WASHINGTON — For the second straight year, overall defense revenues for the Top 100 defense companies in the world increased in 2017, a sign that the defense industry has weathered sequestration-related budget cuts and emerged on the other side.
Total 2017 defense revenues for the Top 100 companies came in at $375.4 billion, a 2.9 percent increase over the companies represented in the previous year’s list, according to numbers compiled by Defense News as part of the annual Top 100 list.
The top 25 companies accounted for a little more than 71 percent of total defense revenues in the year, and the top 10 firms accounted for 51.6 percent of total defense revenues in the year. While those percentages are both slightly lower than in 2016, it shows that the defense industry remains a top-heavy marketplace.
Geographically, 40 of the Top 100 firms are based in the U.S., which accounted for about 59 percent of total defense revenue. Both those numbers are down slightly from 2016.
Europe, including Turkey, has 31 companies featured, up one from 2016. Russia had six companies listed; Russian firm RTI, which ranked 86th in 2016, declined to participate in this year’s survey, citing dissatisfaction with American sanctions against Russian business interests.
The Asia-Pacific region has 16 companies, up by one from 2016, while Africa, Canada and South America once again were represented by a single firm each. And, again, Israel is the lone country in the Middle East to appear on the list, with four companies.
The annual Defense News Top 100 list relies on self-reporting from companies, many of whom provide estimates rather than definitive data for their defense percentages. Hence, while the list is the industry standard, the numbers come with some variance.
Seven of the top 10 companies increased their defense revenues from 2016, including a 10 percent jump for Lockheed Martin, the largest defense company in the world for the 19th straight year.
Overall, four companies on the list increased their defense revenues by $1 billion or more over the previous year — Lockheed (+$4.5 billion), Raytheon (+$1.1 billion), Northrop (+$1.5 billion) and Almaz-Antey (+$2.5 billion).
Lockheed took in a little less than $48 billion in defense revenue, accounting for 94 percent of its $51 billion total revenue for the year. The company accounted for 21 percent of all American defense revenue in 2017, and its defense revenue totaled more than the combined defense revenues of the bottom 50 companies on the list — signs that CEO Marillyn Hewson has positioned Lockheed to maintain a stranglehold on the industry.
That Lockheed is No. 1 isn’t shocking, said Byron Callan, an analyst with Capital Alpha Partners. But he points out that the margin between Lockheed and everyone else continues to expand. As recently as 2011, the difference between No. 1 and No. 2 on the list were less than $10 billion in revenue; this year, it is about $24 billion.
Raytheon took the No. 2 spot, the first time since 2012 that ranking is occupied by someone besides Boeing, thanks in part to a 5 percent increase in defense revenues from 2016. The Massachusetts-based company brought in $23.5 billion in defense revenues, 93 percent of its overall revenue totals.
Both companies should continue to grow for several years at least, said Roman Schweizer, an analyst with Cowen, thanks in part to their respective munitions businesses. The U.S. and allies are in the early stages of a major refresh of munitions, to both fill out stocks depleted by operations in Iraq, Afghanistan and Syria, and to develop weaponry to combat near-peer competitors.
He also noted that expensive missile defense outlays are expected to grow in the next few years, including a potential $15 billion deal with Saudi Arabia for the Terminal High Altitude Area Defense, which could boost both companies' bottom lines.
Lockheed and Raytheon are “outsized beneficiaries” of munitions spending, Schweizer said, adding that “you’ll have multiyear growth cycle in the munitions piece. And even some defense officials have said they expect strong munitions spending to go two or three more years.”
U.K. giant BAE Systems came in third, the seventh time in a row it has slotted into that position — but for the second year in a row, defense revenue declined, dropping 5 percent from $23.6 billion in 2016 to $22.4 billion in 2017.
Northrop Grumman jumped from fifth place on last year’s list to fourth on this year’s list, with a 7 percent increase in defense revenue, up to $21.7 billion.
Boeing slipped from the No. 2 spot to the No. 5 spot, with $20.5 billion in defense revenue representing just 22 percent of Boeing’s total $94 billion 2017 revenue. It’s a notable drop for Boeing, but a drop that comes with an important caveat.
In the last year, Boeing reorganized itself and moved both its commercial and defense sustainment offices into the Boeing Global Services business unit. As a result, Boeing no longer tracks the defense-related portion of the Global Services unit and could not report that funding as part of the Boeing Defense, Space and Security unit.
