).

5 Airbus press release, http://www.airbus.com/tools/airbusor/analysts/ (accessed August 23, 2012).6 Boeing Current Market Outlook 2012 2031, http://www.boeing.com/commercial/cmo/index.html (accessed August 16, 2012).


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As U.S. and European military budgets decline over the nextseveral years, there is revenue growth pressure on major

deense contractors as competition over major programs

intensies. Companies with heavier exposure to the deense

sector will compete or a smaller share o total market and

thus be challenged to ll the revenue gap. Thus, acquisitions

are expected to increase in order to access new technical

capabilities, to access new customers as well as to build

scale economies o production. Additionally, deense

budgets in Asia and the Middle East are expected to grow

which represents an opportunity or deense companies to

drive growth with oreign military sales.

Commercial vs. Deense and U.S vs. Europe nancialperormance: In reviewing the top 20 global A&D

companies, we estimate that the commercial aerospace

segment grew revenues 14.9 percent, while the deense

segment revenues decreased 1.0 percent.7 In addition, we

estimate that commercial aerospace segment operating

earnings jumped 29.2 percent, while deense segment

operating earnings eked out a 1.5 percent increase.

On a regional basis, the top 20 U.S. based companyscommercial aerospace 1H 2012 sales increased at a aster

pace than the group at 18.0 percent driven in part by

Boeings rising airplane deliveries,8 while operating

earnings growth o 24.4 percent trailed the combined

operating earnings o 29.2 percent. Comparatively,

European commercial aerospace revenue grew at a slightly

slower pace o 14.2 percent, while operating earnings rose

50.5 percent, largely driven by EADS strong rst hal

protability and the absence o large non-recurring

charges by European companies.

Deense sector revenues continue to remain fat to

negative or both the U.S. and European companies asdeense budget cuts create an uncertain outlook. U.S.

based A&D companies deense revenues increased 0.3

percent, compared to European based rms which saw

deense related revenues drop 4.5 percent in 1H 2012.

BAE Systems deense revenue decreased 9.7 percent due

to lower volumes in the Land & Armaments business

primarily refecting the completed Family o Medium

Tactical Vehicles (F-MTV) program.9

7 Based on extrapolation o the commercial aerospace and deense business perormance o the Top 20 companies. See methodology section orurther inormation and denitions o nancial metrics.

8 Boeing Co., 2Q12 10-Q, July 25 2012.9 BAE Systems, Hal-Yearly Report and Presentation 2012

Commercial aerospace Deense

1H 2012 1H 2011 Change

(1H12 versus

1H11)

1H 2012 1H 2011 Change

(1H12 versus

1H11)

Revenue ($ Billion)* $103.2 $89.8 14.9% $127.5 $128.8 -1.0%

Operating earnings ($ Billion) $8.6 $6.6 29.2% $12.0 $11.8 1.5%

Operating margin 8.3% 7.4% 12.4% 9.4% 9.2% 2.6%

Top U.S. based companies

Revenue ($ Billion)* $55.4 $46.9 18.0% $93.7 $93.5 0.3%



Top European based companies

Revenue ($ Billion)* $44.1 $38.6 14.2% $33.7 $35.3 -4.5%



Figure 2 Top 20 A&D companies by commercial aerospace versus deense revenue, operating earnings and

operating margin

*Extrapolation o the Commercial Aerospace versus Deense perormance o the Top 20 A & D companies. See methodology section or urtherinormation and denitions o nancial metric


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Detailed Financial Perormance Analysis: The ollowing section describes and illustrates our analysis o the nancialperormance o the top 20 global A&D companies. We assess revenue growth, operating earnings, and operating

margins as well as share price perormance.

Metrics 1H 2012 1H 2011 Change (1H12 vs. 1H11)

Revenue ($B) $236.6 $224.2 5.5%

Operating earnings ($B)* $20.0 $18.4 8.8%

Operating margin% 8.4% 8.2% 3.0% (25 bps)

Free cash fow ($B) $2.8 $2.9 -3.5%

Free cash margin % 1.1% 1.2% -7.5% (-9 bps)

Figure 3 Average perormance o the top 20 Global A&D companies in 1H 2012 compared to 1H 2011

* United Technologies does not disclose the portion o its operating earnings related to A&D and is not included in the calculation o Industry earnings.

