Defying fiscal disruption: Defense revenues on Top 100 continue to climb, despite supply chain turmoil

WASHINGTON — For Raytheon Technologies, it wasn’t one specific material that surged in price, causing headaches for the defense contractor.

Instead, it has been virtually all supplies the company uses to make key defense products, including the F-35 Joint Strike Fighter’s engine.

“It’s components, it’s raw materials,” Greg Hayes, Raytheon’s chief executive, told analysts in October. “Think about aluminum prices going up, [think] of steel, all of the basic raw materials, lead times pushing out. And it’s just harder to get material in the door on time.”

See the Top 100 list here

Aerospace and defense firms faced a thorny mess in 2021, as pandemic-related supply chain snarls and worker shortages — plus fears of a U.S. government budget downturn — entangled the sector. Among the biggest American firms, sales growth last year was mostly flat, reflecting a multibillion-dollar dip in U.S. defense outlays at the end of the Trump administration, following several big increases.

The same day Raytheon, the world’s second-largest defense contractor, reported a more challenging supply chain, Lockheed Martin, the largest, disclosed that supply chain delays had struck its F-35 fighter and other programs, and lowered revenue expectations for 2021 and beyond.

Even so, the defense revenues of the top 100 defense companies climbed for a sixth consecutive year, a sign of the global industry’s continued resilience in the face of the COVID-19 pandemic and related economic shocks that stretch back to 2019.

Fiscal 2021 defense revenue recorded for the Defense News Top 100 list totaled $595 billion, up nearly 8% from last year’s list. (The increase does come with an asterisk because of an anomaly with the Emirati firm Edge Group’s revenue calculations last year, but its exclusion would only nudge the increase to 9%.)

The growth is partly driven by the 2021 list’s inclusion of Chinese defense firms for the third straight year, which account for just under 20% of the Top 100′s total defense revenues.

The top 10 firms on this year’s list represent roughly 52% of the total defense revenue; the top 25 firms account for 75% of total defense revenue for the year.

Geographically, 46 of the firms on the list are based in the U.S., which accounted for 53% of total defense revenue. Thirty-one firms are based in Europe (including Turkey but excluding Israel and Russia), and there are nine non-Chinese firms from the Asia-Pacific region on the list, three Israeli firms and one each from Brazil, Canada, Russia and Saudi Arabia.

The Stockholm International Peace Research Institute’s broader assessment of global defense spending for 2021 found that figure continued to grow, surpassing $2 trillion for the first time. The five largest spending nations in 2021 were the U.S., China, India, the U.K. and Russia, which together account for 62% of expenditures, according to its tally.

The labor shortages and supply chain challenges have continued in 2022, along with intensifying inflation. Earlier this year, the chief executive of Boeing, the third-largest defense company in the world, said the firm’s defense business was suffering after winning fixed-price programs and later facing dramatically increased costs.

“We took some risks not knowing that COVID would arise and not knowing that an inflationary environment would take hold like it has,” David Calhoun said in April. “And both of those things have impacted us fairly severely.”

US defense companies

The top 10 U.S. firms are Lockheed Martin ($64 billion), Raytheon Technologies ($42 billion), Boeing ($35 billion), Northrop Grumman ($31 billion), General Dynamics ($31 billion), L3Harris Technologies ($15 billion), HII ($9 billion), Leidos ($8 billion), Amentum ($6 billion) and Booz Allen Hamilton ($6 billion).

Lockheed, whose revenue represents nearly 11% of the total, topped the list for the 23rd year in a row.

The annual Defense News Top 100 list relies heavily on self-reporting from companies, many of which provide estimates rather than definitive data for their defense percentages. That means that while the list is the industry standard, the numbers come with some qualifiers.

The order of the top 10 U.S. firms was virtually unchanged from this year compared to last year. Given the White House’s unfriendliness toward defense mergers by the largest companies — as exemplified by the blocked Lockheed-Aerojet Rocketdyne merger last year — the list may be frozen for some time to come.