Still, reporting structure aside, Schweizer notes that 2017 was a bit of a down year for Boeing, with a number of programs slowing. However, that should reverse in the next Top 100 list, thanks to a number of big orders, including F-15 jets for Qatar, F-18 fighters for Kuwait and increased P-8 aircraft buys.
European giant Airbus held still at spot seven, but defense revenue dropped 9 percent ($1.13 billion) from 2016 to 2017.
Almaz-Antey represents the sole Russian firm to crack the top 10, coming in at eighth place after ranking 11th in last year’s list. The company claimed $9.1 billion in 2017 defense revenue, about a 30 percent increase from the $6.5 billion worth of 2016 defense revenue. However, Callan expressed some skepticism about that figure, given open-source reporting on overall Russian defense spending.
“If you look at all the other companies, is it really feasible they would be getting that high a percentage of the Russian budget? They’re selling stuff to India, China and internationally, but how feasible is it that they are that big a company?” Callan asked, before acknowledging: “It’s possible.”
While the $375.4 billion total for 2017 defense revenue represents a second year in a row of overall growth, it is still not enough to eclipse the 2014 defense revenue total of $385.6 billion, let alone the $401.1 billion total for 2012 defense revenue.
But there are reasons for optimism in the coming years, analysts said. Both Callan and Schweizer noted that the defense budgets for the Pentagon have been strong in both 2018 and 2019, data points not represented quite yet on this list.
“There is still a lot of money that needs to work its way through the system and convert into revenues. and that’s just on the U.S. side,” Schweizer said, adding that foreign spending continues to rise, specifically in Europe where NATO nations continue to increase defense spending year over year.
Daniel Gouré, a vice president with the Lexington Institute think tank, predicted flat to modest growth in defense budgets with Congress moving to ease Budget Control Act spending caps as it has in recent years.
“The military is working real hard to come up with alternative budgets, if they have to go back to budget caps. I don’t think that will happen,” Gouré said. “When you try to drop $150 billion out of the budget from 2019 to 2020, to meet the BCA, you’re out of your mind. It just will not happen.”
Still, there are a number of questions: Will there be a protracted period of deficits, or will the administration attain the economic growth it’s seeking? How will midterm election results change the politics of defense spending? How will global threats drive future budgets?
“I would count on the world driving us to continued defense spending,” Gouré said.
Mergers and drop-offs
Missing from this year’s list: services giant CSRA, ranked 39 on the 2017 list (which ranked 2016 defense revenue). The company was acquired by General Dynamics over the last calendar year, after the reporting period used for this list; however, CSRA still declined to submit information, as they are no longer an independent company. Expect General Dynamics to grow from its sixth-ranked, $19.5 billion defense revenue total in next year’s list as a result of the acquisition.
Northrop Grumman will also expand its portfolio in the next year thanks to its acquisition of Orbital ATK (No. 30 on this year’s list, with $3.3 billion in defense revenue), as well as United Technologies and its acquisition of Rockwell Collins (41 on this year’s list, with $2.28 billion in defense revenue).
Roughly, while the top 15 companies remain stable year in and year out, “some of the small guys are where some of the interesting, competitive changes and dynamics are playing out,” Callan said, adding that in particular “it’s a given that there’s going to be more consolidation” among services providers.
“I’m seeing partnerships where the service provider to the service provider is providing all the bundled services to the government. Some of these (larger) guys might decide it’s better to have someone inside, as part of us, working only with us,” Gouré said.
Across the board, the biggest risers and fallers came from Japan. Komatsu dropped 30 spots, Mitsubishi Heavy Industries dropped 22 and Fujitsu dropped 13. Kawasaki Heavy Industries went up 18 spots and NEC up 12.
However, some Japanese firms decline to directly report their numbers; instead, defense revenue numbers reflect awards made by the Japan Ministry of Defense for the fiscal year ending March 31, 2018. Hence, there is more year-over-year volatility among Japanese firms.
Other major shifts include Korea Aerospace Industries (dropped 25 spots); ManTech International, Ukroboronprom and Kongsberg (all down 10); and Ultra Electronics and Dassault (both up seven).
Chinese firms are not represented on the list, but would likely place five to 10 companies in the list if they were, predicted Callan.
Joe Gould contributed to this report.
Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.