CompanyRevenue

growth

Operating

prot growth

Operating margin

rate growth

Free cash fow

growth

Free cash margin

rate growth

Boeing 25.2% 23.0% -1.7% 1,081.0% 883.4%

EADS 13.7% 105.3% 80.6% -851.6% -737.2%

Lockheed Martin 4.7% 19.1% 13.8% -56.4% -58.3%

General Dynamics -1.1% -2.6% -1.4% 10.8% 12.0%

BAE Systems -9.7% 3.8% 15.0% 412.1% 445.6%

Northrop Grumman -6.2% -5.0% 1.3% 559.7% 590.0%

United Technologies*(a) -3.4% NA NA 14.2% 18.2%

Raytheon -2.6% 15.0% 18.1% -78.5% -83.4%

Finmeccanica -4.8% 16.8% 22.7% -2.0% -7.2%

GE Aviation*(b) 7.1% -0.9% -7.5% NA NA

Rolls-Royce 6.6% -19.0% -24.0% -123.3% -121.9%

Saran 14.1% 22.6% 7.5% -33.8% -41.9%

Thales 7.4% 11.4% 3.7% 58.6% 61.5%

L-3 Communications -3.0% -8.8% -6.0% -24.7% -22.3%

Honeywell Aerospace* 8.6% 19.4% 10.0% 100.0% 89.5%

Textron 12.8% 138.7% 111.5% -360.0% -330.4%

Bombardier Aerospace* -11.9% -21.5% -10.9% 8.3% -12.4%

Huntington Ingalls

Industries

1.3% 5.7% 4.3% 10.0% 11.1%

Harris -0.7% -87.1% -87.0% 104.0% 105.5%

Exelis(c) -1.0% 20.4% 21.7% -174.2% -175.0%

Total 5.5% 8.8% 3.0% (25 bps) -3.5% -7.5% (-9 bps)

Figure 4 Perormance o the top 20 Global A&D companies in 1H 2012 compared to 1H 2011

* Partial company results based on A&D activities.(a) United Technologies does not disclose the port ion o its operating earnings related to A&D and is not included in the calculation o Industry earnings.(b) GEs FCF and FCM are not included in the calculation o Industry FCF and FCM. Reer to the methodology section or additional detail.(c) Exelis was spun out o ITT Corporation and listed on October 31, 2011; hence its share price growth cannot be calculated.

Source: Deloitte Services LP analysis or 1H 2012 data or U.S. and non-U.S. companies lings as well as company press reports o unaudited nancialperormance in the last two quartersNote: The above companies represent the largest A&D companies (based on 2011 annual data) or which perormance nancials are available.Percentage change year over year (YOY) between 1H 2011 and 1H 2012


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* Partial company results based on A&D activities.(d) United Technologies does not disclose the portion o its operating earnings related to A&D and is not included in the calculation o Industry earnings.(e) GEs FCF and FCM are not included in the calculation o Industry FCF and FCM. Reer to methodology section or details.() Exelis was spun out o ITT Corporation and listed on October 31, 2011; hence its share price growth cannot be calculated.Note: Financial metrics sourced rom companies audited or unaudited 1H 2012 results; stock perormance sourced rom Capital IQ.(g) Rolls-Royce operating prot taken beore the disposal o the IAE business

Figure 5 Perormance o the top 20 Global A&D companies in 1H 2012 compared to 1H 2011

Revenue ($M) Operating prot ($M) Operating margin Free cash fow ($M) Free cash margin

Company 1H 2012 1H 2011 1H 2012 1H 2011 1H 2012 1H 2011 1H 2012 1H 2011 1H 2012 1H 2011

Boeing $39,388.0 $31,453.0 $3,118.0 $2,534.0 7.9% 8.1% $981.0 -$100.0 2.5% -0.3%

EADS $32,365.6 $28,474.0 $1,100.7 $536.1 3.4% 1.9% -$2,272.9 -$238.8 -7.0% -0.8%

Lockheed Martin $23,214.0 $22,169.0 $2,212.0 $1,857.0 9.5% 8.4% $997.0 $2,285.0 4.3% 10.3%

General Dynamics $15,501.0 $15,677.0 $1,830.0 $1,878.0 11.8% 12.0% $1,027.0 $927.0 6.6% 5.9%

