2011 global aerospace and defense industry performance

7/31/2019 2011 Global Aerospace and Defense Industry Performance

1/36

2011 Global Aerospace & DefenseIndustry performance wrap-upWidening gap between

commercial versus defense;United States versus Europe

July 2012


2/36

2

Summary discussion 3

Summary o key nancial measures 4

Study scope 5

2011 Global A&D Industry perormance in detail 7

U.S. versus European companies 20

Commercial versus deense segment 22

Subsector perormance 23

Study methodology 29

Contact 35

Contents


3/36

2011 Global Aerospace & Deense Industry perormance wrap-up 3

Summary discussion

Signs o growth due to the commercial aerospace

rebound Global aerospace and deense (A&D) Industry

revenues grew overall by 2.3 percent in 20111, driven largely

by increased production levels o large commercial aircrat.

The commercial aircrat segment in 2011 set an annual

production record o 1,011 deliveries by Boeing and Airbus2.

Indeed, commercial aircrat segment revenues increased by

10.1 percent in 20113

. Commercial aircrat production levelsare anticipated to continue to set new records in 2012,

building on the strong growth between 2005 and 2011

when over 12,500 large commercial aircrats were ordered4.

Demand or production is being driven by lightweight

aircrat requiring less maintenance and more uel-ecient

jet engines that reduce the uel costs or airlines. Also, sales

o new aircrats are being supported by increasing travel

demand, especially in geographies such as China, India,

Brazil, and the Middle East, where more people can aord

to travel or business and leisure.

Deense is shrinking overall, with selected regional

increases Global deense revenues decreased by 3.3

percent in 20115, primarily due to aordability, competing

domestic priorities, weak economies in the western world,

and the drawdown o orces in Iraq and Aghanistan.

As the largest deense marketplace globally, accounting

or a major portion o deense spending, the United

States (U.S.) is undergoing a cyclical downturn, starting

with an announced US$487 billion deense budget cut

over the next 10 years, ollowed by potentially another

US$500 billion sequestration driven deense budget cut6.

1 Deloitte Touche Tohmatsu Limited (DTTL) Global ManuacturingIndustry group analysis, February 2012. See methodology section orurther inormation and denitions o nancial metrics.2 Boeing, Order and deliveries, http://active.boeing.com/commercial/orders/

index.cm?content=timeperiodselection.cm&pageid=m15523 (accessed 14February 2012); Airbus, Summary results 1989-2011, http://www.airbus.com/presscentre/corporate-inormation/key-documents/(accessed 14 February 2012).3 See the methodology section or urther inormation and denitionso nancial metrics related to the commercial versus deensecalculations. Reer to Figure 3 in report.4 Boeing, Annual orders summary, http://active.boeing.com/commercial/orders/index.cm?content=displaystandardreport.cm&RequestTimeout=500&optReportType=AnnOrd&pageid=m15521 (accessed 14 February 2012); Airbus, Airbussummary results 1989-2011, http://www.airbus.com/presscentre/corporate-inormation/key-documents/(accessed 14 February 2012).5 DTTL Global Manuacturing Industry group analysis, February 2012. Seemethodology section or urther inormation and denitions o nancial metrics6 NBC News, Panetta: Military cuts to hit all 50 states, 26 January2012, http://usnews.msnbc.msn.com/_news/2012/01/26/10244240-panetta-military-cuts-to-hit-all-50-states?lite.

Alternatively, deense spending is increasing in geographies

such as India, China, Japan, the United Arab Emirates (UAE),

Saudi Arabia, and Brazil. For example, India has a major deense

recapitalization program7 as their economy expands, while other

countries are increasing their deense spending as their wealth

increases and in light o growing national security concerns.

Industry nancial perormance generally ell in

2011 Even with the increasing ortunes in the

commercial aircrat segment, many nancial perormancemetrics or the global Industry as a whole generally

decreased in 2011, likely because o the predominant

weighting o the deense sub-segment. Reported operating

earnings, a key nancial metric, decreased 3.1 percent.

In addition, reported operating margins decreased 5.3

percent, ree cash fow (FCF) decreased 13.3 percent,

and reported operating earnings per employee decreased

5.2 percent8. However, on the positive side, the book to

bill (BTB) ratio, an indicator o uture revenue growth,

increased 17.4 percent9, likely as a result o the sales

bookings at Airbus and Boeing and their suppliers or new

uel-ecient commercial aircrat, as mentioned above10.

Increased one-time charges, but not a pattern

Non-recurring exceptions, or one-time charges, increased

in 2011 to US$4.8 billion, compared to one-time charges

in 2010 o US$2.3 billion11. In prior years, one-time

charges were largely attributable to programs experiencing

diculties with cost and schedule perormance, but

this does not seem to be the case in 2010 nor 2011.

Finmeccanicas US$2.1 billion charges (part o its total

one-time charges), accounted or a majority o the US$2.5

billion increase in industrys one time charges in 2011.

Most o the remaining charges were attributable to

corporate repositioning and restructuring charges. Absent

these charges, core12 operating earnings or the Industry7 Deense media network, Indian navy orce structure developmentis driven by blue water maritime strategy, 1 June 2012, http://www.deensemedianetwork.com/stories/indian-navy-orce-structure-development-is-driven-by-blue-water-maritime-strategy/2/.8 DTTL Global Manuacturing Industry group analysis, February 2012.See methodology section or urther inormation and denitions onancial metrics.9 Ibid.10 Ibid.11 Ibid.12 Comparison o 2011 to 2010 core earnings is requently reerred to in thisreport to refect realistic operating perormance, which adjusts or the eecto non-recurring A&D related company charges year to year. One-time A&Drelated company charges reers to program write-os (such as cancellations,terminations), restructuring charges, asset impairment charges, acquisition-


4/36

4

actually grew 1.2 percent, while operating margins ell

slightly to 8.9 percent rom 9.0 percent in 201013.

Europe continues to lag the U.S. Financial

perormance dierences between A&D companies based

in the U.S. and Europe continue to diverge, as described

in the2010 Global Aerospace & Defense Industry

Performance Wrap-up report14. Global regional divergence

in the 2011 perormance o A&D companies is indicative

o dierent incentives, management philosophies, andwork orce practices in the U.S. and Europe. The European

A&D Industry grew only by 0.8 percent and U.S. Industry

grew revenue 3.3 percent. Reported operating earnings

in Europe ell 21.6 percent, while U.S. operating earnings

grew 2.9 percent, with reported operating margin

declining 22.2 percent and 0.4 percent, respectively. Free

cash fow (FCF) declined 0.7 percent in the U.S., while it

ell 43.4 percent in Europe. Furthermore, European A&D

companies continue to lag in employee productivity, with

Europe reporting operating earnings per employee down

25.0 percent, while their U.S. peers improved 1.9 percent

in that important metric. Reported operating margin in the

U.S. was 10.5 percent and 4.7 percent in Europe in 2011.

Reported return on invested capital was 20.7 percent in

the U.S. while in Europe it was 8.7 percent15.

Suppliers perormed better than original equipment

manuacturers (OEMs) Tier one, two, three suppliers,

many o which have signicant participation in the

commercial aerospace segment had reported revenue

increases o 5.1, 11.1 and 29.1 percent respectively16.

This compares with revenue growth o 0.1 percent or

OEMs, many o which are deense segment companies.

A more stark comparison is operating earnings growth

between these suppliers and their customer, the OEM

companies. Tier one, two, and three suppliers had reportedoperating earnings growth o 15.9, 12.3, and 34.8 percent

respectively. This compares to operating earnings growth

o 2.5 percent or OEMs. Finally, suppliers had reported

related expenses, loss on disposal o businesses, and litigation charges13 DTTL Global Manuacturing Industry group analysis, February 2012.See methodology section or urther inormation and denitions onancial metrics.14 Deloitte Development LLC, 2010 Global Aerospace & DeenseIndustry Perormance Wrap-up, 7 July 2011.15 DTTL Global Manuacturing Industry group analysis, February 2012.See methodology section or urther inormation and denitions onancial metrics16 Ibid.

operating margins o between 12.1 and 14.2 percent, while

OEMs had reported operating margins o 7.6 percent17.

Summary o key nancial measures

The global A&D Industry as a whole grew to US$681

billion in 2011, posting a revenue gain o 2.3 percent,

compared to revenue growth o 2.5 percent in 2010

and 4.5 percent in 200918.

In 2011, U.S. A&D companies revenue grew by 3.3

percent, as compared to 0.8 percent or European

companies, reversing a two-year trend o lower U.S.

companies revenue growth. U.S. Industry revenue

growth was largely driven by higher commercial aircrat

deliveries and a stronger atermarket business19

OEM subsector revenue grew by 0.1 percent and

reported operating earnings increased by 2.5 percent

in 2011, as commercial aircrat production more

than oset weakness in the deense segment. In

contrast, the deense electronics subsectorwhich

posted declines o 2.4 percent and 67.5 percent in

revenue and reported operating earnings in 2011,

respectivelywas impacted rom a slowdown in U.S.deense spending.

Reported Industry operating earnings decreased 3.1

percent to US$56.1 billion, largely due to one-time

A&D related company charges o US$4.8 billion in 2011

compared to US$2.3 billion in 2010.

U.S. companies reported operating earnings

increased by 2.9 percent compared to a decline o

21.6 percent or European companies in 2011, as

the impact o non-recurring A&D related charges

was greater in European than in the United States.

Excluding charges, U.S. companies core operating

earnings increased 4.6 percent, and the Europeancore operating earnings ell by 7.1 percent.

Five companies accounted or the majority o the

global A&D Industrys US$4.8 billion non-recurring

A&D related charges in 2011: Finmeccanica, URS

Federal Services, Hawker Beechcrat, BAE Systems,

and Huntington Ingalls. Excluding these one-time

charges, Industry core operating earnings increased

by 1.2 percent to US$60.9 billion in 2011

17 Ibid.18 Ibid.19 Ibid.


5/36


Reported Industry operating margin decreased by 46

basis points (bps) to 8.2 percent in 2011, largely due

to an increase in non-recurring A&D related company

charges. Core operating margin declined marginally by

9 bps to 8.9 percent in 201120.

