[governance] Companies Profiting the Most From War

[Hindenburgo Pires]

*Companies Profiting the Most From War*
Posted on March 5, 2014 6:24 am EST
By Vince Calio and Alexander E.M. Hess
http://247wallst.com/special-report/2014/03/05/companies-profiting-the-most-from-war/print/


Global military spending was down in 2012 for the first time since 1998.
And for the second year in a row, arms sales from private industry to
governments were down as well.

Despite the decline in military spending, the business of war remains a
good one. The 100 largest arms producers and military services contractors
recorded $395 billion in arms sales in 2012. Lockheed Martin, the largest
arms seller, alone accounted for $36 billion in such sales during 2012.
Based on figures compiled by the Stockholm International Peace Research
Institute (SIPRI), 24/7 Wall St. examined the 10 companies profiting most
from war.

The withdrawal of U.S. troops from Iraq and Afghanistan is among the
biggest reasons for the drop in military spending, according to SIPRI.
Spending on these campaigns fell from $159 billion to $115 billion between
2011 and 2012.

Austerity also contributed to cuts in military spending. Budget control
measures were responsible for a $15 billion reduction in U.S. military
expenditures in 2012. Belt-tightening in Europe also had an impact on arms
sales. In 20 of the 37 countries in Western and Central Europe, military
spending declined by more than 10% between 2008 and 2012.

In an interview with 24/7 Wall St., Dr. Samuel Perlo-Freeman, director of
the SIPRI Programme on Military Expenditure and Arms Production, said that
while government military spending is waning in the United States and
Western Europe, many developing countries are increasing their
expenditures. Arms sellers in several countries, most notably Russia, are
benefiting from their nation’s military budget expansion, Perlo-Freeman
noted. While U.S. military expenses declined in 2012, Russia’s increased by
an estimated 16% that year.

Companies reacted differently to the sales downturn. L-3 Communications
spun off part of its business in 2012 to limit exposure to declining
government military spending. Other government contractors wrote off
significant losses in response to decreased military spending, including
General Dynamics, which took a $2 billion goodwill charge related to
declining opportunities in the defense sector.

Faced with possible tough times, some companies have engaged in corrupt
practices. Last year, the CEO of Italian aerospace and defense firm
Finmeccanica was charged by Italian prosecutors with fraud and corruption
related to the company’s sale of helicopters to the Indian government.
However, according to Perlo-Freeman, this is nothing new. “The arms
industry has always been associated with corruption both in international
arms transfers and sometimes in domestic procurement.”

Arms sales have remained concentrated among the same small number of
companies for more than a decade. The top 10 companies have largely
remained in place because industry consolidation in the 1990s made them
dominant players, even through fluctuations in government military
spending. “These companies tend to have their core competencies in getting
money out of governments,” Perlo-Freeman said.

To identify the 10 companies profiting most from war, 24/7 Wall St.
reviewed the 10 companies with the most arms sales based on SIPRI’s list of
the top 100 arms sellers in 2012. Arms sales, including advisory, planes,
vehicles and weapons, were defined by sales to military customers, as well
as contracts to government militaries. We also considered the company’s
2012 total sales and profits, and the total number of employees at the
company, as well as nation-level military spending, all provided by SIPRI.

These are the companies profiting the most from war.

*10. L-3 Communications*
*> Arm sales 2012:* $10.8 billion
*> Total sales 2012:* $13.1 billion
*> 2012 profit:* $782 million
*> 2012 employment:* 51,000

L-3 Communications Holdings Inc. (NYSE: LLL) moved down a notch in the
rankings from the previous year. The company’s 2012 arms sales totaled
$10.8 billion, down from $12.5 billion the year before. Still, arms sales
accounted for 82% of L-3′s total 2012 sales. The company has four main
business units: secure communications, electronics systems, platform and
logistical solutions, and national security solutions. In July 2012, L-3
spun off its government services business into a standalone company, called
Engility. With the spinoff, L-3 aimed to limit its exposure to cuts in
government spending on defense contractors.