BAE Systems $13,144.9 $14,556.5 $1,239.7 $1,194.0 9.4% 8.2% $974.7 -$312.3 7.4% -2.1%

Northrop Grumman $12,472.0 $13,294.0 $1,570.0 $1,652.0 12.6% 12.4% $639.0 -$139.0 5.1% -1.0%

United Technologies*(d) $11,013.7 $11,399.6 NA NA NA NA $2,595.0 $2,272.0 9.9% 8.4%

Raytheon $11,930.0 $12,253.0 $1,448.0 $1,259.0 12.1% 10.3% -$241.0 -$135.0 -2.0% -1.1%

Finmeccanica $10,419.4 $10,945.2 $486.8 $416.7 4.7% 3.8% -$1,568.0 -$1,536.9 -15.0% -14.0%GE Aviation*(e) $9,746.0 $9,100.0 $1,784.0 $1,800.0 18.3% 19.8% NA NA NA NA

Rolls-Royce(g) $9,021.9 $8,460.4 $914.8 $1,129.3 10.1% 13.3% -$99.4 $425.9 -1.1% 5.0%

Saran $8,324.4 $7,297.6 $859.3 $700.9 10.3% 9.6% $135.0 $203.8 1.6% 2.8%

Thales $8,324.0 $7,746.9 $438.5 $393.6 5.3% 5.1% -$142.8 -$345.3 -1.7% -4.5%

L-3 Communications $7,146.0 $7,367.0 $724.0 $794.0 10.1% 10.8% $333.0 $442.0 4.7% 6.0%

Honeywell Aerospace* $5,977.0 $5,506.0 $1,096.0 $918.0 18.3% 16.7% $818.0 $409.0 4.4% 2.3%

Textron $5,875.0 $5,207.0 $432.0 $181.0 7.4% 3.5% -$130.0 $50.0 -2.2% 1.0%

Bombardier Aerospace* $3,764.0 $4,273.0 $193.0 $246.0 5.1% 5.8% -$1,354.0 -$1,476.0 -17.6% -15.7%

Huntington Ingalls Industries $3,289.0 $3,247.0 $186.0 $176.0 5.7% 5.4% -$235.0 -$261.0 -7.1% -8.0%

Harris $2,912.2 $2,933.8 $59.9 $465.6 2.1% 15.9% $476.3 $233.5 16.4% 8.0%

Exelis() $2,800.0 $2,829.0 $283.0 $235.0 10.1% 8.3% -$141.0 $190.0 -5.0% 6.7%

Total $236,628.1 $224,189.0 $19,975.7 $18,366.2 8.4% 8.2% $2,792.0 $2,893.8 1.1% 1.2%

Sales revenue: The global top 20 companies revenues

grew 5.5 percent, to $236.6 billion in 1H 2012, with

Boeing contributing the highest incremental revenues

among the peer group or the six month period. Four

companies: Boeing, EADS, Lockheed Martin, and Saraneach generated incremental revenues in excess o $1

billion in 1H 2012.

Boeings revenue increased 25.2 percent in 1H 2012 to

$39.4 billion helped by rising airplane deliveries and

deense sales. Boeing Commercial Airplanes unit reported

a 42.7 percent increase in 1H 2012 sales compared to 1H

2011 sales, with 1H 2012 sales amounting to $22.8 billion.

Through 2Q12, Boeing delivered 287 commercial airplanes

and reiterated its orecast to deliver a record 585 to 600

commercial planes putting the company on pace to winthe annual order race or the rst time since 2006.

Additionally, despite a weakening deense spending

environment, the companys deense unit sales rose 7.3

percent to $16.4 billion or the rst hal o 2012.10

10 Boeing Co., 2Q12 Press release, http://boeing.mediaroom.com/index.php?s=43&item=2361 (accessed August 16, 2012)


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Saran also started o 1H 2012 with a 14.1 percent

increase in revenue growth to $8.3 billion, helped by

record production rates in aerospace original equipment.

FM56 engine deliveries reached 723 units up 87 units rom

1H11. Revenue was also boosted by an improvement in

improving atermarket trends and momentum in the

security business unit.11

Operating earnings: The global top 20 companies

operating earnings increased 8.8 percent to $20.0 billion

in 1H 2012, driven by avorable contract mix and cost

reduction initiatives. Many deense contractors have

started to reduce overhead costs and personnel in

anticipation o expected deense budget cuts in 2013.

