Revenue for the top U.S. defense contractors dropped 2.6 percent last year as troops withdraw from the Middle East and spending continues to tighten, according to an analysis announced Monday by a major consulting and audit firm.
Defense sector revenues have declined for the third year in a row and will probably continue to fall, forcing a consolidation in an industry that has been shedding jobs and closing plants, according to the report compiled by Deloitte. Of the top 20 contractors, 17 showed revenue decreases, “an indication of how widespread the impact of budget reductions has been on the industry,” the firm said.
The report also showed a rise in profitability of almost 18 percent, although the report cautioned that much of the increase was due to the “absence of one-time charges” and actions taken in anticipation of the government spending cuts.
As U.S. defense spending has dropped, many large contractors have looked to foreign governments and the commercial sector to help offset the losses. A wave of mergers and acquisitions will probably continue because the defense market simply can’t support as many companies as it did just a few years ago.
Tom Captain, a Deloitte vice chairman, said that he expects several acquisition announcements in the next few months. He said that the companies that will continue to thrive are those investing in their own research and development, acquiring foreign contracts and finding commercial applications for technologies that had been developed for the defense and intelligence communities such as cyberprotection and unmanned aerial vehicles.
“You can’t cut your way to profitability,” Captain said. “The very capable defense companies are looking for ways to break the fall and resume growth.”
Lockheed Martin, the Pentagon’s biggest contractor, has moved aggressively into commercial markets. It recently acquired Industrial Defender, a Massachusetts company that helps protect electrical grids, oil and gas pipelines, and other critical infrastructure against cyberattacks.
The company, which reported last week that first-quarter sales fell by 3.6 percent while profits grew by 23 percent, is also expanding into the pharmaceutical and financial industries, company officials have said. And it’s planning the international debut of its F-35 fighter jets in England this summer in an attempt to attract more foreign buyers.
Northrop Grumman is also looking abroad. In an earning call last week, chief executive Wes Bush said that global orders made up 14 percent of Northrop Grumman’s year-end backlog in the first quarter and that he expects that percentage to grow.
Captain said that companies are also developing technology that could transform the way wars are fought. They are making advancements in unmanned aerial vehicles, robots that can carry equipment into battle and even lasers that “sizzle” instead of blowing things up and causing collateral damage, Captain said.
“You’re going to find more companies spending their own money to invent the next generation of technology,” he said.
Amrita Jayakumar contributed to this report.