U.S. A&D companies reported a 10.5 percent

operating margin in 2011, compared to 4.7 percent

or European A&D companies. This dierence

suggests the likely impact on European companiesperormance o costs associated with operating

in countries with higher government intervention.

In terms o 2011 core operating margin, U.S.

companies outperormed the European companies,

11.0 percent versus 6.0 percent, respectively21.

The book-to-bill (BTB) ratio22 grew to 1.32x in 2011 rom

1.12x in 2010, or by 17.4 percent. A large portion o this

increase benetted rom US$154.4 billion in incremental

backlog at EADS and Boeing23. Excluding EADS 2.88x

and Boeings 1.50x BTB perormance, the Industry BTB

equaled 1.07x, a 10.0 percent increase versus 201024.

Led by Boeing and EADS, the OEM group producedthe highest BTB ratio o 1.46x, in contrast to the

deense electronics subsector BTB o 0.97x, the

weakest perorming subsector.

Deense companies remain challenged to maintain

revenue, let alone grow, based on the BTB ratios

calculated or the Industry. Underscoring this point,

in 2011, the top ve deense companies revenue-

weighted BTB ratio was 0.93x, a sharp contrast to

the 3.16x average revenue-weighted BTB ratio o

Boeings and EADS commercial aircrat business, led

by EADS Airbus commercial BTB ratio o 4.10x.

The total level o global A&D Industry employmentincreased by 2.3 percent to over 2.1 million employees

in 201125, as compared to the 3.0 percent growth in

employment or the larger index group.

20 Ibid.21 Ibid.22 Book-to-bill ratio: See methodology section or urther inormationand denitions o nancial metrics.23 DTTL Global Manuacturing Industry group analysis, February 2012.See methodology section or urther inormation and denitions onancial metrics.24 Ibid.25 Ibid.

A more detailed analysis o the nancial metrics is

described in the upcoming sections in this report.

Study scope

The Deloitte Touche Tohmatsu Limited (DTTL) Global

Manuacturing Industry groups2011 Global Aerospace

and Defense Industry performance wrap-up includes

analysis o 110 A&D companies or segments o industrialconglomerates with A&D businesses that recorded revenue

greater than US$500 million in 2011. The study scope,

however, does not include A&D organizations such as

government controlled entities, private companies that

do not release public lings, and companies that identiy

the A&D Industry as an end market. Due to the need

or consistent and standardized comparisons, the study

included companies and divisions with publicly reported

nancial lings and or-prot entities.

The DTTL Global Manuacturing Industry group conducted

the study o the 2011 nancial perormance o the

Industry by assessing key nominal and growth metrics,

including revenue, operating earnings, operating margin,

return on invested capital (ROIC), ree cash fow (FCF),

ree cash margin (FCM), book-to-bill (BTB) ratio, employee

productivity, and equity market perormance. All nancial

metrics in the study are based on constant currency

conversion method (unless otherwise stated as dierential

method) to eliminate the impact o oreign exchange

fuctuations on companies or Industrys perormance. For

more inormation on the conversion method, reer to the

Methodology section o this report.

The global A&D Industry is highly concentrated with

revenues or the top 10 companies comprising 53.4

percent o overall Industry revenue in 201126. Thus,the combined perormance o these top 10 companies

signicantly impacted the perormance o the Industry as

a whole.

Figure 1 includes the 110 companies and divisions that are

included in this study. These companies combined accounted

or approximately 92 percent o the overall global A&D

Industry revenue in 2011. The remainder, an estimated 160

organizations, comprising close to US$60 billion in revenues,

were excluded rom the study, as described above.

26 DTTL Global Manuacturing Industry group observation based on theanalysis o the companies in Figure 1.


6/36

6

Figure 1: A&D companies included in the analysis

A&D companies or divisions included in this study in sales revenue order

1. Boeing 2. EADS 3. Lockheed Martin 4. General Dynamics

5. BAE Systems 6. Northrop Grumman 7. Raytheon 8. United Technologies*

9. Finmeccanica 10. GE Aviation* 11. Thales 12. Rolls-Royce

13. Saran 14. L-3 Communications 15. Honeywell Aerospace* 16. Textron

17. SAIC 18. Bombardier Aerospace* 19. Goodrich 20. Huntington Ingalls

21. Harris 22. ITT Exelis 23. Embraer 24. Mitsubishi Heavy IndustriesAerospace*

25. Kawasaki Aerospace and Gas

Turbines*

26. Spirit Aerosystems 27. Alliant TechSystems 28. Rockwell Collins

29. Singapore Technologies

Engineering Ltd.

30. URS Federal Sector* 31. Dassault Aviation 32. CSC*

33. Oshkosh Deense* 34. Babcock International 35. MTU Aero Engines 36. Zodiac SA

37. Delta Tucker 38. SAAB 39. CACI 40. Precision Castparts*

41. Fluor Government Group* 42. IHI Aero Engine & Space* 43. Rheinmetall Deence* 44. Cobham

45. Triumph Group 46. Mantech 47. Avio S.p.A. 48. Elbit Systems

49. QinetiQ 50. KBR* 51. B/E Aerospace 52. Hawker Beechcrat

53. GKN Aerospace* 54. Meggitt 55. MOOG 56. Jacobs Engineering Group*

57. BBA Aviation 58. ThyssenKrupp Marine Systems* 59. Navistar* 60. Teledyne Technologies61. Parker Hannin Aerospace* 62. AAR 63. Esterline 64. Diehl Deence and Aerosystems*

65. Eaton Aerospace* 66. CAE 67. Samsung Techwin Engine &

Turbo Machinery & Deense

Machinery*

68. Serco Deence, Science,

Nuclear*

69. Allegheny Technologies* 70. Kongsberg Gruppen Deence &

Protech Systems*

71. Hexcel 72. Orbital Sciences

73. Cubic 74. Transdigm Group 75. Chemring 76. Ultra Electronics

77. Curtiss Wright* 78. Loral Space & Communications

Ltd.

79. Korea Aerospace Industries 80. Titanium Metals

81. Volvo Aero* 82. Fuji Aerospace* 83. Stork Fokker Technologies* 84. GenCorp

85. Woodward Aerospace* 86. Microsemi 87. Smiths Detection* 88. Latecoere

89. Amphenol* 90. Alion Science & Technology

Corp

91. Ball Aerospace* 92. OHB Technology AG

93. MacDonald, Dettwiler and

Associates

94. HEICO Corporation 95. Aerofex 96. Kratos Deense & Security

Solutions

97. FLIR Government Systems* 98. Wesco Aircrat 99. Indra Sistemas Security &

Deence*

100. Magellan Aerospace

101. Crane Aerospace & Electronics* 102. Industria De Turbo Propulsores

Sociedad Anonima

103. VSE 104. Senior Aerospace*

105. Ducommun 106. Kaman Aerospace* 107. RTI International Metals 108. SKF*

109. JAMCO Corporation 110. LISI Aerospace** Partial company results based on A&D activity, identied by A&D-specic business segment, where possible.

Source: DTTL Global Manuacturing Industry group analysis, 2011. See methodology section or urther inormation and denitions o nancial metrics.


7/36


Figure 2 summarizes the key perormance metrics or the Industry in native currency, thereby eliminating potential

distortions caused by oreign currency fuctuations. All metrics are based on reported lings, unless otherwise stated as

core perormance. Each perormance metric is discussed in greater detail in this study.

Figure 2: Average perormance o A&D companies in 2011 compared to 2010

Metrics 2011 2010Reported change Core change*

(2011 versus 2010) (2011 versus 2010)

Revenue (US$ billion) $681 $666 2.3% 2.3%

Operating earnings (US$ billion) $56 $58 -3.1% 1.2%

Operating margin percentage 8.2% 8.7% -5.3% (-46 bps) -1.0% (-9 bps)

ROIC percentage 16.2% 16.1% 1.0% (15 bps) 4.3% (71 bps)

FCF (US$ billion) $47 $54 -13.3% -13.3%

FCM percentage 4.9% 6.1% -18.7% (-114 bps) -18.7% (-114 bps)

BTB 1.32 1.12 17.4% 17.4%

A&D revenue/employee (US$) $323,839 $323,785 0.0% 0.0%

A&D operating prot/employee (US$) $26,668 $28,141 -5.2% -1.0%

Number o A&D employees 2,103,924 2,057,405 2.3% 2.3%

Dow Jones (DJ) A&D Index versus S&P

500 (bps)

322 bps -221 bps 544.0 bps 544.0 bps

STOXX Europe TMI A&D Index versus

STOXX Europe 600 (bps)

1,213 bps 656 bps 557.0 bps 557.0 bps

*Core change column represents the percentage and basis point changes rom 2011 to 2010 or the ollowing metrics: Operating earnings,operating margin, ROIC, and operating earnings/employee. Core results are calculated ater adjusting or the eect o non-recurring A&D relatedcompany charges year to year. Non-recurring A&D related company charges reer to program write-os (such as cancellations, terminations),restructuring charges, asset impairment charges, acquisition-related expenses, loss on disposal o businesses, and litigation charges.

Source: DTTL Global Manuacturing Industry group analysis, 2011. See methodology section or urther inormation and denitions onancial metrics.

2011 Global A&D industry perormance in detail

The ollowing sections discuss the 2011 nancial perormance o the Industry, based on type o company, geography, as

well as on a consolidated basis:

2011 Industry perormance details

U.S. versus European comparisons

Commercial aerospace versus deense segment comparisons

Subsector perormance comparisons

Revenue: Revenue or the Industry grew at a rate o 2.3 percent, to US$681 billion in 2011 rom US$666 billion in 2010.