Textrons operating earnings increased 138.7 percent to

$432 million, beneting rom strong demand or

helicopters, and sales o its Cessna corporate aircrat which

picked up ater languishing helping the unit leverage higher

sales volume over xed operating costs.12 EADS operating

earnings jumped 105.3 percent to $1.1 billion in 1H 2012,

driven by improved volume and cost perormance within

Airbus Commercial, as well as strong commercial and

support demand rom its Eurocopter business.13

Operating margin: The top 20 global companies

operating margin grew 3.0 percent to 8.4 percent in 1H2012. Only GE Aviation and Honeywell Aerospace posted

operating margins in excess o 15 percent in 1H 2012.

Honeywell Aerospaces operating margin increased 10.0

percent to 18.3 percent in 1H 2012, beneting rom higher

commercial demand, an 8 percent positive impact rom

OEM payments, and growth rom acquisitions.14 Although

GE Aviations operating margin decreased 7.5 percent in

1H 2012, the company still posted the second highest

operating margin among the peer set at 18.3 percent in 1H

2012, as higher equipment revenues more than oset

lower service revenues.

Free cash fow (FCF): The top 20 companies FCF

decreased 3.5 percent to $2.8 billion in the rst hal o

2012, largely due to slowing government deense

spending, and companies deploying cash towards

acquisitions and non-operating areas, such as higher

pension contributions, that exceeded the revenue and

cash fow growth rom commercial aerospace.

Boeing and Northrop Grumman achieved the astest FCF

growth in 1H 2012, up rom negative cash fows in 1H

2011. Boeings FCF improved rom -$100.0 million in 1H

2011 to $981.0 million in 1H 2012, largely due to higher

net earnings and lower inventory growth.15 Northrop

Grummans FCF improved to $639.0 million in 1H 2012rom -$139.0 million in 1H 2011, owing to lower retiree

benet unding, better working capital management, and

lower capital expenditures in the rst hal o 2012

compared to the same period in 2011.16

EADS posted FCF o -$2.3 billion in 1H 2012, due to

unavorable changes in working capital and higher capital

expenditures. Eight other companies also posted negative

FCF in 1H 2012, primarily due to lower cash fows rom

operations, unavorable working capital changes, and

higher capital expenditures.

Free cash margin (FCM): The top 20 companies FCM ellslightly by 9 bps to 1.1 percent in 1H 2012, due to lower FCF

as described above. Harris FCM more than doubled to 16.4

percent in 1H 2012, thanks to higher cash fow rom

operations and lower capital expenditures during the rst

hal o 2012 compared to the corresponding period in

2011.17 United Technologies FCM grew 18.2 percent or 153

bps to 9.9 percent, as its FCF increased 14.2 percent to $2.6

billion largely owing to higher net earnings while revenues

dropped by 3.4 percent to $26.2 billion in 1H 2012.18

Nine companies recorded negative FCM ratios due to

negative FCF in 1H 2012, due to lower cash fows, working

capital changes, and higher capital expenditures.

11 Saran, Firs t-hal 2012 earnings, July 31 201212 Textron Inc., 2Q12 10-Q, July 26, 201213 EADS, H1 Results 2012, July 27, 201214 Honeywell Inc., 2Q12 10-Q, July 18, 201215 Boeing Co., 2Q12 10-Q, July 25, 201216 Northrop Grumman Corp., 2Q12 Press release, http://investor.northropgrumman.com/phoenix.zhtml?c=112386&p=irolnewsArticle&ID=

1718109&highlight= (accessed August 31, 2012)17 Harris Corporation, 4Q12 Financial tables, http://harris.com/pd/investors/2012Q4.pd (accessed August 31, 2012)18 United Technologies Corp., 2Q12 Financial tables, http://www.utc.com/StaticFiles/UTC/StaticFiles/2012-q2_nancial_tables.pd

(accessed August 31, 2012)


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U.S. vs. European companies: U.S. based A&D

companies, accounting or 64 percent o the global Top 20

companies $236.6 billion revenue, generated $151.3

billion in 1H 2012 revenues up 6.2 percent rom the rst

hal o 2011. European companies, accounting or 34.5

percent o the top 20 revenue, increased 5.3 percent to

$81.6 billion.