“If Lockheed can’t buy Aerojet, and you assume the primes can’t buy each other, and at least with this administration and their view of consolidation, this could be it,” said Roman Schweizer, a market analyst with research firm Cowen. “This could be the way they line up.”

U.S. military spending in 2021 amounted to $801 billion, down 1.4% from 2020, according to SIPRI. Defying market expectations, the defense budget under President Joe Biden’s administration rose. And driven by Russia’s invasion of Ukraine, defense spending is expected to rise in European countries and again in the United States.

“There may be another growth spurt coming after this. That doesn’t even include the Europeans, who are definitely going to see a big increase,” said Byron Callan of Capital Alpha Partners, a research firm. “Even if there’s a cease-fire in Ukraine, you’ve still got a Russia that’s implacably hostile to the West.”

Below the top tier, the revenue of firms on the list is diversified — with an average of about 56% of their revenue coming from defense, noted Steven Grundman, a former Pentagon industrial policy chief now with the Atlantic Council think tank.

The Raytheon-United Technologies Corp. merger in 2020, for example, tied together Raytheon, primarily a defense firm, with UTC, a company more focused on commercial aerospace.

Diversification reflects one response to market volatility, Grundman said.

“The conventional wisdom holds that most companies in defense are pure-play, without much diversification, but that’s not what these data show,” Grundman said. “Once you get beyond the top 10, most companies have exposure to commercial [markets], primarily commercial aero. In addition to helping to manage volatility, diversification also gives defense companies better access to advanced technologies.”

Defying the conventional wisdom that the defense industry is barbell shaped — a few large and small firms with very few midsized firms in between — roughly half of the firms on the list fall between $1 billion and $5 billion in revenue. They fall on a scale considered mid- or small-cap by Wall Street (a measure of the size of a firm based on the market value of its outstanding shares).

“It’s an indication of industry health that you have a nice mix of small, medium and large companies among the Top 100,” Grundman said.

Great power competitors

China again had seven firms on the list, all in the top quarter and with a combined $117 billion in defense revenue. That’s more than the combined defense revenue for firms from NATO countries (excluding the U.S.) — $110 billion — and far more than that of the other Asia-Pacific firms (excluding Russia) on the list, at $23 billion.

Whereas most Western defense firms on the list disclosed their defense revenue, Chinese firms did not. That data and analysis came from the London-based International Institute for Strategic Studies, which Defense News teamed with for the third consecutive year.

Russia, which historically accounts for 20% of global arms sales, this year had a sole participant: Tactical Missiles Corp., which reported a 36% increase in defense revenue from FY20 to FY21, from roughly $3 billion to about $4 billion.

No other Russian companies responded to requests for data, including Almaz-Antey, featured on the list for several prior years.

In 2021, Russia was building up its forces along the Ukrainian border and grew its military spending by nearly 3%, to about $66 billion, according to SIPRI. This was the third year of growth, and Russia’s military spending reached 4% of its gross domestic product in 2021.

The reaction from the West to Russia’s invasion of Ukraine in February won’t be reflected in 2021 data; neither will the fallout from retaliatory sanctions. But Daniel Gouré of the Lexington Institute expects the Russian market share to wane as its historic defense customers, like India, look elsewhere.

“The guys who have bought mostly Russian stuff are now shifting,” Gouré said, adding that beyond its economic isolation, there’s more competition from the U.S. and other global players.

“The Russians are going to find it tougher going forward,” he noted. “The West is going to be more of a competitor than it has been in the past because we may be willing to give out more stuff to keep the Chinese/Russians out [of markets], and then you’ve got more competition from middle-tier players like the Turks, the [South] Koreans.”

There are 31 European countries on the list (including Turkey but excluding Israel and Russia), whose defense revenues total about $120 billion, or 20% of the list’s total. BAE Systems ($26 billion), Leonardo ($14 billion) and Airbus ($11 billion) make up the top three.

Several European firms that weren’t on last year’s list — Polish Armaments Group, Ireland’s Eaton, Turkey’s Roketsan, Germany’s Diehl Group, Norway’s Nammo and Finland’s Patria — made it into the list’s bottom third.