An increase in commercial aircrat delivery volume likely drove this perormance and helped both Boeing and EADS to

achieve signicant revenue growth as compared to 201027 28. Higher delivery volumes also generally benetted the Tier

one and two suppliers and aerostructure subsectors, which accounted or 15 o the top 20 perormers in 2011 revenue

growth percentage. Overall, 65 percent o the companies revenue growth exceeded that o the total Industry average.

In Figure 3, Boeing, the overall A&D revenue leader and largest global A&D company, grew revenue 6.9 percent in 2011

to US$68.7 billion, likely due to higher delivery volume and avorable mix at Boeing Commercial Airplanes (BCA) and

27 Boeing, 2011 10-K, 9 February 2012.28 EADS, Annual results presentation, http://www.eads.com/eads/int/en/investor-relations/events-reports/Financial-Statements-and-Presentations/2012.html (accessed 24 April 2012).


8/36

8

sales growth in commercial aviation services29. In 2011,

Boeing delivered 477 commercial airplanes, up rom

462 in 2010, including rst-time deliveries o a 787 to

All Nippon Airlines and a 747-8 Freighter to Cargolux30 31

32. EADS revenue increased by 7.4 percent to US$68.4

billion, benetting rom positive volume and mix impacts

at Airbus Commercial, which delivered 534 aircrat in 2011

versus 510 in 201033. In addition, the company saw an

increase in commercial activity at Eurocopter, as higherrevenue in support and services activities led to record

annual sales, despite slightly lower deliveries 503 in

2011 compared to 527 in 201034. Lockheed Martins 2011

revenue increased 1.8 percent to US$46.5 billion likely due

to production activities on the F-35 LRIP contracts, higher

volume rom C-130 programs (including delivery o eight

C-130J aircrat) and C-5 programs (including one C-5M

aircrat delivery), and F-16 support activities and deliveries

(two F-16 aircrat deliveries)35.

In Figure 4, Triumph Group, the top company by 2011

revenue growth, increased 124.4 percent to US$2.9

billion, likely due to a US$1.5 billion contribution in net

sales through the integration o Vought a global

manuacturer o aerostructures or commercial, military,

and business jet aircrat acquired in 201036.

Conversely 30 o the 110 companies, mostly deense,

experienced a decline in revenue in 2011, likely due to

the impact o cancellations or a reduction in the value o

government contracts. In contrast to 2010s avorable

perormance, revenue at Oshkosh Corporations Deense

29 Boeing, 2011 10-K, 9 February 2012.30 Ibid.31 Boeing, ANA celebrate rst 787 Dreamliner delivery, http://boeing.mediaroom.com/index.php?s=43&item=1939, 26 September 2011.32 Boeing, Boeing delivers rst 747-8 reighter to cargolux, http://

boeing.mediaroom.com/index.php?s=43&item=1970, 12 October 2011.33 EADS, 2011 Financial statements, http://www.eads.com/dms/eads/int/en/investor-relations/documents/2012/events-reports/AGM-2012/Financial-Statements-2011-Complete-EN/Financial%20Statements%202011.pd (accessed 24 April 2012).34 EADS, Press release: Fourth quarter and ull year, http://www.google.co.in/url?sa=t&rct=j&q=eads%202011%20press%20release&source=web&cd=1&ved=0CFwQFjAA&url=http%3A%2F%2Fwww.eads.com%2Fdms%2FPress-DB%2FEADS%2FFinancial_Communication%2F2012%2FMarch%2FIncreasing-Growth-Momentum--EADS-Reports-Full-Year-Results-2011%2FPDF-APC-2012%2FEADS-FY-2011-Results---en%2FEADS%2520FY%25202011%2520Results%2520-%2520en.pd&ei=6RvHT_THKIrprAp9W8Dg&usg=AFQjCNGGXgtTssyR97TNhQ6gA9gDFaFMMg (accessed 24 April 2012).35 Lockheed Martin, 2011 10-K, 23 February 2012.36 Triumph Group, 2011 10-K, 29 May 2012.

segment had the largest percentage revenue decline in the

Industry, alling 39.0 percent to US$4.4 billion in 2011.

Oshkoshs Deense segment revenue declined largely due

to a signicant reduction in deliveries o Mine Resistant

Ambush Protected All Terrain Vehicles (MATVs) 645

units in 2011 compared to 7,539 units in 2010. Oshkosh

received the M-ATV contract rom the Department o

Deense (DoD) in June 2009 which was largely ullled in

2010; thus MATV sales (including parts and services sales)declined US$3.2 billion in 2011 compared to 201037.

Figure 3: Top 20 companies in revenue perormance

in 2011

Top 20 companies in revenue perormance

(US$ millions) (2011)

Boeing $68,735

EADS $68,427

Lockheed Martin $46,499

General Dynamics $32,677

BAE Systems $28,510

Northrop Grumman $26,412

Raytheon $24,857

United Technologies* $24,440

Finmeccanica $24,121

GE Aviation* $18,859

Thales $18,146

Rolls-Royce $17,847

Saran $16,238

L-3 Communications $15,169

Honeywell Aerospace* $11,475

Textron $11,275

SAIC $10,587

Bombardier Aerospace* $8,594

Goodrich $8,075

Huntington Ingalls $6,575

* Partial company results based on A&D activity, identied byA&D-specic business segment, where possible.

Source: Company lings and press releases, DTTLs GlobalManuacturing Industry group analysis, 2011. See methodology sectionor urther inormation and denitions o nancial metrics.

37 Oshkosh, 2011 10-K, 16 November 2011.


9/36


Figure 4: Top 20 companies in revenue growth in 2011

Top 20 companies in revenue growth (2011)

Triumph Group 124.4%

Kratos Deense & Security Solutions 77.0%

Microsemi 61.3%

Transdigm Group 45.7%

Babcock International 45.4%

Allegheny Technologies* 44.1%

Ducommun 42.2%

AAR 34.9%

OHB Technology AG 30.6%

Zodiac SA 28.0%

B/E Aerospace 26.0%

Meggitt 25.2%

Chemring 24.8%

HEICO Corporation 24.0%

Latecoere 23.9%

ThyssenKrupp Marine Systems* 23.3%

RTI International 22.7%

Titanium Metals 21.9%

Precision Castparts* 19.4%

Hexcel 18.6%* Partial company results based on A&D activity, identied byA&D-specic business segment, where possible.


Operating earnings: The Industrys reported operating

earnings decreased by 3.1 percent to US$56.1 billion in

2011 rom US$57.9 billion, as combined non-recurring A&D

related company charges increased 111.9 percent to US$4.8

billion rom US$2.3 billion in 2010. Within this study, 64percent o the companies reported positive year over year

(YoY) operating earnings growth; however, charges rom a

small set o companies in 2011, magnied by Finmeccanicas

US$2.1 billion in non-recurring A&D related charges,

impacted overall Industry protability38. Overall core Industry

operating earnings increased by 1.2 percent to US$60.9

billion in 2011 rom US$60.1 billion in 2010.

38 Finmeccanica, Consolidated nancial statements, http://www.nmeccanica.com/EN/Common/les/Corporate/Bilanci_Presentazioni/Bilanci_e_Presentazioni_2012/Bilanci_2011_nal/BILANCIO_CONSOLIDATO_2011_ENG.pd (accessed 24 April 2012).

The same group o companies which accounted or 66

percent o 2010 non-recurring A&D related company

charges (i.e. Raytheon, Finmeccanica, Lockheed Martin,

United Technologies, BAE Systems, and QinetiQ) continued

to represent 62 percent o write-os in 2011. Four

additional companies contributed 24 percent to the total

US$4.8 billion in non-recurring A&D related company

charges, or US$1.2 billion, in 2011(i.e. URS Federal Services,

Hawker Beechcrat, Huntington Ingalls, and Thales).In Figure 5, Boeing ranks as the top company by operating

earnings with a 17.6 percent increase to US$5.8 billion in

2011, beneting rom higher sales and lower research and

development (R&D) spending at BCA39. Although second in

absolute operating earnings perormance, Lockheed Martins

operating earnings decreased 1.7 percent to US$4.0 billion as

higher non-cash pension adjustments oset earnings increases

in all business segments40. Similarly, General Dynamics

operating earnings ell 3.0 percent to US$3.8 billion, due to

higher R&D expenses and selling expenses associated with

increased order activity in the aerospace segment41. In Figure

6, Thales generated the highest operating earnings growth

a 491.5 percent jump to US$945 million rom US$241.4

million in 2010 primarily due to the absence o US$1.0

billion in charges related to program supply contracts, which

diluted Thaless 2010 operating earnings42.

Forty o the 110 companies in the study registered declines

in reported operating earnings in 2011. As mentioned

previously, 2011 Industry operating earnings decreased

due to signicant company losses rom non-recurring

A&D-specic write-os and deense contract losses at

Finmeccanica, Oshkosh Deense, and L-3 Communications,

among others. With the highest operating earnings decline

in 2011, Finmeccanica registered an operating loss o

US$3.3 billion, a 293.7 percent decrease rom 2010 dueto one-time charges and business restructuring o its

Aeronautics and Deence Electronics businesses43.

39 Boeing, 2011 10-K, 9 February 2012.40 Lockheed Martin, 2011 10-K, 23 February 2012.41 General Dynamics, 2011 10-K, 7 February 2012.42 Thales, Registration document, http://www.google.co.in/url?sa=t&rct=j&q=thales%202011%20registration%20document&source=web&cd=1&ved=0CE8QFjAA&url=http%3A%2F%2Fcms.thalesgroup.com%2FWorkarea%2FDownloadAsset.aspx%3Fid%3D6442451499%26LangType%3D2057&ei=IxzHT4e7DdHorQeKzNziDg&usg=AFQjCNEBVNBlTvp4GOJSal9RXnmM4ieRw (accessed 24 April 2012).43 Finmeccanica, Full year press release, http://www.nmeccanica.it/EN/Common/les/Corporate/Comunicati_stampa/2012/Marzo_2012/ComFin_Bilancio_2011_27_03_2012_ING.pd (accessed 24 April 2012).


