Aerospace and Defence Biannual Newsletter – June 2012

In this issue:

Editorial Overview | A&D 2011 Review | Top performing companies | Gaining Altitude with PwC | Mission control 2011

Editorial Overview

It is hard to believe that another six months have already passed by and that only a few weeks remain to the Farnborough International Airshow in July. We are certainly looking forward to the airshow and to seeing a large number of Quebec and Canadian aerospace companies there.

It is an important time for the Canadian Aerospace Industry to share their views on the future of the industry. The Aerospace Review, mandated by Government of Canada, is currently in progress and has many industry leaders participating in round table discussions, work groups and preparing submissions. We have joined the conversation to support the industry by bringing a global perspective on aerospace issues and trends to the Secretariat and Advisory Council.

During the C2 MTL conference on May 23rd, we hosted a workshop to explore "creative" answers to commercial questions. We assembled a group of industry members from SMEs, financial community, associations, services and government to brainstorm on the topic "Aerospace integrators – Are they the weakest link?". We collectively came up with some new ideas to an ongoing issue. Watch for more details as this industry interest group will be communicating more broadly. If you want to join in, please contact us for more information.

During 2011 the global A&D industry achieved record results in terms of revenues and profits. The commercial aerospace industry is soaring with record backlogs and no sign of a "bubble". Defence faces some challenges, but is well positioned to respond to these challenges so long as policy makers avoid sequestration in the U.S. We expect that 2012 should be another strong year for the industry and possibly another record year.

In summary, it seems to be a very busy time for the A&D industry with record backlogs and overall growth in the commercial industry. We look forward to seeing you at the Farnborough Airshow, and if we miss you, we would like to wish you a wonderful summer. We hope that you summer holidays with family and friends are enjoyable.

Regards,

Mario Longpré, CA, CPA
PwC | Partner, Canadian Aerospace & Defence Leader
T : +1 514 205 5065

Aerospace and defence industry delivers a second consecutive year of record results in terms of revenues and profits
The A&D industry delivered its best year ever in 2011 on the strength of a surging commercial aviation market that more than offset a soft defence performance. For 2011 the top 100 A&D companies reported $677 billion in revenue and $60.0 billion in operating profit, setting records. Revenue was higher by 5% compared with 2010, while operating profit was up 2% over 2010. Operating margin dropped 27 basis points to 8.86%. The mood in commercial aerospace is described by industry leaders as optimistic. Air traffic is strong and steady, driving the lucrative after­market business; the industry delivered a record number of large aircraft and the orders continue, driving record backlog — more than eight years — at current production rates.

Join Aviation Week and PwC for a complimentary webinar on how the industry’s diverging fortunes, a booming civil aviation sector and a defence sector that is feeling the pinch of budget cuts, have reshaped the ranking of 60 publicly traded aerospace and defence companies worldwide. Our participants look at highlights in this year’s ranking and discuss where the industry is heading based on findings in the annual TPC study.

Aviation Week editors and industry specialists from PwC will highlight:

• Which companies are emerging as leaders, who is lagging, and why.
• Whether the supply chain can keep up with surging orders for commercial jets.
• How budget cuts and uncertainty are affecting defense contractors and what strategies they should take in a leaner climate.
• Perils, volatility and risk across the value chain.
• What are the opportunities and investment trends.

PwC proudly launched a new series, Gaining Altitude with PwC. In this series of white papers we will share with clients insights that we gain from working with clients, customers and suppliers in the ever changing dynamics of the global value chain for aerospace and defence. Our insights will cover all aspects of the program lifecycle: program strategy; bid and proposal; design, engineering and planning; field sustainment; program delivery; IT effectiveness and cross phase processes.

Over the next year, new issues will be released. Below is the list of already issued white papers and those currently on the schedule.

• Issue 1: Supply chain and manufacturing: Focus on three "Vs" to improve supply chain management (launched February 2012)
• Issue 2: Supplier management: Can aircraft manufacturers prevent rate ramp-up problems (launched March 2012)
• Issue 3: Value chain maturity: Focus on commercial aviation spares forecasting best practices (launched April 2012)
• Issue 4: SAP program capture management (scheduled launch in May 2012)

The key themes from this year's Mission control are:

• Aerospace M&A pushes deal totals to record levels
  2011 was a record year for aerospace and defence transactions. The 341 deals and $43.7 billion of deal value announced during 2011 beat the previous highs: 332 deals in 2010 and the $42.0 billion of value in 2007. The $16 billion United Technologies acquisition of Goodrich Corporation was the primary value driver.
• Defence divestitures and private equity exits boost large deal volume
  Divestiture of slower-growth defence businesses and private equity exits dominate the list of largest deals. Two headline divestitures, the Northrop Grumman shipbuilding spin-off and the break-up of ITT, ranked among the top five deals this year. In addition, four of the top 10 deals were sales by private equity companies to strategic investors.
• Europe and the United States drive global activity as Asia takes a step back
  European acquirers played a much more significant role in the 2011 A&D deal market compared with 2010. The pace of market consolidation hastened within Europe and outbound deals also increased. The focus was firmly trans-Atlantic; all European outbound deals above the $50 million threshold in 2011 were for North American targets, boosting the number of cross-border deals for US targets.
• Deal volumes likely to grow in 2012
  With OEM backlogs contributing to higher overall sector growth prospects, aerospace M&A is likely to continue to lead the A&D deal market in 2012. The outlook for defence is somewhat less certain. Defence M&A will likely remain oriented toward large spin-offs of lower growth units and smaller acquisitions in growth areas, such as cyber security.

The Mission control Q1 2012 update is also now available at this link MCQ1-2012