*9. Finmeccanica*
*> Arm sales 2012:* $12.5 billion
*> Total sales 2012:* $22.1 billion
*> 2012 profit:* -$1.0 billion
*> 2012 employment:* 67,408

Ongoing corruption probes may have hurt Italian aerospace and defense giant
Finmeccanica, which posted $12.5 billion in arms sales in 2012, roughly $2
billion less than in 2011. Finmeccanica posted a net loss of $1 billion in
2012, mostly due to a write-down of the value of its U.S. defense
electronics unit, DRS Technologies. Following his February 2013 arrest in
connection with charges of bribery of Indian government officials regarding
a contract for 12 military helicopters, Finmeccanica’s CEO, Giuseppe Orsi,
resigned from the company. The bribery charges have also held up payment
from India for the helicopters, causing the highly indebted company to lose
an important source of cash.

*8. United Technologies*
*> Arm sales 2012:* $13.5 billion
*> Total sales 2012:* $62.2 billion
*> 2012 profit:* $5.2 billion
*> 2012 employment:* 218,300

United Technologies Corp.’s (NYSE: UTX) 2012 arms sales increased from the
year before, the only company in the top 10 ranking with a year-over-year
increase in its arms sales. The company recorded $13.5 billion in arms
sales in 2012, up from $11.6 billion in 2011. The company’s total profit
that year was $5.2 billion, third among all arms companies. Its Sikorsky
division, known for the Black Hawk and Seahawk military helicopters,
accounted for $4.5 billion in arms sales that year. Its Pratt & Whitney
division, which produces aircraft engines, accounted for $3.7 billion in
2012 arms sales. The company also sold parts of its Hamilton Sundstrand
subsidiary in July 2012 for $3.5 billion to a venture led by private equity
managers, The Carlyle Group and BC Partners. The sale helped United
Technologies fund its more-than $16 billion purchase of aircraft parts
maker Goodrich to expand further into the commercial aerospace sector.

*7. EADS*
*> Arm sales 2012:* $15.4 billion
*> Total sales 2012:* $72.6 billion
*> 2012 profit:* $1.6 billion
*> 2012 employment:* 140,000

The European Aeronautic Defence and Space Company tried to complete a $45
billion mega-merger with fellow arms company BAE in 2012. While European
leaders nixed the merger because of antitrust laws, the European Union
Institute for Security Studies noted in late 2012 that European austerity
may eventually prompt further industry consolidation in the future. EADS’
total arm sales were $15.4 billion in 2012, down by $1 billion versus the
prior year. Still, it was able to hold onto its seventh-place ranking among
arms dealers. Arms sales accounted for just 21% of its $72.6 billion in
total sales during 2012. To reflect the massive contribution of its Airbus
commercial aircraft business to company revenue, EADS changed its name to
Airbus Group in 2014.

*6. Northrop Grumman*
*> Arm sales 2012:* $19.4 billion
*> Total sales 2012:* $25.2 billion
*> 2012 profit:* $2.0 billion
*> 2012 employment:* 68,100

Virginia-based Northrop Grumman Corp. (NYSE: NOC) specializes in producing
unmanned systems, missile defense radars and critical incident response
systems. In February 2012, the U.S. Navy awarded the company a contract
worth as much as $638 million to provide Navy ships with a networked common
computing environment. In January of that year, the Navy also began using
Northrop’s high-altitude drone to monitor activity in Iran. Last year, the
company was awarded nearly $8.6 billion in such contracts, second-most of
any company in the nation. The company’s arms sales, which totaled more
than $19 billion in 2012, accounted for 77% of its total revenue that year.
The company’s 2012 profit was nearly $2 billion.

*5. General Dynamics*
*> Arm sales 2012:* $20.9 billion
*> Total sales 2012:* $31.5 billion
*> 2012 profit:* -$332 million
*> 2012 employment:* 92,200

Like many of its defense-sector competitors, Virginia-based General
Dynamics Corp. (NYSE: GD) felt the sting of the decreased U.S. military
spending. The company, which specializes in aircraft, land and
expeditionary combat vehicles, and shipbuilding, lost $332 million in 2012,
and its arms sales totaled $20.9 billion, down from $23.3 billion the year
before. The loss was due, in large part, to a $2 billion goodwill charge
related to declining business opportunities in the defense sector. In its
most recent year, the company reported a 16.4% drop in sales in its combat
systems group, for which the U.S. Army is major customer.

