2011 has proven to be the year of the budget crush. When Leon Panetta takes over as Secretary of Defense this summer, that crush is expected to hit the Pentagon's bottom line. With this in mind, perhaps it's time to put aside defense darlings like Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC) in favor of companies that diversify their operations across the defense/aerospace industry.

Show me the doughnut
Lockheed reported that 84% of 2010 sales were thanks to the U.S. government. You won't see numbers like this from the likes of Honeywell (NYSE: HON), United Technologies (NYSE: UTX) , or Goodrich (NYSE: GR) because, though they cash in on defense, it is not their sole focus. Let's take a quick look at how diverse sales are for these companies in 2010. (All data from respective companies' 10-Ks.)



Honeywell is incredibly diverse. Defense aerospace only makes up 16% of its business, and, according to its 2010 annual report, only 13% of its revenue came from the government.

United Technologies is less diverse than Honeywell, but still has a relatively small percentage of its business dedicated to defense. In 2010, only 18% of its revenue came from government sales.

Goodrich could stand to diversify. In 2010, 32% of its operations are dedicated to defense and space, and 25% of its revenue was from government sales.

According to the charts and sales numbers, Goodrich is the most vulnerable to what some say are inevitable cutbacks in defense spending. Where does a Fool turn for assurance that his or her company has the potential to recover? Why, free cash flow of course.

What about my return?
As good as it feels to pocket your company's free cash flow -- United Technologies dedicated 75% of FCF to shareholder return in 2010 -- now more than ever it's important for these businesses to have the flexibility to throw money at R&D or acquisitions in the commercial sector, should they see fit. Here's how the free cash flow picture shapes up for our three stocks under consideration.


FCF 2010

FCF 2009

Market Cap





United Technologies








Source: Yahoo! Finance. Dollar values in billions.

All three companies are in good shape for their size. In the first quarter of 2011, Goodrich actually cut the amount it typically contributes to pensions, freeing up more cash. This move -- given that it has the least diverse operation of the three -- is a sign that management is paying attention and taking important steps to keep the company moving forward.

Full speed ahead
It's all about moving forward. In an industry like aerospace and defense that's heavily dependent on government funds, it's important to take a closer look at the constitution of your company. Is it diverse -- does it have the capabilities to diversify?

Know of a company poised to rise in the aerospace industry? Head over to our free investing community, Motley Fool CAPS, and make your pitch!