Rankings of publicly traded aerospace and defense contractors are the result of a composite scoring of four equally weighted performance categories that place significant emphasis on operating excellence. Category weightings are based on results of two surveys conducted by Aviation Week with senior management of companies generating annual revenues greater than $1 billion.
The four categories are:
Return on Invested Capital (ROIC), measuring net profitability (NOPAT) to average capital investment. This is a widely used asset utilization metric for evaluating a company’s investment decisions. AW&ST’s computation rewards companies with superior top-line profitability (referred to as “operating profit”). Non-operating income and/or expense, discontinued operations, extraordinary and special items are not considered. Goodwill is included in the capital base.
Earnings Momentum, offering a string of metrics measuring year-over-year earnings momentum, earnings quality and revenue expansion that evaluate company decisions to adjust plant capacity, lower unit costs and/or increased sales at rates ahead of the accompanying rise in direct production costs.
Asset Management, presenting the composite result of a series of industry turn-rates that measure how efficiently a company employs its resources using comparisons of revenue to total assets, inventory, working capital and receivables.
Financial Health, representing the composite result of a string of metrics measuring a company’s financial strength, including an overall solvency assessment, liquidity available to fund current operating requirements and debt coverage.
Four groups were ranked by revenue this year: companies with revenues greater than $20 billion, between $5-$20 billion, between $1-$5 billion and $250 million-$1 billion.
Scoring Algorithms Assigned to Companies Based on Revenues
To accommodate differences in operating profiles, separate scoring algorithms were applied to companies falling into one of the four groups according to fiscal 2011 revenues.
Ratios Selected From Regression Procedure
The scoring algorithms used to rank this year’s Top-Performing Companies were last revised for FY2009 results. They were compiled from an initial sampling of test ratios assigned to the four performance categories. Test ratios were calculated for most companies surveyed in the study over the 12-year period of 1998-2009 and subjected to an extensive compilation that generated preliminary values for total score. Preliminary results were then analyzed using a regression procedure that identified test ratios most closely supporting the preliminary values. Those ratios were selected to build the scoring algorithms that generated the rankings.
Calculations are based on the latest operating results reported for fiscal years ended no later than Jan. 31. Mark-to-market asset impairment write-downs, gains/losses from currency-related derivatives and other non-operating transactions are excluded from all cash flow-related computations to normalize current and prior years’ results.
Where possible, companies with fiscal year-ends prior to Dec. 31 have been scored, using interim quarterly data, to the calendar year-end to better match operating performance between companies.
For non-U.S. companies, income statement data presented in native currencies have been converted to U.S. dollars on an averaged, annual basis. Balance sheet data have been adjusted to year-end currency conversion rates.
To be included in this survey, companies had to derive at least 30% of revenues from the aerospace and defense sector and have direct and/or indirect state ownership of less than 50%.
Further Review Opportunity Gained From Methodology Design
In addition to facilitating company rankings, total score and results shown in the tables for the four performance categories can also be interpreted as percentiles of performance for fiscal 2011, compared to peer results over the 12-year test period. A score of 85, for example, indicates that a company’s performance is within 14 points of the best result earned by a company in its peer group during the 1998-2009 period.
BUSINESS SEGMENT RESULTS
Business segment scoring accompanies TPC survey results.
This year’s rankings include 164 operating units with fiscal year revenue greater than $250 million, grouped into 10 operating categories including:
1. Air platforms
2. Avionics/flight management/control systems
3. Civil and military training and support services
4. Forgings/castings/precision components
5. Information technology services
6. Land, missile and sea weapon systems
8. Radars/sensors/electronic warfare/C4ISR
9. Space systems
Except for those operating units assigned to information technology services (“IT”), scored results can be compared across the other nine categories and TPC-defined peer groups. Three scoring algorithms were compiled for this study. Metrics for each were built from data extracted from parent company footnote disclosures.
Certain large U.S. companies with a high concentration of government contracts subject to federally mandated Cost Accounting Standards (CAS) report business segment footnote data on the more favorable CAS versus GAAP/IAS accounting basis. Since the CAS benefit is currently disclosed in an aggregate amount not allocated to specific business units, this year’s calculations exclude an adjustment used in 2010 that conformed segment data to the parent company’s GAAP/IAS-based operating results and financial position.
Where possible, business units with fiscal year-ends prior to Dec. 31 have been scored, using interim quarterly data, to the date corresponding to the parent company’s TPC-scored result. If applicable, prior year results have been restated.
The three scoring algorithms include:
1. Primary algorithm (“Primary”), scoring 136 segments (83%) of the total units presented. Metrics used in this algorithm, if applied to the consolidated profit-and-loss and balance sheet results of non-IT companies, are 80% correlated to parent TPC scores based on a 12-year (1999-2010) look-back period.
2. Limited algorithm, scoring 18 segments (11% of total units presented) operated by, Chemring, , , and . Correlation of metrics used in this algorithm to parent results of non-IT companies and their corresponding TPC scores over the primary test period is 74%.
3. IT algorithm, scoring 10 segments and qualifying companies that have a heavy concentration of A&D-related government contracting (representing 6% of total units presented). This algorithm was developed to accommodate the unique nature of the IT business model compared to other A&D operating units. Correlation of IT metrics to parent results and earned TPC scores over the primary test period is 72%.
Business segment scores across all categories (except IT) have been adjusted to present relative values ranging from 1.0 (worst performance) to 99.0 (best result) over a two-year period (2009-2010). Because of this arithmetical transformation and construction of the scoring algorithms that were not specifically aligned with TPC-defined peer groups, business segment scores will not necessarily correspond or provide a meaningful comparison to parent company TPC results.
Raw information for TPC results was provided by database vendor Standard & Poor’s (which, like AW&ST, is a division of The McGraw-Hill Companies).