Lockheed: Sequestration creating ‘fog of uncertainty’

June 24, 2012

If the government makes across-the-board cuts to federal spending in January, Lockheed Martin’s chief executive said the company will not likely be so even-handed, choosing to take a more strategic approach.

Contracting executives have become increasingly worried about a cut known as sequestration, a roughly $1 billion reduction from fiscal 2013 to 2021 put in place last year during debate over the debt ceiling. The cuts would be split between defense spending and all nondefense accounts.

In particular, company officials have denounced the lack of information about how the cut would be implemented.

“From an industry perspective, the near-term horizon is completely obscured by a fog of uncertainty,” Robert J. Stevens, chairman and chief executive at Bethesda-based contracting giant Lockheed Martin, said during an event with reporters last week. “With only 196 days remaining, we have no insight into how sequestration ... will be implemented, which programs will be curtailed, which sites will be closed, which technologies will be discontinued.”

What Lockheed does anticipate is a roughly 10 percent reduction across the board, said Stevens.

“Sequestration occurs as across-the-board reductions,” he said. “That in no way suggests that we’re going to cut across it. That’s an inefficient way to manage an enterprise.”

Marion Blakey, president and chief executive of the Aerospace Industries Association, said contractors may have to make larger reductions internally because the across-the-board reductions will make some programs unsustainable.

“You’re going to see much deeper slices,” she said. Companies will have to cut areas “where you’ve no longer got critical mass.”

Congress could still stop sequestration, but many in industry are skeptical that any changes will be made before the election. Lockheed has said that it might be forced to warn employees and suppliers of job losses as early as this fall.

Stevens said last week those notices could affect as many as 123,000 employees and 40,000 suppliers.

All of those employees and suppliers “want to know, ‘Am I going to have a job in January and am I going to have a contract in January?’” said Stevens. “The answer from us today is we’re not clear about that.”

He said Lockheed continues to trim its overhead expenses, noting that the company has reduced its footprint by 1.5 million square feet over the last three years and plans to reduce by another 2.9 million square feet before the end of 2014. The contractor’s workforce, he added, is 18 percent smaller than it was three years ago and its hiring has “slowed considerably.”

At McLean-based contracting giant Booz Allen Hamilton, Samuel R. Strickland, the company’s chief financial officer, said it too has trimmed its costs.

During a call with investors earlier this year, Strickland said the company could only “guess what’s going to happen” with sequestration. However, company officials anticipate that the cost reductions it has made “will carry us through whatever turbulence we’re going to see.”

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