U.S. companies reported operating earnings rose 7.2

percent, and reported operating margin remained fat at

9.7 percent. However, European companies recorded a

higher increase in reported operating earnings and

operating margin than their U.S. counterparts in the rst

hal o 2012. The reported operating earnings o theEuropean companies rose 15.3 percent to $5.0 billion and

the reported operating margin improved by 54 bps to 6.2

percent in 1H 2012.

U.S. companies FCF increased 15.3 percent to $7.1 billion

in 1H 2012, thanks to higher FCF posted by companies

such as Boeing, and Northrop Grumman, among others.

While FCF or European peers decreased to -$3.0 billion in

1H 2012 rom -$1.8 billion in 1H 2011, due to negative cash

fows posted by EADS, and Finmeccanica, and Thales. The

FCM o U.S. companies rose 9.8 percent or 37 bps to 4.2

percent, while that o European companies remained in

the negative terri tory at -3.6 percent and -2.3 percentduring 1H 2012 and 1H 2011 respectively.

Share price perormance: The rise and all and rebound

o the S&P 500 through the rst six months, refects

ongoing equity and credit market concerns over Europes

sovereign debt crisis and the potential slowdown in the

global economic recovery.

During the rst hal o 2012, both the S&P 500 and DJ A&D

index were in positive territory. The DJ A&D index

underperormed the S&P 500 by 401 bps during amid the

looming U.S. deense budget cuts. In 2011, the DJ A&D

index outperormed the S&P 500 index by 322 bps

growth, ollowing three consecutive years o underperor-

mance. The DJ A&D index outperormance against the S&P

500 in 2011 took place primarily in the rst hal o 2011.

In contrast the European A&D equity markets outper-ormed the U.S. equity markets, with the STOXX Europe

TMI A&D index improving in 1H 2012 compared to 1H

2011. The STOXX Europe TMI A&D index outperormed

the STOXX Europe 600 index or the second consecutive

year by 1,970 basis points in 1H 2012 and 446 basis

points in 1H 2011. However, the overall European equity

perormance remained negative given the challenging

macroeconomic conditions, with the STOXX Europe 600

index alling 7.9 percent in 1H 2012 compared to a 1.1

percent decline in 1H 2011.

Companies displayed mixed share price perormance in

1H12 compared to 1H11. Stock valuations o a ewcompanies improved thanks to the recovery in the

commercial aircrat and atermarket business. However,

share prices o other companies ell amid uncertainty

regarding various deense programs.

Source: Yahoo! Finance and Bloomberg accessed in August 2012. Figures include historical prices o the respective indexes over the identiedtime periods.

Figure 6 Share price perormance o the industry composite index relative to the broader S&P 500 index over

the last ew years

1H 2012 2H 2011 1H 2011 2011 2010 2009 2008

DJ A&D Index 4.3% -7.8% 12.0% 3.2% 10.6% 21.6% -38.7%

S&P 500 Index 8.3% -4.8% 5.0% 0.0% 12.8% 23.5% -38.5%

Basis point dierence -401 -304 696 322 -221 -182 -17

1H 2012 2H 2011 1H 2011 2011 2010 2009 2008

STOXX Europe TMI A&D 11.8% -2.5% 3.4% 0.8% 15.2% 24.8% -43.2%

STOXX Europe 600 -7.9% -10.4% -1.1% -11.3% 8.6% 28.0% -45.6%

Basis point dierence 1,970 786 446 322 1,213 -316 239


10/12

10

This analysis is based on key metrics or top 20 global A&D

public companies chosen on the basis o A&D revenue size

(based on 2011 annual data). The top 20 global A&D public

companies represent approximately 71 percent o total

global industry revenues according to our 2011 report,19

and provides a reasonable proxy or the perormance o the

entire industry with U.S. companies representing 44% o

the top 20 revenues (60% in our 2011 report) and European

companies representing 25.4% (34% in our 2011 report).

The report uses the latest audited and unaudited results

through 6/30/12 or each company. Goodrich and SAIC

were not included in the top 20 as United Technologies

completed the acquisition o Goodrich in July 2012 and

SAICs scal year ends in January and the 2Q12 releaseoccurred ollowing our 6/30/12 cut-o date. By using the

data rom respective companies audited and unaudited

results into the calculation ramework, we analyzed the

Industrys perormance in rst hal o 2012 and highlighted

specic companies that had an impact on the Industrys

perormance. The analysis o U.S. compared to non-U.S.

companies uses the constant conversion approach to

eliminate the eect o any oreign currency fuctuations

rom year to year.