10/36

10

Figure 5: Top 20 companies in operating earnings

perormance in 2011

Top 20 companies in operating prot perormance

(US$ millions) (2011)

Boeing $5,844



GE Aviation* $3,512

United Technologies* $3,402


Raytheon $2,857

BAE Systems $2,535


Rolls-Royce $1,903

EADS $1,787


Goodrich $1,336

Saran $1,163

Harris $970

Thales $945

Precision Castparts* $863

Rockwell Collins $846

Textron $772

Oshkosh Deense* $543



Figure 6: Top 20 companies in operating earnings

growth in 2011

Top 20 companies in operating prot growth (2011)

Thales 491.5%

QinetiQ 316.2%

SAAB 201.6%

Allegheny Technologies* 161.7%

Korea Aerospace Industries# 140.0%

Textron 116.9%

JAMCO Corporation 115.8%



Diehl Deence and Aerosystems* # 71.6%

Zodiac SA 58.8%

Senior Aerospace* 49.2%

Samsung Techwin Engine & Turbo

Machinery and Deense Machinery*

48.6%

AAR 47.9%

Hexcel 47.9%

Mitsubishi Heavy Industries Aerospace* 46.9%ThyssenKrupp Marine Systems* 46.9%


B/E Aerospace 35.4%

Transdigm Group 34.2%# Based on 2010 data as 2011 nancials were unavailable until thecut-o date o 17 May 2012.




11/36


Operating margin: Reported operating margin or the

Industry in 2011 decreased 46 bps to 8.2 percent rom

8.7 percent in 2010. The Industrys core operating margin

declined by 9 bps to 8.9 percent compared to 9.0 percent

in 2010. As discussed above, the reported operating

margin decline was predominately related to the increase

in non-recurring A&D related charges, which or many

A&D companies oset margin benets stemming rom

higher sales volume, premium pricing, and operationaleciencies.

Although acquisition-related expenses drove Transdigm

Groups operating margin down by 348 bps to 40.4

percent in 2011 (see Figure 7), the company retained

the highest operating margin in 201144. Additionally,

companies with the second and third highest operating

margins in 2011 both posted declines in growth. FLIR

Government Systems operating margin decreased 703

bps to 28.7 percent, as higher operating expenses and

amortization o intangible assets oset benets rom

the ICx Technologies acquisition45. Precision Castparts

operating margin ell 191 bps YoY to 24.2 percent in 2011,

due to higher costs and selling, general and administrative

(SG&A) expenses, and higher sales o low-margin products

in 201146. In Figure 8, SAAB reported the highest operating

margin growth at 853 bps to 12.5 percent in 2011, as

operating earnings tripled to US$453.9 million, due to

the capital gains rom the sale o companies such as C3

Technologies and Grintek Ewation in 201147.

While only ve o the 110 companies registered negative

operating margins in 2011, exactly hal o the companies

operating margins declined YoY. For the second year in a row,

Hawker Beechcrat recorded the Industrys lowest operating

margin percentage, alling 1,359 bps to -19.8 percent rom -6.2

percent in 2010. Hawkers operating margin deterioration wasprimarily due to asset impairment charges o US$292.6 million

compared to US$25.6 million in 2010. A majority o 2011

charges, US$226.6 million, stemmed rom lower jet product

sales volumes and downward pricing pressure due to the

depressed business and general aviation market. Additionally,

the company reported a US$66 million impairment charge in

44 Transdigm Group, 2011 10-K, 18 November 2011.45 FLIR, 2011 10-K, 29 February 2012.46 Precision Castparts, 2011 10-K, 31 May 2012.47 SAAB, Annual report, http://www.saabgroup.com/Global/Documents%20and%20Images/About%20Saab/Investor%20relations/Financial%20reports/SAAB_AR_ENG_nal_120313.pd (accessed 24 April 2012).

the Trainer/Attack Aircrat segment related to decreased cash

fows in anticipation o decreased sales48.

Figure 7: Top 20 companies in operating margin

perormance in 2011

Top 20 companies in operating margin perormance

(2011)


FLIR Government Systems* 28.7%

Precision Castparts* 24.2%

Wesco Aircrat 22.7%

Crane Aerospace & Electronics* 21.5%

Amphenol* 19.1%

GE Aviation* 18.6%


Meggitt 18.0%

Honeywell Aerospace* 17.6%

Rockwell Collins 17.6%

B/E Aerospace 17.1%


Goodrich 16.5%Harris 16.4%

CAE 15.9%

MacDonald, Dettwiler and Associates 15.4%

Woodward Governor Aerospace* 15.4%

Eaton Aerospace* 14.8%

Kaman Aerospace* 14.7%* Partial company results based on A&D activity, identied byA&D-specic business segment, where possible.


48 Hawker Beechcrat, 201110-K, 13 April 2012.


12/36

12

Figure 8: Top 20 companies in operating margin

growth in 2011

Top 20 companies in operating margin growth (bps)

(2011)

SAAB 853

Thales 653

Korea Aerospace Industries# 491

QinetiQ 477

KBR* 455Allegheny Technologies* 374

Textron 346

Senior Aerospace* 331



303

Hexcel 273

Titanium Metals 261

Zodiac SA 261

Crane Aerospace & Electronics* 256

Northrop Grumman 236

JAMCO Corporation 231

ThyssenKrupp Marine Systems* 229

Goodrich 221Diehl Deence and Aerosystems* # 201

Cobham 201

RTI International 198

# Based on 2010 data as 2011 nancials were unavailable until thecut-o date o 17 May 2012.



Return on invested capital (ROIC)49: In 2011, the

Industrys reported ROIC was 16.2 percent, a slight

15 bps increase compared to 2010, while core ROIC

increased 71 bps to 17.2 percent in 2011. Boeing largely

drove the overall Industrys revenue-weighted 2011 ROIC

perormance, as was the case in 2010. This Industry leader

by total revenue registered ROIC o 40.2 percent up rom

34.3 percent in 2010, a 596 bps improvement. This ROIC

expansion resulted rom a net income rom continuing

operations increase o US$700 million to over US$4 billion

and decline in net debt o US$3.7 billion to US$5.6 billion

49 Industry ROIC is based on a revenue weighting o individualcompany ROIC perormances with larger companies having largeimpact on Industry ROIC

in 201150. Although EADS ROIC improved 261 bps to

8.6 percent in 2011 due to a US$647.7 million increase

in net income rom continuing operations, the company

continued to underperorm the Industry average ROIC51.

In Figure 9, GenCorp generated the highest Industry

ROIC at 64.0 percent in 2011. The company recorded a

2,364 bps improvement in 2011 as compared to 2010,

partly owing to a reduction in debt and a shareholder

equity decit which infated its ROIC calculation52. Navistarachieved a 45.7 percent ROICa 3,257 bps increase rom

a 13.1 percent ROIC in 2010largely due to a US$1.5

billion increase in net income rom continuing operations53.

Rounding out top three, Lockheed Martins ROIC improved

882 bps to 42.5 percent in 2011 due to improvement in

net income partly as a result o lower income taxes. The

company also repurchased 31.8 million common shares in

2011, reducing its equity base54.

In total, seven o the 110 companies in the study recorded

negative reported ROIC in 2011. Hawker Beechcrat

reported the lowest ROIC in the study at -37.8 percent in

2011, largely due to a US$327.9 decrease in net incomerom continuing operations to -US$632.8 million and

increased net debt to US$2.2 billion55.

50 Boeing, 2011 10-K, 9 February 2012.51 EADS, Financial statements, http://www.eads.com/dms/eads/int/en/investor-relations/documents/2012/events-reports/AGM-2012/Financial-Statements-2011-Complete-EN/Financial%20Statements%202011.pd(accessed 24 April 2012).52 GenCorp, 2011 10-K, 7 February 2012.53 Navistar, 2011 10-K, 20 December 2011.54 Lockheed Martin, 2011 10-K, 23 February 2012.55 Hawker Beechcrat, 2011 10-K, 13 April 2012.


13/36


Figure 9: Top 20 companies in ROIC perormance

in 2011

Top 20 companies in ROIC perormance (2011)*

GenCorp 64.0%

Navistar 45.7%

Lockheed Martin 42.5%

Diehl # 41.5%

Boeing 40.2%

Rockwell Collins 32.2%Bombardier 29.4%

Fluor Government Group 28.8%

Kongsberg Gruppen Deence & Protech Systems 27.1%

MacDonald, Dettwiler and Associates 26.0%

Cubic 25.8%

Singapore Technologies Engineering Ltd. 21.9%

KBR 21.8%

OHB Technology AG 21.2%

Ultra Electronics 21.2%

SKF 20.7%

MTU Aero Engines 20.5%

United Technologies 18.6%

Rolls-Royce 18.6%GKN 18.3%

# Based on 2010 data as 2011 nancials were unavailable until thecut-o date o 17 May 2012.

* ROIC is refective o the entire company as companies report it at thecompany level and not at the segmental level.


Free cash fow (FCF): The Industrys FCF decreased 13.3

percent to US$47.1 billion in 2011, as a slowdown in

government deense spending and companies redeploying

cash towards acquisitions and non-operating areas, such as

higher pension contributions, more than exceeded revenue

and cash fow growth rom commercial aerospace, as

described earlier.

The top 10 companies in this category contributed 54.6

percent o the total Industry FCF, up rom 52.8 percento FCF in 2010. In Figure 10, specically, three companies

with the highest FCF levels accounted or 25.1 percent o

total Industry FCF: United Technologies (US$5.6 billion),

Lockheed Martin (US$3.4 billion), and General Dynamics

(US$2.8 billion). United Technologies FCF increased

US$566 million to US$5.6 billion due to increased sales

and a US$750 million reduction in contributions to its

global pensions56. In 2011, Lockheed Martin and General

Dynamics replaced EADS and Volvo among the top three

companies. Despite a decrease in Lockheed Martins

net income, the companys FCF increased 15.4 percent

to US$3.4 billion rom US$3.0 billion in 2010, due to a

61.7 percent decline in postretirement contributions as

well as improvement in cash provided by working capital

stemming rom better accounts payables management57.

