As sequestration looms, contractors don’t fret

The next few months could look even scarier than the last few for defense contractors already battered by federal budget cuts, thanks to the threat of automatic reductions looming in March. But industry executives had a surprising message for shareholders this week: Don’t worry about it.

In call after call with investors, officials at some of the area’s largest contracting firms refused to guess how much it would cost them if Congress allows the “sequester” to kick in on March 1. Even as their lobbyists keep warning how much the cuts would hurt the industry, the executives are projecting confidence that the sequester will not happen.

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Northrop Grumman chief executive Wes Bush said Wednesday that his company’s outlook for the year projects “the sequestration is not triggered” and that Congress barely touches federal contract spending levels for 2013. General Dynamics chief Phebe Novakovic said last week that she had developed a “realistic” risk assessment for the company’s bottom line — and it, too, assumes no sequestration.

Their confidence defies the emerging consensus on Capitol Hill that Congress will not find an agreement in time to cancel or delay the cuts. It also threatens to disappoint investors in the event the sequester goes through, and it leaves thousands of Washington area contracting employees to wonder how safe their jobs are.

If the sequester cuts take effect in full, economists estimate they will destroy about 1 million jobs nationwide, including hundreds of thousands in the Washington area.

The executives do not appear to believe that will come to pass. It may be because Congress keeps averting fiscal crises at the very last minute, and because the Obama administration asked contractors last year not to issue layoff notices in preparation for cuts that were originally scheduled to begin this month.

It may also be because contracting firms appear confident in their ability to lobby for sequester relief.

‘Encouraging action’

Lockheed Martin chief executive Marillyn A. Hewson warned analysts last week that the automatic cuts would hurt her company and the country’s defense capabilities. But Lockheed’s projections, like its competitors, excluded the possibility of the sequester going through. In her remarks, Hewson noted “encouraging action” taken by President Obama and Congress to delay the sequester in December, and she promised that “in the weeks ahead, we’ll continue to work with our government leaders to encourage a more effective solution to our nation’s fiscal challenges.”

Contractors say they cannot account for possible sequestration costs, because of huge uncertainty over whether the cuts will happen and how they would be distributed across programs.

“We are just now starting to see conversations around what cost would be reduced if we go into sequestration,” Samuel R. Strickland, the chief financial officer at Booz Allen Hamilton, said Wednesday. “So we still haven’t yet been able to identify how much that would impact us, if at all.”

Some industry analysts note that the contracting firms routinely account for various risks and liabilities in their earnings projections. They seem puzzled by the executives’ reluctance to quantify the risks associated with sequestration.