In the commercial versus deense segment analysis, the

study compares and contrasts the perormance o the top

20 global A&D companies on the metrics o revenue,operating earnings and operating margins. The aggregate

revenue o the top 20 companies rom commercial

aerospace and deense is not equal to the total revenue as

total revenue includes a certain portion o non-A&D

revenue o companies that are majority A&D. The

commercial/deense split o all the Top 20 companies was

only available or a select group o companies on a

quarterly basis. These companies are: Boeing, EADS,

Thales, Rolls-Royce, Honeywell Aerospace, Bombardier

Aerospace, Huntington Ingalls Industries, and Harris. For

the remaining companies, the study used the commercial

and deense percentage o revenue published in the

companys 10-K or annual report. Additionally, only a ew

companies provided a breakout o commercial and

deense operating earnings (Boeing, EADS, Thales,

Rolls-Royce, Bombardier Aerospace, and Huntington

Ingalls Industries); or the remaining companies, the study

used the commercial and deense percentage o revenue

as a proxy to estimate the respective operating earnings.

A ew companies do not give detailed break up o their

commercial aerospace and deense revenues. We have

taken the ollowing approach or these companies:

BAESystems:TheElectronicSystemsandCyber&

Intelligence segments provide the commercial vs.

deense split, and we estimate the Platorms & Services

segments revenue are solely deense due to lack o

inormation.

Harris:SegmentrevenueisseparatedintoU.S.

Government revenues and oreign military sales (FMS).

For the lack o inormation, all U.S. Government revenues

are assumed to be deense related. The remaining sales o

the RF Communications and Government Communica-

tions Systems segments are taken as commercialaerospace revenues, while the remaining revenues or the

Integrated Network Solutions segment are not

considered as commercial aerospace, given its other end

markets (e.g. healthcare, energy).

NorthropGrumman:Thecompanybreaksitsrevenue

between the U.S. Government and other customers. Since

there is no detailed breakup o U.S. Government revenues,

the study assumes it as all deense-related sales.

Raytheon:CompanylingsbreakU.S.Government

revenues (rom DoD and rom non-DoD customers);

however there is no detailed breakup o international

sales between commercial aerospace and deense. This

study assumes that all international sales including FMSare deense related sales.

Exelis:Forlackofinformation,thestudyassumesall

international sales to be deense related.

Further, as Saran and Finmeccanica do not break out the

mix o commercial and deense sales, the study has taken

the ollowing approach:

Safran:DefenseNews20 in its annual ranking o Top 100

deense contractors in 2011 (latest available) states that

Saran has 20.0 percent deense revenues in 2011. The

study assumes the remaining company revenues are

related to commercial aerospace.

Finmeccanica:DefenseNews21 in its annual ranking o

Top 100 deense contractors in 2011 states that

Finmeccanica has 60.5 percent deense revenues in

2011. The remaining company revenues are adjusted or

non A&D businesses (e.g., Energy, Transportation, and

Other activities) to arrive at commercial aerospace

revenues.

Methodology2012 top 20 Global A&D mid-year company performance

19 Calculation based on Top 20 companies 2011 ull year perormance rom the 2011 Global Aerospace & DeenseIndustry perormance wrap-up, DTTL

20 Deense News Top 100 or 2011, http://special.deensenews.com/top-100/charts /rank_2011.php21 IBID


11/12


1. A&D revenue:a) To calculate A&D Revenue or an individual company, it

was necessary to determine the percentage o revenue

associated with A&D activities. In calculating such

percentage, we rst checked to see whether the

company explicitly stated an A&D revenue gure in its

1H 2012 lings. In such a case, we used that explicitly

stated percentage directly. I such percentage was not

explicitly stated, we analyzed the companys various

business segments or end-markets and considered

those which are related to A&D in estimating the A&D

revenue percentage. In the case o United Technologies,

since the A&D revenue percentage is not explicitly

stated by the company in its 2Q12 release, we use the2011 revenue percentage to arrive at its A&D revenues.

b) Once we assigned A&D percentages to all o the compa-

nies, we put them into two categories: those companies

with less than 60 percent o their respective revenue

rom A&D and those companies with equal to or more

than 60 percent o their respective revenue rom A&D.

