Meggitt interim results 2014

Business focus: Civil approach could soften defence impact

British defence engineering companies hit by US spending cuts fight back, while South Korean giant looks to next generation.

The business impact of the US government's continuing squeeze on military spending is hitting three quite different British defence companies. All three have recently published their half-year financial results, and they have each warned that they face more turbulence in the second half of the year. Meggitt saw revenue fall 11 per cent to £719m in the first half, compared with the same period in 2013. Profits at the maker of aircraft parts such as braking and controls systems fell 20 per cent to £98m.

The company admitted that it now expected organic growth for the full year to be slower than foreseen – its second growth downgrade since November last year. With its military aerospace division accounting for a third of group revenue, and the US being its most important market, Meggitt is looking to its civil aviation and energy activities to buoy it up. These two sectors make up 48 per cent and 11 per cent of revenues respectively (with 9 per cent accounting for other engineering work). The expected growth in the production of large passenger jets will help bolster its revenues, the company said, adding that it is also increasing its market share in the provision of printed circuit heat exchangers and condition-monitoring equipment in the energy sector.

By contrast, Cobham, which relies on the US defence and security sector for over a third of its sales, is not cutting its forecast for full-year revenue. Cobham provides a range of aerospace and defence security services including avionics, radar and aircraft-to-aircraft refuelling. Its first-half profits fell 14 per cent to £117m, on the back of a 3 per cent fall in revenue to £834m. But the company said the impact of US cuts was being offset to some extent by a rise in sales for its commercial activities. Like Meggitt, Cobham is also being helped by the growth in civil aircraft production. The company said it remained on track to deliver mid-single digit organic revenue growth next year.

The smaller defence engineering specialist Ultra Electronics is also optimistic about its prospects for 2015, despite its defence activities also taking a hit in the US. The company provides a range of control and sonar systems for air and sea defence, and control and automation systems for airports, rail networks and power plants. Group profits in the first half fell 8.5 per cent to £53m, while revenues dropped 7 per cent to £341m, the company said. But it pointed to new opportunities that would result from a shift in governments' defence priorities away from land-air operations and towards maritime, air and special forces capabilities. "Tensions and conflict in Eastern Europe and the Middle East highlight the increasing demand for intelligence, surveillance and reconnaissance capabilities," the company added.

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