“We are not pleased with the considerable decline in margins in this group,” Novakovic said. “The performance was disappointing at best.” She added that she would not have allowed the company to go through with some of the acquisitions.
Without the loss in the IT division, the company would have had fourth-quarter earnings of $491 million. A year ago, the company reported $603 million in fourth-quarter profits.
Local fallout from shrinking government spending.
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Overall, Fuller calculates that defense procurement in the Washington metro area dropped from $39.5 billion in 2011 to $36.9 billion last year, a nearly 7 percent drop.
Next year looks worse, particularly in IT. The Pentagon plans to spend $32 billion on IT contracts across the entire country in fiscal 2013. That’s down from $37 billion in 2012.
The drop reflects a shift from large-scale IT modernization programs that can take several years complete to shorter-term projects, such as implementing a Web-based e- mail system. The government also is trying to save money by combining computer systems — for payroll, budgets and other functions — among agencies.
All those changes hurt metro area contractors, giving them less certainty about future work.
Among contracting firms specializing in larger projects such as weapons manufacturing, “you’re probably two years out before you start to see the impact” of budget cuts, said William Loomis, managing director at the financial services firm Stifel Nicolaus. “The shorter-cycle businesses see the impact earlier.”
Economists don’t expect the budget cuts currently coming into effect to drag the metro area into recession, unless the federal fiscal situation deteriorates considerably. That’s partly because government largess has built a foundation of prosperity in the area. The local housing market, for instance, remained relatively calm even as real estate in other regions melted down during the financial crisis. Washington’s regional unemployment rate is at 5 percent, nearly three percentage points below the national rate.
Even with the cuts now hurting contractors, “we’re going to still look pretty good here, because we have such a strong base,” Fuller said. “We still have $170 billion in federal money in the local economy. It’s not that they’ve taken it all away. It just isn’t growing as much.”
What could really damage the area — what Fuller calls “the end-of-the-world kind of hit” — would be if lawmakers allow $85 billion in “sequester” cuts, split between defense and non-defense programs, to go through in March as planned. Those cuts would reduce federal spending — and procurement — at a much faster clip than the current reductions.
Fuller estimated last July that the sequester cuts would destroy some 450,000 jobs across Virginia, Maryland and the District of Columbia.
Lisa Rein contributed to this report.
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