General Dynamics FCF increased 6.3 percent to US$2.8

billion rom US$2.6 billion in 2010, partly related to a

US$600 million increase in customer advances and deposits

in 2011 related to long-term production programs or the

Spanish Ministry o Deence58.

Fiteen o the 110 companies covered in the study

recorded negative FCF in 2011. Bombardier posted FCF* o

-US$1.2 billion, as the companys net capital expenditures

o US$1.5 billion surpassed cash fows rom operations59.

56 United Technologies, 2011 10-K, 9 February 2012.57 Lockheed Martin, 2011 10-K, 23 February 2012.58 General Dynamic, 2011 10-K, 17 February 2012.59 Bombardier, Annual report, http://www.google.co.in/url?sa=t&rct=j&q=bombardier%202011%20annual%20report&source=web&cd=1&ved=0CF0QFjAA&url=http%3A%2F%2Fwww.bombardier.com%2Fles%2Fen%2Fsupporting_docs%2FBI-Bombardier_Annual_Report_FY2010-11.pd&ei=3FbHT8XQF-meiA7srjoDg&usg=AFQjCNE5kTTcnQXOC3oQ0WHh1cNmijv3g&cad=rja (accessed 24 April 2012).


14/36

14

Figure 10: Top 20 companies in FCF perormance (US$

millions) in 2011

Top 20 companies in FCF perormance (US$ millions)

(2011)*

United Technologies $5,607



Mitsubishi Heavy Industries Aerospace $2,487

Boeing $2,404Honeywell $2,041


Raytheon $1,848

Volvo $1,756

Rolls-Royce $1,484

EADS $1,334


Fuji $1,019

Parker Hannin $992

Precision Castparts $918

Goodrich $864

Saran $741

SAIC $707Eaton $680

Textron $645

FCF is refective o the entire company, as it is impractical to allocatecash fows to a companys A&D and non-A&D segments.

*Bombardier posted the second lowest FCF ater ThyssenKrupp.However, ThyssenKrupp is not d iscussed since A&D accounts or just3.4 percent o its total company revenue and it is impractical to allocatecash fows to a companys A&D segment as stated.


Free cash margin (FCM): In 2011, 28 percent o the

companies in the study recorded FCM above 8 percent,while 12 percent posted FCM in excess o 10 percent.

Industry FCM decreased 114 bps to 4.9 percent in 2011

rom 6.1 percent in 2010, largely due to the decline in FCM

o European-based A&D companies.

Although Transdigm Group posted one o the highest

2011 FCM across the Industry, its FCM declined 217 bps

and 85 bps, respectively. In Figure 11, despite the decline,

Transdigm Group moved into the top position at 20.1

percent FCM in 2011 as its FCF increased 31.5 percent

to US$242.6 million driven by increase in sales and net

income rom various accretive acquisitions completed in

2011 and 201060. Cobham rounded out the top three at

15.5 percent FCM, a 404 bps jump rom 11.5 percent

in 2010, as FCF increased 31.7 percent in 2011 driven

by higher operating earnings, lower working capital and

capital expenditures in 201161.

Fiteen o the 110 companies covered in this study

recorded negative FCM in 2011. T itanium Metals posted

the lowest FCM in the study at -9.2 percent, which

refected the impact o a 198.3 percent decrease in 2011FCF largely due to working capital changes and increased

capital expenditures62.

60 Transdigm Group, 2011 10-K,18 November 2011.61 Cobham, Annual report, http://www.google.co.in/url?sa=t&rct=j&q=cobham%202011%20annual%20report&source=web&cd=5&ved=0CGkQFjAE&url=http%3A%2F%2Fwww.cobhaminvestors.com%2Fpd%2FAnnual_Report_and_Accounts_2011.pd&ei=VjHT8qjMoSaiAu_bjIDg&usg=AFQjCNFMmOCHqua0U5-Sjtua7AQ22eanPw (accessed 24 April 2012).62 Titanium Metals, 2011 10-K, 29 February 2012.


15/36


Figure 11: Top 20 companies in FCM perormance

in 2011

Top 20 companies in FCM perormance (2011)*


Meggitt 19.6%

Cobham 15.5%


Precision Castparts 14.8%

Ultra Electronics 13.7%Microsemi 13.6%

FLIR Systems 13.1%

Amphenol 12.0%

Wesco Aircrat 11.4%

Rockwell Collins 10.8%

Goodrich 10.7%

Dassault Aviation 10.4%

Zodiac SA 9.8%

QinetiQ 9.7%

Cubic 9.6%

B/E Aerospace 9.6%

United Technologies 9.6%

Teledyne Tech 9.2%CAE 9.0%

FCM is refective o the entire company, as it is impractical to allocatecash fows to a companys A&D and non-A&D segments.



Book-to-bill (BTB): The Industrys BTB ratio is a key

indicator o uture revenue. In 2011, the Industrys BTB

ratio increased to 1.32x rom 1.12x in 2010, or 17.4

percent, and continued an upward trend which began

in 2009 when BTB was 0.89x. Total backlog or theIndustry rose 10.4 percent to US$2.2 trillion in 2011,

as commercial aircrat demand outpaced a slowdown

in deense sales order commitments. The combination

o 2011 Industry sales growth o 2.3 percent and a BTB

ratio well above 1.0x suggests that Industry revenue will

likely improve in 2012, primarily driven by sales orders in

the commercial aircrat segment.

In Figure 12, EADS attained the top BTB position in the

study, posting a 25.4 percent increase to 2.88x, up rom

2.30x in 2010, due to large additions in incremental

commercial aircrat backlogs63. Boeing continued a

two-year improvement trend with a 39 percent increase in

BTB to 1.50x in 2011, up rom 1.08x in 201064. Because

EADS and Boeing represent the top two companies in

terms o revenue, their BTB perormance disproportionately

impacts the Industrys overall revenue-weighted BTBincrease. Excluding EADS and Boeing, the global Industrys

BTB ratio increased 10.0 percent in 2011 to 1.07x, well

below 1.32x with those companies included, but above the

Industrys revenue replacement benchmark o 1x, largely

driven by sales bookings by suppliers to the commercial

aerospace segment.

Ranking second in BTB, Babcock International posted a

10.8 percent increase to 2.45x, up rom 2.21x in 2010,

mostly due to a combination o rebids, contract extensions,

and new contracts65. Saran was ranked third with 2.08x

BTB in 2011, up 69.8 percent rom 1.23x, due to a

US$16.4 billion increase in 2011 backlog compared to

201066.

A number o companies that recorded lower backlogs

relative to 2010 oset the Industrys strong 2011 BTB

perormance. Twenty-nine o the 110 companies included

in the study reported BTB ratios under 1.0x. URS Federal

Sector reported the lowest BTB ratio perormance in the

study at 0.41x in 2011. The companys backlog ell by

US$2.7 billion to US$8.5 billion in 2011, rom US$11.3

billion the previous year, due to the delay o various

company programs67.

63 EADS, Financial statements, http://www.eads.com/dms/eads/int/en/investor-relations/documents/2012/events-reports/AGM-2012/Financial-Statements-2011-Complete-EN/Financial%20Statements%202011.pd(accessed 24 April 2012).64 Boeing, 2011 10-K, 9 February 2012.65 Babcock International, Annual report, Trusted to deliver, http://www.google.co.in/url?sa=t&rct=j&q=babcock%20international%202011%20annual%20report&source=web&cd=1&ved=0CFoQFjAA&url=http%3A%2F%2Fwww.babcock.co.uk%2Fmedia%2F63725%2Fannual_report_2011.pd&ei=51vHT5aNMM-UiQvtbDUDg&usg=AFQjCNFz_96Tt9k50vHA_SrDEZqbQDqg (accessed 24 April 2012).66 Saran, Annual report, Meeting tomorrows challenges throughinnovation, http://www.saran-group.com/IMG/pd/SAFRAN_RA_2011_GB_-3.pd (accessed 24 April 2012).67 URS, 2011 10-K, 27 February 2012.


16/36

16

Figure 12: Top 20 companies in BTB perormance

in 2011

Top 20 companies in BTB perormance (2011)

EADS 2.88

Babcock International 2.45

Saran 2.08

GE Aviation* 2.03

Triumph Group 1.85

Spirit Aerosystems 1.72Kratos Deense & Security Solutions 1.59

Orbital Sciences 1.53

Ducommun 1.53

Boeing 1.50

Thales 1.41

Goodrich 1.38

MTU Aero Engines 1.29

Serco Deence, Science, Nuclear* 1.28

Cubic 1.27

Rolls-Royce 1.27

RTI International 1.24

Transdigm Group 1.22

Harris 1.21AAR 1.21



Industry employment: Total Industry employment

increased by 2.3 percent to 2,103,924, an increase o

46,519 in 2011. O the 110 companies in the study, 68

percent added headcount in 2011, a sign o business

cycle growth, principally driven by increased production in

commercial aerospace.

Higher orders and deliveries at OEMs and suppliers drove

the increase in 2011 total employee headcount. In Figure

13, companies that added employees include EADS

(+11,424) and Boeing (+11,200) which, combined,

achieved the highest production level in commercial

aircrat history at 1,011 deliveries and over 2,200 new

orders in 201168 69 70 71. EADS Industry-leading increase in

active workorce stemmed rom both business growth and

various acquisitions including Vector Aerospace (2,419

employees), PFW Aerospace (2,155 employees), Vizada

(719 employees), ND Satcom (301 employees), and Satair

(377 employees)72.

