Defense contractors preach caution, not panic
By Marjorie Censer,
For many, the “supercommittee’s” failure to reach a deal last month signaled a major threat to defense spending. After all, the lack of an agreement is supposed to trigger a $1.2 trillion cut in government spending, half of which would hit the Pentagon in early 2013.
The defense industry is more sanguine about its prospects. Industry executives, many of whom gathered last week at a defense and aerospace conference held by Credit Suisse in New York, sought to assure investors that they’re not panicking and are instead moving to reorient their businesses to prepare for what may come.
With the current budget set and next year’s “largely established,” contractors are “about 21 / 2 years away from any real impact,” said Mark DeYoung, president and chief executive of ATK, which specializes in producing ammunition and rockets. “Beyond that, there’s a lot of uncertainty . . . so I won’t try to predict what happens 21 / 2 years from now.”
Companies such as ATK, which relocated its corporate headquarters from Minneapolis to Arlington this year, instead emphasized the steps they’re taking to prepare for the future.
DeYoung touted the contractor’s “platform independence,” or the ability to use its products on a wide range of systems, regardless of manufacturer.
Officials at McLean-based contracting giant Booz Allen Hamilton said the firm is finding opportunities in helping federal agencies implement cost-control strategies and in burgeoning markets such as cybersecurity and health care.
If budget cuts trim new work, there will be opportunities in fixing up older equipment, predicted executives at McLean-based ITT Exelis, which specializes in radios and other electronic equipment and offers technical services.
“It’s a mixed bag,” said David F. Melcher, Exelis’s chief executive and president. “We would be affected in one way, but I think it’s up to us to find the opportunities about how to mitigate that.”
Industry officials said budget cuts might not affect every company equally.
“I think it will be a very targeted set of reductions,” said Bruce L. Tanner, chief financial officer at Bethesda-based Lockheed Martin. “There will definitely be bigger losers in that environment than others, and that will depend on what reductions are actually taken on a program-by-program basis.”
Byron Callan, a director at Washington-based investment research firm Capital Alpha Partners, said the dominant perception within the industry “is that somehow this will change and [the impending cut to defense spending] won’t be the ton of bricks that drops the way the law is written.”
But contractors “can’t just pretend this thing doesn’t exist,” he said, adding that companies may react by making subtle changes to the way they do business, such as moving more cautiously on acquisitions. “It’s maybe watch what they do, not what they say.”
Still, contractors said they’re spending less time trying to predict how cutbacks will happen and more time bracing for a generally more difficult spending environment.
Booz Allen officials said the company is investing in its international and commercial businesses as well as finding ways to cut costs. As an example, Booz Allen has implemented a “hoteling” system that eliminates designated desks for many employees and requires them to share space, trimming office space expenditures.
“We’re not trying to place a bet on [whether] this thing is going to go away [or] the cut is going to be X percent ... because I think that frankly is going to play out over years,” said Horacio D. Rozanski, Booz Allen’s chief operating officer. “We’re placing more of our emphasis on not trying to read the tea leaves but actually becoming much more flexible.”