A look at the Pentagon’s budget

As analysts pored over the newly released president’s proposed fiscal 2013 budget last week, Capital Business headed to the Center for Strategic and International Studies for a panel discussion on what the Pentagon budget means for defense contractors. Here are some of the highlights:

David J. Berteau, director of the international security program at the Center for Strategic and International Studies

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Berteau walked attendees through the numbers, noting that procurement — the budget category that covers buying new weapons and equipment — is taking a larger hit than some of the Pentagon’s other categories.

Total procurement spending in the president’s proposed fiscal 2013 budget is down 10 percent from the funding enacted in the fiscal 2012 budget, he said. And though procurement represents about 18 percent of the budget, it took a much larger share — about 38 percent — of the Pentagon’s cuts.

Research, development, test and evaluation—another key funding area for contractors — took a smaller hit. Spending would drop 3.1 percent from the level provided in fiscal 2012, and, though it represents about 11 percent of the budget, its share of the cuts would be about 7 percent, Berteau said.

Brett Lambert, deputy assistant secretary of defense for manufacturing and industrial base policy

Lambert said his office was engaged in making sure the fiscal 2013 budget took into account the industrial base — the term the Pentagon uses to describe the contractors and suppliers who serve it.

The industrial base is “not the primes,” he stressed. “That is part of the industrial base, but it’s certainly not the only critical component of the industrial base.”

The Defense Department is keeping a careful eye on the companies it relies upon, but “nobody in the department ... has used the word bailout,” he said.

“We’re not bailing out companies, we’re talking about intervening when it’s completely in our self interest to invest in capabilities that we’re going to need,” Lambert continued.

When it comes to troubled programs, the Pentagon has to make the “hard decisions early.”

In the past, “when programs got in trouble, when they were bleeding, we would cauterize the wound with more money,” he said. “The fact is there’s no more money.”

Byron Callan, director, Capital Alpha Partners, a Washington-based investment research firm

Callan said that thus far the budget’s impact on defense contractors “actually looks fairly benign.”

“When I think about the risk to the industrial base ... there’s really not a lot that jumps out,” he added.

Stocks have thus far “handled this very well,” said Callan. “Lockheed [Martin], which is really the bellwether here, is ... keeping pace with the market.”

He acknowledged that cybersecurity could be a growth area for contractors but said it’s hard to figure out how to define cybersecurity, which has become a buzz word among information technology-focused companies.

“From the standpoint of someone who looks at large-size, publicly-traded companies, it’s hard to really see it,” Callan said. “Some of the companies will talk about, ‘We have $2 billion in cyber,’ and you actually find out a lot of that is IT with some form of protection in it.”