A 13.6 percent revenue jump in Boeings Commercial

Airplanes division likely accounted or most o the

companys 11,200 employee gain73. Roundingout the top three in total number o employee

additions, Babcock Internationals employee base

jumped by 10,951 employees in 2011 (65.8 percent

YoY) to 27,588 employees through its VT Group

acquisition and the beneits o increased outsourcing

opportunities74. In Figure 14, Triumph Group showed

the highest workorce percentage gain in the study,

slightly more than doubling (+101.9 percent) its

number o employees, attributed to the Vought

68 EADS, 2010 and 2011 nancial statements, http://www.eads.com/dms/eads/int/en/investor-relations/documents/2012/events-reports/AGM-2012/Financial-Statements-2011-Complete-EN/

Financial%20Statements%202011.pd,; http://www.google.co.in/url?sa=t&rct=j&q=eads%202010%20nancial%20statements&source=web&cd=1&ved=0CGQQFjAA&url=http%3A%2F%2Fwww.eads.com%2Fdms%2Feads%2Fint%2Fen%2Finvestor-relations%2Fdocuments%2F2011%2FEvents-Reports%2FAGM2011%2FFinancial-Statements-2010%2FEADS%25202010%2520FS_EV.pd&ei=HmvIT_eFBJCJrAeoppC2Dg&usg=AFQjCNHxzJtPuJ7Hx9HtE-gYpzdYLgQy_g (accessed 24 April 2012).69 Boeing, 2010 and 201110-Ks, 9 February 2011 and 9 February2012.70 Airbus, Summary results, 1989-2011, http://www.airbus.com/presscentre/corporate-inormation/key-documents, (accessed 14February 2012).71 Boeing, Recent annual orders, http://active.boeing.com/commercial/orders/index.cm?content=displaystandardreport.cm&RequestTimeout=500&optReportType=AnnOrd&pageid=m15521, (accessed 14 February2012); Boeing, Deliveries, http://active.boeing.com/commercial/orders/index.cm?content=timeperiodselection.cm&pageid=m15523 (accessed

14 February 2012).72 EADS, Annual general meeting release, http://www.google.co.in/url?sa=t&rct=j&q=inormation%20notice%20annual%20general%20meeting%20eads&source=web&cd=3&ved=0CFIQFjAC&url=http%3A%2F%2Fwww.eads.com%2Fdms%2Feads%2Fint%2Fen%2Finvestor-relations%2Fdocuments%2F2012%2Fevents-reports%2FAGM-2012%2FINFO_EVF_WEB_VERSION_120412.pd&ei=bITIT_W-LcnLrQeSgq2wDg&usg=AFQjCNH9MODxTviYtQRLtaX5CQl3Wcq8HQ&cad=rja(accessed 25 May 2012).73 Boeing, 2011 10-K, 9 February 2012.74 Babcock International, Annual report, http://www.google.co.in/url?sa=t&rct=j&q=babcock%20international%202011%20annual%20report%20&source=web&cd=1&ved=0CFkQFjAA&url=http%3A%2F%2Fwww.babcock.co.uk%2Fmedia%2F63725%2Fannual_report_2011.pd&ei=kYXIT8PoK4iu8QT_7uGTDw&usg=AFQjCNFz_96Tt9k50vHA_SrDEZqbQDqg (accessed 24 April 2012).


17/36


acquisition, which accounted or most o the

employment gain75.

However, some deense-related companies conducted

workorce reduction in anticipation o deense program

cuts. Most notably, Lockheed Martin reduced total

headcount by 9,000 (6.8 percent YoY decrease) to 123,000

employees rom 132,000 in 2010 citing workorce and

cost reduction initiatives to better align the organization

and cost structure76. This action ollowed the companys2010 workorce reduction o 8,000 employees (5.7 percent

YoY decrease)77.

Figure 13: Top 20 companies in employee additions

in 2011

Top 20 companies in employee additions (2011)*

EADS 11,424

Boeing 11,200

Babcock International 10,951

Delta Tucker 6,700

Triumph Group 6,106

Saran 5,549

General Dynamics 5,100Thales 4,591

Esterline 3,138

Zodiac SA 2,622

Goodrich 2,400

Meggitt 2,169

Ducommun 1,726

Rolls-Royce 1,500

Transdigm Group 1,400

Spirit Aerosystems 1,202

Harris 1,100

Kratos Deense & Security Solutions 1,100

B/E Aerospace 1,050

Chemring 788Ranking o addition in employee levels refects companies that derive atleast 60% o their revenue rom A&D activity.



75 Triumph Group, 2010 and 2011 10-Ks, 29 May 2011 and 29 May20176 Lockheed Martin, 2011 10-K, 23 February 2012.77 Lockheed Martin, 2010 10-K, 23 February 2011.

Figure 14: Top 20 companies in employment additions

growth in 2011

Top 20 companies in employee additions growth

(2011)*


Ducommun 95.1%

Babcock International 65.8%


OHB Technology AG 41.1%Kratos Deense & Security Solutions 37.9%

Esterline 35.0%

Meggitt 30.2%

Delta Tucker 30.0%

Chemring 22.5%

Microsemi 20.0%

B/E Aerospace 15.8%

Zodiac SA 15.5%


Latecoere 14.0%


Hexcel 11.5%

Saran 10.2%Spirit Aerosystems 9.5%

EADS 9.4%Ranking o addition in employee levels refects companies that derive atleast 60% o their revenue rom A&D activity.



Employee productivity78: Reported operating earnings

per employee ell 5.2 percent in 2011 to US$26,668,

as aggregate Industry operating earnings decreased by

3.1 percent, while total Industry employment increased.However, the Industrys core operating earnings per

employee ell by only 1.0 percent YoY in 2011 to

US$28,945 per employee, refecting the deteriorating

impact o non-recurring A&D related company charges on

the Industrys protability. The adjustment o non-recurring

charges improves the YoY change in core operating

eciency versus that o reported operating eciency;

78 Operating earnings per employee is a more accurate measure o acompanys eciency compared to revenue per employee, which canskew the results and lead to challenging interpretations o operatingeciency.


18/36

18

however, despite this adjustment, the change continues to

be negative as elimination o charges alone is not enough

to oset the increased Industry headcount in general.

O the top 15 companies by employee productivity, only

one company GE Aviation generated revenue

greater than US$10.0 billion79. The majority o the top 20

perormers in this category are companies with revenue o

less than US$5.0 billion.

In Figure 15, Wesco Aircrat maintained the highest

reported operating earnings per employee o US$159,379.

Wescos high rating stems rom the companys ocus on

inventory and supply chain eciencies80. Also ocused

on operational eciency, FLIR Government Systems and

Transdigm Group led in this category with, operating

earnings per employee o US$143,809 and US$128,193,

respectively81. Both companies also achieved top two

nishes in 2009 and 2010.

Five o the 110 companies in the study reported operating

losses per employee in 2011. Hawker Beechcrat recorded

the highest operating loss per employee in 2011 at

US$65,108, due to higher impairment charges and SG&Aexpenses82.

79 GE, 2011 10-K, 24 February 2012.80 Wesco Aircrat, 2011 10-K, 5 December 2011.81 FLIT Government Systems, 2011 10-K, 29 February 2012; Transdigm,2011 10-K, 18 November 2011.82 Hawker Beechcrat, 2011 10-K, 13 April 2012.

Figure 15: Top 20 companies in operating earnings per

employee perormance in 2011

Top 20 companies in operating earnings per

employee perormance (2011)

Wesco Aircrat $159,379

FLIR Government Systems* $143,809

Transdigm Group $128,193

GE Aviation* $91,132

Precision Castparts* $82,084Oshkosh Deense* $72,022

Kongsberg Gruppen Deence & Protech

Systems*

$69,978

Titanium Metals $63,491

Ball Aerospace* $58,375

Harris $57,408



$56,029

B/E Aerospace $55,584

HEICO Corporation $55,372

ThyssenKrupp Marine Systems* $55,182

Avio S.p.A. $54,245

Crane Aerospace & Electronics* $52,009MacDonald, Dettwiler and Associates $51,566

MTU Aero Engines $49,110


Goodrich $47,707

*Partial company results based on A&D activity, identied byA&D-specic business segment, where possible.



19/36


Equity markets: In Figure 16, U.S. equity market perormance was fat to sluggish in 2011, as the S&P 500 index had

zero growth and the DJ A&D index grew only 3.2 percent ater three consecutive years o underperorming the broader

market. Following a strong rst hal o 2011 when the DJ A&D index outperormed the broader S&P 500 by 696 basis

points, the U.S. equity markets turned negative as the U.S. sovereign debt downgrade in August 2011, coupled with the

sluggish economic recovery, ueled investor concern over the potential or a double-dip recession. The DJ A&D index

pulled back in the second hal o 2011 and underperormed the S&P 500 by 304 basis points, as expectations o U.S.

deense budget cuts weighed on the outlook or deense company stocks.

Figure 16: U.S. equity market comparisons to U.S. A&D Industry perormance

2011 2010 2009 2008 2007-11 2007-10 1H 2011 2H 2011DJ A&D Index 3.2% 10.6% 21.6% -38.7% -14.8% -17.5% 12.0% -7.8%

S&P 500 Index 0.0% 12.8% 23.5% -38.5% -14.4% -14.4% 5.0% -4.8%

Basis point dierence 322 -221 -182 -17 -49 -315 696 -304

Source: Yahoo! Finance, accessed in February 2012. Figure includes historical prices o the respective indexes over the identied time periods.

In Figure 17, the European equity markets perormance mirrored that o the U.S. equity markets, with weakness in the

STOXX Europe TMI A&D index and STOXX Europe 600 index in 2011 compared to 2010. The STOXX Europe TMI A&D

index outperormed the STOXX Europe 600 index or the second consecutive year by 1,213 basis points in 2011 and

656 basis points in 2010. However, the STOXX Europe TMI A&Ds perormance decreased by 0.8 percent in 2011 rom

15.2 percent in 2010. Similarly, the STOXX Europe 600s perormance ell by 11.3 percent in 2011 rom 8.6 percent in

2010, due to the European debt crisis and sovereign rating downgrades o several Euro zone countries.

