As both the US and European allies continue to cut defense programs and spending, the mil/aero market’s slow growth continues.
Bishop & Associates tracks 11 companies in the military/aerospace (mil/aero) market sector. This market has shown anemic results over the last five quarters, as measured by these 11 companies’ revenues. In 2013, these companies grew 2.3% year over year. In 1Q14, the combined revenues of these companies contracted 2.7% year over year; in 2Q14 they contracted 0.3% over the prior year; and they grew 1.1% in 3Q14. In comparison to these companies, the cable assembly market for the worldwide mil/aero market sector contracted 3.1% in 2013 and grew 2.5% in 2014.
Bishop follows electronic interconnect sales trends in 13 markets. The combined annual revenue of all the market sectors was $4.24 trillion in 2013 and grew 0.8% over 2012. Of the 13 market sectors, mil/aero was the sixth fastest growing market sector in 2013 at 2.3%, with combined revenues of $321.4 billion. Profitability was $24.4 billion at 7.6% of sales.
Textron had the most growth for the first three quarters of 2014 at 13.8%. Third quarter sale were up 18.1% over 2013 at $3,430 million.
“Revenues at Textron Aviation, Industrial, and Bell were up during the quarter, primarily reflecting the success of our new product investment and acquisition strategies,” said Textron Chairman and CEO Scott C. Donnelly. “Operationally, we achieved significant margin improvement in the quarter at Textron Aviation, reflecting higher volumes and better performance. Bell also had improved performance, leading to an increase in quarterly margins compared to last year.”
United Technologies had the second largest increase in sales in the first three quarters of 2014 at 4.9% year over year to $48,104 million. 3Q14 revenues were up 4.6% year over year. United Technologies reported that all of the growth was driven organically.
Honeywell had the third best growth rate for the first three quarters at 4.8%. Year-to-date sales are $30,040 million.
Six of the 11 companies had contracting sales for the first nine months of 2014. Both the US and the European allies continue to cut defense programs and spending.
The following table shows the results for the 11 companies we track in the mil/aero market sector.
Military/Aerospace Market Sector – Sales and Net Income
As shown in the following chart, year-over-year sales results have been poor since 3Q13. Sequentially, third quarter 2014 sales were down 2.7% from the second quarter of 2014.
Trends in the Military/Aerospace Market
- Military spending by the United States and Europe has significantly slowed from prior years. With the Iraq and Afghanistan wars winding down, the West has significantly reduced its presence in the region, thus, military spending is down. The fight against ISIS, however, is somewhat reversing this trend.
- The United States has significantly cut military spending to meet mandatory budget cuts. The Budget Control Act of 2011 and prior cuts already underway reduced military spending by $80 billion per year. To meet these cuts, the US military has reduced active duty personnel and has curtailed many new military programs.
- Europe is also reducing military spending to meet fiscal budget constraints. These budget constraints are resulting in the termination of many military programs for several European countries and for NATO. The conflict in the Ukraine is not likely to reverse this.
- China’s spending is not usually visible. China is spending on its military in order to project more power in its region of the world. The connector and cable assembly spend on most of its programs, however, is not visible, and not in Bishop’s number, as the companies that manufacture the military connectors and assemblies are captive to the Chinese government with no public disclosure.
- Will the Japanese government increase its military spending? Japan has experienced increased military pressure from neighboring countries, particularly China and North Korea. For this reason, its government would like to increase spending. The question is, will it? Japan has the highest debt-to-GDP ratio of all Western economies, so money is tight. It does not seem that the government will have the political wherewithal, however, to significantly increase military spending.
- Replacement of munitions in the Middle East may results in more business for companies building that equipment.
Bishop & Associates estimates the worldwide market for mil/aero cable assemblies grew 2.5% in 2014 to $13.4 billion. At 7.2% year-over-year growth, China was the fastest-growing region in 2014 for this market sector.
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