France’s Dassault, whose revenues jumped 65%, primarily attributed the growth to its deliveries of Rafale aircraft, which increased from 13 in FY20 to 25 in FY21.

The evolving security environment in Europe this year is fueling increased demand for integrated missile defenses, early warning systems, air-to-air missiles, and intelligence, surveillance and reconnaissance platforms. As Lockheed executives noted on a recent earnings call, those investments will likely bear out over the long term.

Bill Greenwalt, a former deputy undersecretary of defense for industrial policy, now with the American Enterprise Institute, said the “interesting data shifts may be seen in the next couple of years as the impact of the war in Ukraine manifests itself in the [Top 100] data as sales are registered and new orders for replacement systems are executed.”

“I would expect those companies who specialize in munitions will see large gains in the coming years,” the think tanker added.

Ukraine’s Ukroboronprom comes in at 89th place, with about $755 million in defense revenue — a 16% rise from FY20 to FY21.

Mergers and absenteeism

Not all of the defense revenue increases on the list came from organic growth, as some firms climbed the list due to mergers and acquisitions.

• Shipbuilding titan HII (17th this year), which in 2022 changed its name from Huntington Ingalls Industries, includes its acquisition of Alion Science and Technology (74th last year).
• Amentum (21st this year) acquired PAE (80th last year).
• Peraton (25th this year) acquired defense IT firm Perspecta (39th last year) and — for $3.4 billion — Northrop’s integrated mission support and IT solutions business. It reported a defense revenue jump from $651 million to about $5 billion.
• KBR (32nd this year) bought Centauri in 2020 to expand its space and military intelligence business as well as tech consultancy Frazer-Nash. It reported $2 billion more in sales over the previous year, some it attributed to its support of U.S. operations to house Afghan evacuees.
• Vectrus (57th this year) acquired both Zenetex and HHB Systems.
• Teledyne (83rd this year) acquired FLIR Systems (88th last year).

State-owned Saudi Arabian Military Industries was a standout in terms of industry consolidation, reporting a revenue jump from roughly $20 million to $605 million, after its acquisition of the Advanced Electronics Co. The kingdom has been consolidating companies within SAMI to achieve a 50% technology transfer target, in line with the economic plan Saudi Vision 2030.

SAMI also attributes its growth to its weapons and missiles business, its emerging technologies division, as well as its joint ventures involving Saudi Aircraft Accessories and Components Co., Navantia and Thales.

The absence of several U.S. nontraditional defense firms on the list is partly a reflection of the state of Defense Department efforts to attract them through novel contracting methods, said Jerry McGinn, executive director of George Mason University’s Center for Government Contracting.

“The department is doing a lot of experiments, prototyping, [other transactional authority contracting]. But now we’re at the point of, ‘Does it scale?’” he said. “That’s how those companies start to get bigger. You’re starting to see it, but it’s not at this level yet.”

As the Pentagon invests in the Joint Worldwide Intelligence Communication System and the Defense Enterprise Office Solution, information technology giants Microsoft and Amazon Web Services, which haven’t participated in the Top 100, are notable for their absence.

Gouré and other industry observers said high-profile tech firms might opt not to participate because they are sensitive to employee dissent. A group of Microsoft employees in 2019 demanded the company abandon a U.S. Army contract that relates to Microsoft’s HoloLens augmented reality technology, and protests from a group of Google employees in 2018 prompted it to pull out of Project Maven, a U.S. Air Force artificial intelligence project.

According to Gouré, the absence of such firms from the list will only become more glaring as the Pentagon spends more on artificial intelligence, quantum computing, and the development of the Joint All-Domain Command and Control project, or JADC2. Such cyber-centric capabilities, likely to come from the commercial side, are the “new arsenal of democracy,” he said.

“You’re now moving into a world in which these companies are providing higher-end products; they’re now participating in more important IT activities,” Gouré said. “The cloud computing backbone of JADC2, which seems like it will be billions upon billions of dollars — there may not be a single integrator, but a couple of companies with billions each for them.”