Figure 17: European equity market comparisons to European A&D Industry perormance2011 2010 2009 2008 2007-11 2007-10 1H 2011 2H 2011

STOXX Europe TMI A&D 0.8% 15.2% 24.8% -43.2% -17.7% -18.3% 3.4% -2.5%

STOXX Europe 600 -11.3% 8.6% 28.0% -45.6% -32.9% -24.4% -1.1% -10.4%

Basis point dierence 1,213 656 -316 239 1,525 603 446 786

Source: Bloomberg L.P., accessed in February 2012. Figure includes historical prices o the respective indexes over the identied time periods.


20/36

20

U.S. versus European companies

Global regional divergence in the 2011 perormance

o A&D companies is indicative o dierent incentives,

management philosophies, and work orce practices in the

U.S. and Europe. Other than book-to-bill and employment

growth, U.S. companies outperormed European peers

across all o the nancial perormance categories.

Generally, this was consistent when comparing U.S. A&D

rms with European peers as outlined in the2009 and2010 Global Aerospace & Defense Industry performance

wrap-up reports83.

As mentioned earlier, the ollowing analysis o U.S.

compared to European companies uses the constant

conversion approach to eliminate the eect o any oreign

currency fuctuations rom year to year.

A&D companies headquartered in the U.S. accounted or

60.2 percent, or US$410.2 billion, o the global Industrys

US$681 billion 2011 revenue. European companies

accounted or 34 percent, or US$228.3 billion, o the

2011 Industry revenue. Companies rom other countries

including Japan, Israel, Canada, Brazil, Singapore, andSouth Korea accounted or the remainder o the revenue

reported in the study.

Revenue: U.S. companies revenue increased 3.3 percent,

while European companies revenue grew 0.8 percent in

2011. The A&D commercial aircrat segment drove growth

both in Europe and the U.S., while deense companies

recorded lower revenue compared to their commercial

counterparts.

As discussed above, Boeing led all U.S. companies in total

revenue and some o that is attributable to the growth

in the commercial aircrat business, while aerostructures

company Triumph Groups revenue increased the astest at124.4 percent driven by a US$1.6 billion increase in revenue

to US$2.9 billion mainly due to the Vought acquisition in

201084 85. Another signicant perormer was GE Aviation,

which saw revenue growth o 7.0 percent, or US$1.2 billion,

to US$18.9 billion on higher volume and prices primarily

driven by increased services and equipment sales86. Northrop

83 Deloitte Development LLC, 2010 Global Aerospace & DeenseIndustry Perormance Wrap-up, 7 July 2011; Deloitte Development LLC,2009 Global Aerospace & Deense Industry Perormance Wrap-up, 11May 2010.84 Boeing, 2011 10-K, 9 February 2012.85 Triumph Group, 2011 10-K, 29 May 2012.86 GE, 2011 10-K, 24 February 2012.

Grummans revenue decreased 6.2 percent, adjusted YoY or

its divestitures, mostly due to lower sales volume on space

and manned aircrat programs in its Aerospace Systems

segment and lower sales volume in Land and Sel Protection

Systems in the Electronic Systems segment87.

EADS, also discussed above, contributed 30.0 percent o

total European Industry revenue in 2011 due to increased

aircrat production and orders88. In addition to strong

revenue growth at Babcock International, as highlightedearlier, Sarans revenue increased 5.7 percent, driven

by higher OEM volumes and improved atermarket

trends in its Aerospace and Security business89. Although

68.0 percent o European A&D companies generated

incremental revenue growth in 2011, cumulative revenue

at BAE Systems, Finmeccanica, and Dassault Aviation

decreased US$8.3 billion in 2011, muting the regions

growth. Coupled with the declines o Finmeccanica and

BAE Systems mentioned above, Dassault Aviations revenue

decreased 21.1 percent due to a reduction in new aircrat

deliveries to 63 rom 95 in 201090.

Operating earnings/Operating margin: U.S. companiesreported operating earnings perormance increased by 2.9

percent, and reported operating margin remained fat at

10.5 percent. Yet, this increase was oset as U.S. companies

recorded one-time A&D related company charges o US$1.9

billion in 2011 versus US$1.1 billion in 2010. Excluding

one-time A&D related company charges, the U.S. Industrys

core operating earnings grew by 4.6 percent and core

operating margin expanded by 14 bps in 2011.

In addition to Boeing and Lockheed Martin recording the

highest operating earnings as discussed earlier, Northrop

Grummans operating earnings increased by 15.9 percent or

US$449 million to US$3.3 billion in 2011, as the company

87 Northrop Grumman, 2011 10-K, 8 February 2012.88 EADS, Fourth quarter and ull year press release, http://www.google.co.in/url?sa=t&rct=j&q=eads%202011%20press%20release&source=web&cd=1&ved=0CFwQFjAA&url=http%3A%2F%2Fwww.eads.com%2Fdms%2FPress-DB%2FEADS%2FFinancial_Communication%2F2012%2FMarch%2FIncreasing-Growth-Momentum--EADS-Reports-Full-Year-Results-2011%2FPDF-APC-2012%2FEADS-FY-2011-Results---en%2FEADS%2520FY%25202011%2520Results%2520-%2520en.pd&ei=6RvHT_THKIrprAp9W8Dg&usg=AFQjCNGGXgtTssyR97TNhQ6gA9gDFaFMMg (24 April 2012).89 Saran, Registration document, http://www.saran-group.com/IMG/pd/SAFRAN_RA_2011_GB_-3.pd (24 April 2012).90 Dassault Aviation, Annual report, http://www.dassault-aviation.com/leadmin/user_upload/redacteur/nance/publications_2012/VA_2011.pd (accessed 24 April 2012).


21/36


benetted rom higher prots across each segment as well

as a net pension adjustment o US$400 million91.

The European companies recorded a more pronounced drop

in reported operating earnings and operating margin than

their U.S. counterparts in 2011. Collectively, the reported

operating earnings o the European companies decreased

21.6 percent and the reported operating margin contracted

by 133 bps to 4.7 percent in 2011. European companies

as a whole recorded non-recurring A&D related companycharges o US$3.0 billion in 2011 versus US$1.1 billion in

2010 primarily associated with Finmeccanicas 2011 US$2.1

billion charge discussed above. Excluding one-time charges,

the European Industrys core operating earnings decreased

by 7.1 percent and core operating margin contracted

51 bps in 2011. Higher sales in Airbus Commercial and

Eurocopter drove strong operating earnings improvement

at EADS92. Other companies such as SAAB recorded

improved operating margin partly due to one-time gains in

201193. Thales operating earnings benetted rom strong

improvement across all Deense & Security divisions as well

as the absence o charges discussed earlier94.

Return on invested capital (ROIC): U.S. companies

reported ROIC improved 82 basis points to 20.7 percent

in 2011. As mentioned earlier, Boeing, with a weighted

average contribution o 17.0 percent to the total U.S.

group, achieved the highest ROIC95. Lockheed Martin also

posted signicant ROIC growth o 882 bps to 42.5 percent

in 2011, up rom 33.7 percent in 2010.

In contrast, European companies ROIC ell 127 bps to 8.7

percent in 2011. Although the region underperormed

the overall A&D ROIC average o 16.2 percent, EADS

European ROIC leader on a weighted revenue basis

improved by 261 bps to 8.6 percent in 201196. Other top

91 Northrop Grumman, 2011 10-K, 8 February 2012.92 EADS, Financial statements, http://www.eads.com/dms/eads/int/en/investor-relations/documents/2012/events-reports/AGM-2012/Financial-Statements-2011-Complete-EN/Financial%20Statements%202011.pd(accessed 24 April 2012).93 SAAB, Annual report, http://www.saabgroup.com/Global/Documents%20and%20Images/About%20Saab/Investor%20relations/Financial%20reports/SAAB_AR_ENG_nal_120313.pd (accessed 24 April 2012).94 Thales, Financial statements, http://cms.thalesgroup.com/Workarea/DownloadAsset.aspx?id=6442451499&LangType=2057 (24 April 2012).95 The Boeing Company, 201110-K, 9 February 2012.96 EADS, Financial statements, http://www.eads.com/dms/eads/int/en/investor-relations/documents/2012/events-reports/AGM-2012/Financial-Statements-2011-Complete-EN/Financial%20Statements%202011.pd(accessed 24 April 2012).

European ROIC companies included BAE Systems at 17.9

percent and Rolls-Royce at 18.6 percent both above the

Industry average. Only two European companies in the

study ThyssenKrupp and Finmeccanica recorded

negative ROIC in 2011 due to net losses97 98.

Free cash fow (FCF)/Free cash margin (FCM): U.S.

companies outperormed their European counterparts in

terms o FCF and FCM, despite a slight decline in the U.S.

groups FCF in 2011. The U.S. companies FCF o US$34.1billion (0.7 percent decline YoY) was a stark contrast to

the European groups FCF o US$9.8 billion (43.4 percent

decline YoY), with similar results or FCM at 6.2 percent (5

bps decline YoY) and 3.5 percent (270 bps decline YoY) or

the U.S. Industry and the European Industry, respectively.

Book-to-bill (BTB): Boeings ongoing BTB improvement,

up 39 percent to 1.50x, helped to drive the 2011 U.S.

BTB to 1.10x in 2011. Excluding Boeing, the U.S. group

posted 2011 BTB o 1.01x, lower than overall U.S. BTB and

minimally above the benchmark o the 1.00x threshold or

uture revenue replacement.

The European Industry BTB ratio o 1.75x (24.1 percentgrowth YoY) outperormed the U.S. Industry in 2011. The

2011 European perormance was largely derived rom

EADS very signicant BTB o 2.88x driven by historic order

levels99. Excluding EADS, the European group BTB was

1.20x, 31 percent below the overall group BTB in 2011.