*4. Raytheon*
*> Arm sales 2012:* $22.5 billion
*> Total sales 2012:* $24.4 billion
*> 2012 profit:* $1.9 billion
*> 2012 employment:* 67,800

While Raytheon’s 2012 arm sales of $22.5 billion were slightly lower
compared to 2011, they remained high enough for the company to rank fourth
among arms companies. The company, which traces its history back to 1922,
assisted the United States in multiple wars, as well as the Apollo 11 moon
landing. Raytheon Co. (NYSE: RTN) provides services in a variety of fields,
from air and missile defense to radar and cybersecurity*.* In all, 92% of
the company’s sales came from arms sales in 2012. But while the U.S. has
cut defense spending in recent years, Raytheon has benefited from a surge
in exports to foreign countries, which has helped to offset federal
government belt-tightening.

*3. BAE Systems*
*> Arm sales 2012:* $26.9 billion
*> Total sales 2012:* $28.3 billion
*> 2012 profit:* $2.6 billion
*> 2012 employment:* 88,200

BAE Systems is the largest non-U.S. military contractor. It had $26.9
billion in arms sales in 2012, which represented some 95% of the company’s
total sales. However, the British company’s year-over-year arms sales
declined that year from $29.2 billion in 2011. Cuts by England’s Ministry
of Defence have taken a toll on the company. As the U.K.’s largest military
contractor, it received 13.7% of procurement funds spent in 2012 to 2013.
In May 2012, the company announced it would close its Armstrong plant —
which made tanks for the nation in World War I and had been in operation
since 1847 — and cut 330 jobs as a result. BAE’s failed $45 billion merger
with fellow defense contractor EADS in 2012 also hurt prospective sales of
England’s main fighter jet, the British Tornado, for which BAE makes the
parts.

*2. Boeing*
*> Arm sales 2012:* $27.6 billion
*> Total sales 2012:* $81.7 billion
*> 2012 profit:* $3.9 billion
*> 2012 employment:* 174,400

Although arms sales accounted for just 34% of Boeing’s revenue in 2012,
Boeing Co. (NYSE: BA) was still the world’s second largest military
contractor that year. In all, the company’s total revenue was nearly $82
billion in 2012. The company’s commercial airplane segment accounted for a
large portion of its sales, with $49.1 billion in revenue that year. Boeing
ended 2012 with $3.9 billion in profit and with more than 174,400
employees. Last year, Boeing and union workers in Washington state engaged
in heated negotiations, with Boeing threatening to move jobs away from the
state unless union workers agreed to concessions related to their pension
plan.

*1. Lockheed Martin*
*> Arm sales 2012:* $36 billion
*> Total sales 2012:* $47.2 billion
*> 2012 profit:* 2.7 billion
*> 2012 employment:* 120,000

In 2012, Lockheed Martin Corp. (NYSE: LMT) led the world in arms sales,
even as its arms sales declined slightly from $36.2 billion in 2011 to $36
billion in 2012. Such sales accounted for 95% of the Maryland company’s
total revenue. The company, which employed 120,000 workers as of 2012,
specializes in aerospace, global security and information technology
systems for the military. It is also known for the C-5 Galaxy Class
airplane — the largest air military transport plane in the world. Lockheed
Martin has been the largest recipient of government procurement contracts
and the top-ranked company on the Washington Technology Top 100 for 19
consecutive years. However, this has also left the company exposed to
changes in the federal budget. In October 2012, at the request of President
Obama, the company held off on firing thousands of workers that it
previously warned it would have to lay off due to military spending cuts.

Tags: The Boeing Company (NYSE:BA)
<http://247wallst.com/companies/ba/>, General
Dynamics (NYSE:GD) <http://247wallst.com/companies/gd/>, L-3 Communications
Holdings, I... (NYSE:LLL) <http://247wallst.com/companies/lll/>, Lockheed
Martin Corp (NYSE:LMT) <http://247wallst.com/companies/lmt/>, Northrop
Grumman Corp (NYSE:NOC) <http://247wallst.com/companies/noc/>, Raytheon
Company (NYSE:RTN) <http://247wallst.com/companies/rtn/>, United
Technologies Corp (NYSE:UTX) <http://247wallst.com/companies/utx/>
Posted in Special Report <http://247wallst.com/special-report/> | Comments
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