I a company derives less than 60 percent o its revenue

rom A&D, we took only the revenue generated by the

A&D part. However, i the company derives equal to or

more than 60 percent o its revenue rom A&D, we used

total revenue or company.

c) In determining Industry A&D revenue, we calculated a

summation o the A&D revenue o all consti tuent 20companies.

2. Operating earnings and margin%:

a) In calculating A&D operating earnings, we took a two

pronged approach (same as above), which states that i a

company derives less than 60% o its revenue rom A&D,

we took only the operating earnings clearly associated

with the A&D part. However, i the company derives

equal to or more than 60% o its revenue rom A&D, we

took the total operating earnings or the company.

b) In the case o United Technologies (less than 60% A&D),

it was not possible to assign operating earnings to the

A&D business. So, the companys earnings were not

included in calculation o the industry earnings.

c) The companies A&D operating margins were calculated

by dividing their respective A&D operating earnings by

their respective A&D revenues.

d) Operating earnings or the Industry is summation o

operating earnings o all constituent 20 companies.

e) Operating margin or the Industry was calculated as:

Total Industry operating earnings as a percentage o

total Industry revenue.

3. FCF/ FCM:a) FCF was calculated or the entire company, as it is

impractical to allocate cash fows to a companys A&D

and non-A&D segments.

b) Bombardier reports FCF on a segment basis. However,

or the sake o consistency, we consider the entire

companys FCF in the study.

c) I the FCF value was published by the company, the

study used it directly as in the cases o EADS, General

Dynamics, BAE Systems, Northrop Grumman, United

Technologies, Finmeccanica, Saran, L-3 Communica-

tions, Thales, Bombardier, Huntington Ingalls Industries,

and Exelis.

d) I the FCF value was not published by the company, itwas calculated as: FCF = Operating cash fow net

capital expenditures.

e) Net capital expenditures are calculated as:

Net capital expenditure = purchases o plant, property,

and equipment proceeds rom the sale o plant,

property, and equipment.

) The study calculated the industry FCF as a summation o

the FCFs o all constituent companies.

g) FCM is calculated or the entire company, analogous to

FCF. FCM or a company was calculated as:

Company FCM = Company FCF/Company revenue.

h) FCM or the Industry is a revenue-weighted average. It

was calculated as: Industry FCM = (CompanyFCM*Company A&D revenue)/total Industry A&D

revenue.

i) The FCF and FCM o GE were excluded as their inclusion

would have had a distorting eect on the calculation o

Industry FCF and FCM, respectively.

4. Share price perormance:

a) Growth in share prices o companies, and index values,

are calculated as the change on the last trading day, i.e.

June 29, 2012 compared to June 30, 2011.

The inormation provided in this Financial Perormance Analysiswas obtained rom sources believed to be reliable, but has notbeen independently veried and its accuracy cannot be assured.Inormation contained herein is as o the date o such inormationor the date o this publication, as applicable. Deloitte undertakesno obligation to notiy any recipient o this Financial PerormanceAnalysis o any such change.


12/12

This publication contains general inormation only and Deloitte is not, by means o this publication, rendering accounting, business, nancial, investment,legal, tax, or other proessional advice or services. This publication is not a substitute or such proessional advice or services, nor should it be used as a basisor any decision or action that may aect your business. Beore making any decision or taking any action that may aect your business, you should consult aqualied proessional advisor.

Deloitte shall not be responsible or any loss sustained by any person who relies on this publication.

About Deloitte

Deloitte reers to one or more o Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network o member rms, eacho which is a legally separate and independent entity. Please see www.deloitte.com/about or a detailed description o the legal structure o DeloitteTouche Tohmatsu Limited and its member rms. Please see www.deloitte.com/us/about or a detailed description o the legal structure o Deloitte LLPand its subsidiaries.

Copyright 2012 Deloitte Development LLC. All rights reserved.Member o Deloitte Touche Tohmatsu Limited

Tom Captain

Global A&D Sector Leader

Deloitte Touche Tohmatsu Limited (DTTL)

+1 206 716 6452

[email protected]

Contact

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