Employment productivity: Overall Industry employment

increased 2.3 percent in 2011 as compared to 2010. U.S.

companies registered a modest increase in the level o

employment o 0.9 percent to 1,295,533 in 2011, while

the European companies recorded an increase o 4.6

percent to 669,984 (+29,437) in 2011. Employment in

regions other than U.S. and Europe grew by 3.9 percent to138,408 in 2011.

97 ThyssenKrupp, Annual report, http://www.thyssenkrupp.com/documents/investor/Finanzberichte/eng/ThyssenKrupp_2010_2011_AR.pd (accessed 24 April 2012).98 Finmeccanica, Financial statements, http://www.nmeccanica.com/EN/Common/les/Corporate/Bilanci_Presentazioni/Bilanci_e_Presentazioni_2012/Bilanci_2011_nal/BILANCIO_CONSOLIDATO_2011_ENG.pd (accessed 24 April 2012).99 EADS, Results presentation, http://www.google.co.in/url?sa=t&rct=j&q=eads%202011%20results%20presentation%20&source=web&cd=3&ved=0CE8QFjAC&url=http%3A%2F%2Fwww.eads.com%2Fdms%2Feads%2Fint%2Fen%2Fpress%2Fdocuments%2FAPC%2FEADS_FY2011-Annual-Results.pd&ei=BIrIT_mEBojlrAej-uycDg&usg=AFQjCNGIzZNuVVX9JwRW-gXhRLW762E8og&cad=rja (accessed 16 April 2012).


22/36

22

U.S. companies reported operating earnings per employee continued to outpace European counterparts. O the U.S.

companies, 60.0 percent achieved positive operating earnings per employee growth in 2011 YoY compared to 53.0

percent o European companies. Reported prot per employee decreased by 25.0 percent to US$15,926 in Europe or

2011, compared to a 1.9 percent increase or the U.S. companies to US$33,264. Core operating earnings per employee

or U.S. companies increased 3.7 percent to US$34,721, while European companies ell 11.2 percent to US$20,362.

Commercial versus deense segment

Although the global A&D Industry revenue in total grew by 2.3 percent in 2011, all o that growth and more was

attributable to increased production levels o large commercial aircrat. Demand or production is being driven by

lightweight aircrat requiring less maintenance and more uel-ecient jet engines that reduce the uel costs or airlines.Also, sales o new aircrat are being driven by increasing travel demand, especially in geographies such as China, India,

Brazil, and the Middle East, where more people can aord to travel or business and leisure.

On the other hand, global deense revenues decreased in 2011, primarily due to aordability, competing domestic

priorities, weak economies in the western world, and the drawdown o orces in Iraq and Aghanistan. The U.S. is the

largest deense marketplace globally, accounting or a major portion o deense spending, and is undergoing a cyclical

downturn, starting with an announced US$487 billion deense budget cut over the next 10 years, ollowed by potentially

another US$500 billion sequestration driven deense budget cut100.

Employee productivity as measured by operating earnings per employee, although down or the entire global Industry,

were improved or commercial aerospace and decreased or the deense segment.

In reviewing the top 20 o global A&D companies representing 70 percent o the total Industry, we estimate that the

commercial aerospace segment grew revenues 10.1 percent, while the deense segment revenues decreased by 3.3

percent101. In addition, we estimate that commercial aerospace segment operating earnings grew 14.1 percent, while

deense segment operating earnings decreased 9.2 percent. Commercial aerospace segment employee growth was 9.2

percent while deense segment employee growth was 4.0 percent. Finally, operating earnings per employee growth was

4.5 percent, and -5.4 percent or the commercial aerospace and deense segments respectively.

Figure 18, compares the growth perormance o both the commercial aerospace and the deense segments in 2011

compared to 2010.

100 NBC News, Panetta: Military cuts to hit all 50 states, 26 January 2012, http://usnews.msnbc.msn.com/_news/2012/01/26/10244240-panetta-military-cuts-to-hit-all-50-states?lite.101 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.

Figure 18: Top 20 companies commercial aerospace versus deense revenue, operating earnings, and employee productivity changes or 2011

Commercial aerospace Deense

2011 2010Change

(2011 versus 2010)2011 2010

Change

(2011 versus 2010)

Revenue (US$ billion)* $174.8 $158.8 10.1% $279.6 $289.1 -3.3%

Operating earnings (US$ billion) $14.4 $12.6 14.1% $24.9 $27.5 -9.2%A&D revenue/employee (US$) $402,529 $399,174 0.8% $337,795 $335,373 0.7%

A&D operating prot/employee (US$) $33,154 $31,731 4.5% $30,126 $31,858 -5.4%

Number o A&D employees 434,302 397,859 9.2% 827,725 862,161 -4.0%*Extrapolation o the commercial aerospace versus deense perormance o the Top 20 A&D companies.

Source: DTTLs Global Manuacturing Industry group analysis, 2011. See methodology section or urther inormation and denitions o nancial metrics.


23/36


Subsector perormance

OEM and supplier companies

The 2011 OEM subsector revenue reported in this years

study increased marginally by 0.1 percent to US$335.0

billion, up rom US$334.5 billion in 2010, well below the

overall Industry revenue growth o 2.3 percent (see Figures

23 and 22). Boeing and EADS contributed signicant

revenue growth compared to the Industry, while others,

particularly those companies in the deense sector,

weighed more heavily on the OEM group average. Driven

by strength in commercial aircrat, the Tier one, two, and

three supplier subsectors each reported positive revenue

growth, which exceeded that o the overall Industry. In

Figure 19, tier three suppliers revenue grew by 29.1

percent compared to Tier two at 11.1 percent and Tier

one at 5.1 percent. Aerostructures revenue grew by 9.8

percentalso aster than the Industry average o 2.3

percentin 2011. Meanwhile, the deense electronics

subsector underperormed Industry revenue growth,

contracting 2.4 percent in 2011, due to tightened deense

spending, particularly in the United States (see Figure 19).

The OEM subsector reported operating earnings increased

2.5 percent to US$25.5 billion in 2011 rom US$24.9

billion in 2010, outperorming the 3.1 percent decrease

in average Industry earnings (see Figures 23 and 21), due

to strength in commercial aircrat which more than oset

weakness in deense. In Figure 20, OEM core operating

earnings increased by 4.2 percent in 2011, above the

Industry core average o 1.2 percent. Deense electronics

companies were hardest hit among the Industry subsectors

with a 2011 reported operating earnings decrease o

67.5 percent (see Figure 19), largely the result o losses

at Finmeccanica due to deense program cuts and

non-recurring write-os as mentioned earlier102. Deense

electronics 2011 core operating earnings strengthened

somewhat, but remained in negative territory at -40.4percent in 2011 (see Figure 20), suggesting the impact o a

slowdown in deense spending on company protability.

The Industry average or reported operating margin declined

5.3 percent, or 46 bps to 8.2 percent, skewed by negative

perormance in deense electronics, which ell by 66.7 percent,

or 648 bps, in 2011 (see Figure 19). The Industry core operating

margin declined 9 bps to 8.9 percent in 2011, with deense

102 Finmeccanica, Financial statements, http://www.nmeccanica.com/EN/Common/les/Corporate/Bilanci_Presentazioni/Bilanci_e_Presentazioni_2012/Bilanci_2011_nal/BILANCIO_CONSOLIDATO_2011_ENG.pd (accessed 24 April 2012).

electronics decreasing 413 bps to 6.5 percent rom 2010

(see gure 20). Tier two recorded the highest reported and

core operating margin among the Industry subsectors at 14.2

percent (see Figure 21) largely due to strong operating margin

at Transdigm Group, FLIR Government Systems, and Precision

Castparts in 2011.

In Figure 19, reported ROIC perormance or the OEM

subsector rose 11.9 percent, or 236 bps (239 bps core),

in 2011, higher than reported Industry average growth o1.0 percent, or 15 bps (71 bps core). Tier three suppliers

and aerostructures also showed improved reported

ROIC growth o 15.3 percent or 119 bps (151 bps core)

and 32.7 percent or 190 bps (233 bps percent core),

respectively, oset by an 82.9 percent decrease in deense

electronics reported ROIC growth or a 923 bps decline

(509 bps core decline) in 2011 (see Figure 19).

OEM total FCF decreased 31.6 percent to US$12.2 billion

in 2011 rom US$17.8 billion in 2010 as compared to an

Industry FCF decline o 13.3 percent (see Figures 19, 21

and 23). The OEM group recorded a 27.3 percent decline

in FCM growth compared to an 18.7 percent decline or

the overall Industry (see Figure 19). Lower OEM FCFs werelargely attributed to EADS, BAE Systems, and Bombardier.

Mitsubishi Heavy Industries and Kawasaki Heavy Industries

were large contributors to the Aerostructures subsector

posting the top FCF and FCM among the Industry

subsectors with growth o 270.1 percent and 360.8

percent, respectively (see Figure 19).

The OEM average BTB in 2011 was 1.46x versus 1.32x

or the Industry. In Figure 19, the BTB ratio or OEMs

increased by 24.1 percent in 2011, as compared to the

average Industry growth rate o 17.4 percent. Boeings

and EADS impact on the BTB ratio or the subsector was

signicant given the relatively high-revenue weighting and

strong individual BTB perormance improvement o thesetwo companies. Aerostructures achieved 43.4 percent BTB

growth in 2011(see Figure 19), highest percentage increase

among the subsectors due to increased bookings at

Triumph Group, Ducommun, and Spirit Aerosystems. The

deense electronics subsector BTB ratio decreased by 6.7

percent to 0.97x in 2011(see Figure 19), due to lower BTB

ratios at Finmeccanica and L-3 Communications.


24/36

24

Services ocused companies

Services companies revenue grew by 3.7 percent to US$62.7 billion (see Figures 19 and 21), exceeding total Industry growth o 2.3 percent, driven

by the contribution o larger services companies such as Babcock International, AAR, and CACI. In particular, government servi