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Balancing Defense and the Budget

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By Dana Hedgpeth
Washington Post Staff Writer
Monday, October 13, 2008

At the Walter E. Washington Convention Center last week, Army soldiers, Pentagon weapons buyers and defense company representatives milled about a cavernous trade show floor for a look at the latest military equipment and gadgets.

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Huge tanks sat beside armored trucks and machine guns. In one aisle, a stack of fake sandbags were arranged around a free cappuccino stand sponsored by KBR, one of the biggest government contractors in Iraq.

The annual exposition -- put on by the Association of the United States Army -- is one of the largest industry shows of its kind in the country, and the bustling convention floor was a testament to the success of an industry that has enjoyed steadily rising sales over the past eight years.

But the mood at the show was hardly celebratory. Rather, Topic A was whether those good times would continue.

Many assumed they would not.

Attendees worried that a new administration may be forced to cut back on defense spending as the nation strains under a global economic crisis and as presidential contenders talk about the eventuality of bringing troops home. Major weapons systems built by the likes of Falls Church-based General Dynamics or Lockheed Martin of Bethesda are likely to face new scrutiny -- potentially dealing a blow to an industry that has helped insulate the region from deeper economic pain.

"There's a lot of uncertainty out there," said Kevin G. Kroger, president of Pura Dyn, a small Boynton Beach, Fla., company, who came to the trade show to pitch the Army on buying more of its oil filters for armored trucks. "We're not sure where the budgets are going and what's going to get funded. It leaves us nervous."

Indeed, in his report on the show, Ron Epstein, an analyst at Merrill Lynch, said vendors acknowledged their worries about the rescue plan. "We expect the bailout plan will put downward pressure on defense spending," Epstein had written a week earlier in a research note to clients.

Although no one is expecting a dramatic drop in next year's Pentagon budget, there is a widespread expectation that spending will begin to level off. Many contractors have begun to prepare.

With nearly 60 percent of its $42 billion in annual sales coming from the Defense Department, Lockheed Martin is pursuing other areas of business to compensate for any slowdown in defense spending. For the past eight years, the Bethesda company has tried to expand its information technology services business. Already, it expects double-digit sales growth in that unit this year compared with last year.

In recent years, Lockheed has landed multiyear contracts with such agencies as the National Archives, the Justice Department, Department of Homeland Security, Securities and Exchange Commission and the National Institutes of Health to help manage records and to do other support services. Lockheed also plans to expand the services it provides to peacekeepers in places such as Sudan.

"Our strategy is to leverage our core capabilities in adjacent markets," said Tom Jurkowsky, a Lockheed spokesman. He said the company's chief executive Robert J. Stevens often calls the company a "global security company," as opposed to being just a defense contractor.


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