April 28, 2014 / 1:05 PM / 6 years ago

M&A activity in U.S. arms sector rises as revenues drop: reports

WASHINGTON (Reuters) - Mergers and acquisitions in the U.S. weapons industry are starting to edge up after a third year of declining revenues across the sector in 2013, according to two separate reports released on Monday.

PriceWaterhouseCoopers said deal volume in the aerospace and defense (A&D) industry was rising and could well exceed 2013 levels by the end of this year, especially if aerospace-focused deals on the commercial side remained strong.

The company cited 12 deals with a total value of $3.3 billion in the first quarter, up from 11 deals with a total value of $1.8 billion in the first quarter of 2013.

“We are starting to see deal activity pick up in the A&D sector as we have a modest improvement in an uncertain environment,” said Scott Thompson, who heads PwC’s U.S. aerospace & defense practice.

But he said uncertainty about the sector’s outlook beyond fiscal year 2015 continued to dampen deal activity, since mandatory military budget cuts are due to resume in fiscal 2016.

Deloitte, another accounting and consulting firm, released a separate report which showed that revenues were down 2.6 percent across the sector in 2013, with 17 of the top 20 arms makers affected. It said the report underscored the widespread impact of budget reductions that began in 2013.

Companies that make armored vehicles and other ground equipment, and firms that offer services in combat zones, suffered the biggest reductions, according to the report.

The report found that job cuts and plant closures helped companies boost profits by 17.9 percent across the sector, even as revenues dropped. About one half of that increase was due to the absence of a one-time $2.1 billion loss reported by General Dynamics Corp (GD.N) in 2012.

Tom Captain, vice chairman of Deloitte and the head of its U.S. and global aerospace and defense practice, said he expected the revenue declines to continue but added that companies were taking aggressive steps to offset shortfalls through foreign military sales, acquisitions, development of new products and growth in non-defense markets.

Captain said companies were expected to turn increasingly to acquisitions since workforce reductions and plant closures could only help boost profitability for a limited time, and prospects for new orders were slim.

“There’s too much capability in the defense industry,” he said. “You can’t cut your way to profitability for very long.”

Reporting by Andrea Shalal; Editing by Paul Simao

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