As the financial crisis hit home, defense departments have also had to take a long hard look at expenditure. The impact of these decisions started to hit the defense industry in 2009, with revenues and associated profitability dropping for the first time in seven years. However, analysis from the Strategy Analytics Advanced Defense Systems (ADS) service report, Defense Industry Profitability Gains in 2010 shows that defense industry performance stabilized in 2010.

Strategy Analytics analysis of twenty companies shows revenues increased year-on-year by 1% in 2010 to reach over $458 billion, arresting a downward spiral though not enough to reverse the losses suffered in 2009. However, profitability improved considerably with year-on-year profits increasing as companies took steps to address the impact of defense budget constraints.

2009 marked the first time that defense industry revenues had dropped in around seven years. However, the industry did manage to stay in the black, even as year-on-year profits dropped by over 49%.

While revenues losses were not reversed in 2010, companies in general managed to arrest the downward spiral and more positively, profit margins returned to more traditional levels as year-on-year profits increased by 59%.

Challenges remain for the industry in 2011, compounded by political inaction. Nevertheless, while we don't expect anything spectacular in terms of growth, we believe the industry will retain an upwards growth trajectory this year.

The defense industry is looking with as positive a frame of mind as it can as 2011 unfolds and this appeared to be supported by a strong start to the year as evidenced by both M&A and contract activity (see the ADS report, Defense Electronics Industry Review: January 2011).

Merger & Acquisition activity in the sector maintained momentum as cash rich larger firms look to secure market share, key technologies or market entry. There were no less than a dozen defense-oriented mergers, acquisitions and partnerships in the past six weeks.

As well as a plethora of M&A activity, total contract orders also maintained momentum and January again saw contracts comfortably in excess of a billion dollars with strong demand for radar technologies as evidenced by contract awards to Raytheon, Lockheed Martin, Saab and Thales with airborne and naval platforms being the target markets. Electronic warfare activity was also strong with IED (improvised explosive device) jamming contracts going to ITT and Raytheon, while Cobham, Harris and Rockwell Collins featured amongst the recipients for communications-related contract awards.

There were also a number of notable announcements on the component front with UK-based Amplifier Technology introducing a number of GaN-based amplifer products targeting EW applications such as IED jamming. On the semiconductor front, Hittite launched a series of products while TriQuint announced a foundry agreement and separately, a contract with AFRL focused on GaN device development.

Looking ahead, DARPA has requested industry to find ways of combining DAC and high-power amplifier technology in a single device for electronic warfare, radar, and military communications systems. The emphasis appears to be focused on using the inherent integration capabilities offered by Si and SiGe technologies, but given the recent advances shown with BiHEMT process technologies, Strategy Analytics sees no reason why GaAs technologies could not be considered also.