PricewaterhouseCoopers, in its latest defense and aerospace review and forecast, said that despite budget constraints and program terminations, the defense sector reported another strong year in 2010.
Industry backlogs in the defense segment have been resilient despite many program terminations, showing only modest erosion.
Revenues are expected to be fairly consistent with last year but profits are anticipated to be modestly higher as companies benefit from productivity improvement initiatives, deferred spending and lower pension costs.
The report said the U.S. defense industry also experienced robust merger and acquisition activity in 2010, with about $20 billion worth of deals, representing a 50 percent increase over the $10 billion reported in 2009.
The trend in merger and acquisition activity is likely to accelerate in 2011.
"Though the short-term outlook is relatively stable, it's nearly impossible to predict the overall health of the defense industry beyond a few years down the road," said Scott Thompson, U.S. aerospace and defense leader at PwC.
"Challenges and uncertainty related to the U.S. military's role in world affairs, recent instability in the Middle East, a tightening Pentagon budget and the continuing threat of terrorism are just a few factors that will influence the long-term picture.
"Despite all these unknowns, we expect in 2011 and subsequent years that defense contractors will face the reality of flat to declining spending."