Financials

Twenty organizations provided income statement information on all operations for the years 1995 through 1998.25 These statements included operations not related to the HPE and HPEC industries (See Table 10 below). According to the BXA survey data, the profitability of the respondents' total operations appears to be increasing.

As a group, the organizations participating in the survey saw net income for all operations increase 30 percent from 1996-1998. These companies also disclosed that the subset comprised of HPE and HPEC operations scored an increase too, but growth was less robust.

Table 10: Income Statement (Entire Firm-All Operations) Total in $000s

Eighteen organizations provided complete income statement data for their HPE/HPEC operations. The response rate was relatively low because some firms could not or would not create a balance sheet for HPE/HPEC operations. HPE/HPEC-only income statements showed that both sales and net income grew approximately 14 percent in this sub-sector (See Table 11 below).

25

The survey also sought 1999 data, but several firms could not provide it. In several instances, the 1995 column contained some one-time extremes that skewed the overall trend. Data for 1995 and 1999 are excluded for these reasons. In addition, one firm that had a small percentage of its overall business in the HPE and HPEC industry was removed from the calculation due to it restructuring, which created an unorthodox balance sheet.

The number of respondents to this question was reduced further because of reporting irregularities. Several organizations that were operating units of larger firms filed separately. Organizations submitted income statement data under the parent firms. Data was consolidated and re-aggregated where feasible. Also, some other organizations did not provide data for all of three years and several could not or would not provide the data.

Asset and Liability Ratios

Twenty-three firms provided current asset and current liability data for their total organization, including all operations. Calculated by dividing current assets by current liabilities, the current ratio is a measure of solvency, or the ability to pay off short-term debts. The total of current assets for these industries was divided by the total of current liabilities. The total current ratio was 1.4.

26

The Bureau of the Census calculates current ratios20 for all manufacturing and for broad industry sectors. From 1995 to 1999, the mean current ratio for all manufacturing was 1.35 while the current ratio for firms within SIC groups 34 and 3527 was 1.7. The

HPE/HPEC ratio of 1.4 falls in between the two Census-based ratios.

The current ratio of 1.4, calculated by combining all the firms' assets and liabilities, can be deceiving, however, because individual firm ratios ranged from 0.45 to over 20. The mean ratio calculated from the individual current ratios was 3.9; however, removing firms with current ratios of over 20 and under 0.5, the mean was 3.04. The median or middle value current ratio was 1.99, reflecting the significant range of individual firm value in these industries and their disproportionate distribution.

Seventeen of the 23 respondents provided additional balance sheets that represented their HPE/HPEC operations only. The average HPE/HPEC generated ratio for this select group was 1.34. Again, there were large differences in the individual current ratios. The mean of the individual current ratios was 3.6.

Overall, this data indicates a great deal of variation in the short-term ability of firms to cover their debts. Some firms were more than able to cover their short-term debt while others were not. Differences were observed between total firm operations and HPE/HPEC-specific operations.

26 The Bureau of the Census calculates total current assets to current liabilities (the current ratio) in a

publication called the Quarterly Financial Report for Manufacturing, Mining, and Trade Corporations.

27

SIC 34 relates to fabricated metal products, except machinery and transportation equipment, while SIC 35 relates to industrial and commercial machinery and computer equipment. SIC 3483 falls into the major group SIC 34.

Research and Development

Research and development is an investment in the future. To have cutting-edge HPES and HPECS in the future, research and development (R&D) must continue to take place at an appropriate level. For example, it can take up to 20 years, industry officials observe, to move an explosive from a blackboard formula to deploying it in a warhead.

There are requirements for new explosives or modified versions of current HPE/HPECS that can tolerate heat, shock, and other stimuli. Explosive components will also have to be designed to use these new explosives and show acceptable performance.

Department of Defense RDT&E Spending

The Department of Defense's own Research, Development, Testing, and Evaluation (RDT&E) budget numbers show that investment in munitions, which included HPEs and HPECS, has decreased rapidly since the mid-1980s and will continue to drop in the near future. Since its 20-year high in 1989, RDT&E had fallen nearly 45 percent by the year 2000. According to current projections, it will fall approximately 50 percent more, to about $820 million, by 2005. (See Chart 10 below). According to Department of Defense numbers, all of the armed services are lowering their munitions RDT&E investment. If support for R&D continues to decline, the ability of the United States to provide world-class munitions in the future could be degraded.

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year

Note: National Missile Defense Program dollars have been removed from this chart

Source: Office of the Secretary of Defense (Acquisitions, Technology, and Logistics)
Strategic and Tactical Systems, Munitions

What makes this issue even more serious is that munitions RDT&E is also falling as a percentage of Department of Defense's overall RDT&E budget. Munitions RDT&E was between four to six percent of the overall Department of Defense RDT&E budget from 1986 to 2000. By 2005, however, the munitions portion contracts to about 2.4 percent of the overall defense RDT&E budget (See Chart 11 below).

Chart 11: Percent of RDT&E Dollars for Munitions Programs

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year

Note: National Missile Defense Program dollars have been removed from this chart

Source: Office of the Secretary of Defense (Acquisitions, Technology, and Logistics) Strategic and Tactical Systems, Munitions

BXA Research and Development R&D Data

28

From 1995 through 1999, BXA survey respondents conducted approximately $154 million of R&D. The U.S. Government sponsored just over 50 percent of their R&D, while survey respondents funded approximately 33 percent of the total, and nongovernmental customers and foreign governments funded the remainder.

Overall, R&D funding peaked in 1996 (nearly $35 million) and decreased to $28.4 million in 1999 (See Table 12 below).29 Likewise, by 1999 U.S. government sponsorship of R&D had slipped from a high of 55 percent in 1995 to 48.6 percent of total spending in 1999.

28 Seventeen respondents provided R&D data. One of the larger firms submitted several surveys and consolidated some of its R&D numbers into a corporate response. Considering this point, sixty one percent of the respondents provided data on R&D expenditures. This number seems rather low; however, several of the respondents (GOCOS) appear to be build-to-print activities and do not normally engage in R&D. Some of the 17 firms were either unwilling or unable to breakdown their R&D expenditures.

29

The domestic/foreign customer and foreign governments are combined to protect potentially proprietary data.

Table 12: Funding for R&D of HPEs and HPECS (in $000)

Dept of Energy and
NASA

Due to their low value and low number of projects, NASA and DOE data

have been removed

*The above table reports expenditures by BXA survey respondents only. Government-owned governmentoperated R&D organizations were not surveyed as a part of this assessment.

The U.S. Army, as the largest munitions buyer, was the largest source of R&D dollars, in absolute terms and as a percentage from 1995 to 1999. The second largest source of HPE and HPEC R&D funding (running a close second to the Army) was private industry. Interestingly, foreign governments and domestic/foreign commercial customers provided more R&D funding than either the Navy or the Air Force.

Although all three services have lowered their R&D funding, the Army has maintained and even increased its percentage of R&D sponsorship. The Air Force and the Navy combined lowered their percentage by seven percent from 1995 to 1999 (See Chart 12 below).