U.S. Defense Industry Preparing For Leaner Times
U.S. weapons makers told investors this week they are doing all they can to prepare for leaner and more uncertain U.S. defense budgets, including redoubling their efforts to cut costs, drum up export sales and sell more goods to commercial clients.
Industry executives and Pentagon officials say they are still sorting out the potential impact of an additional $600 billion in defense cuts over the next 10 years, on top of some $489 billion in cuts already being absorbed.
Even if those additional cuts can be averted, as Republicans hope, the industry is facing pressure on profit margins and a dearth of new programs after more than a decade of strong growth, industry executives and analysts agreed.
The Pentagon's No. 2 budget official, Mike McCord, told a conference hosted by Credit Suisse and Aviation Week that the fiscal 2013 defense budget proposal now being finalized already included cuts in the $40 billion-range from previous plans, following a cut of around $25 billion in fiscal 2012.
He said the White House had not ordered the Pentagon to revamp that plan to reflect another $50 billion in cuts, and it would be difficult, if not impossible, to do that in the few weeks before the budget documents must be completed.
"We're a little bit in the dark like everybody else is about the future of sequester," McCord said.
Clay Jones, chief executive of Rockwell Collins Inc (COL.N), a flight-controls supplier and subcontractor on many key weapons programs, said commercial sales would account for a growing share of his company's revenue as government orders declined.
"It's been a great ride," he told the conference. "The ride's over."
Rockwell Collins expects sustained double-digit growth in its commercial business but says its outlook for government sales is clouded by lingering uncertainty about the U.S. defense budgets for fiscal 2012 and beyond.
Bill Swanson, chief executive of Raytheon Co (RTN.N), said he was hopeful that Washington could avert the additional $600 billion in defense cuts but said his company had studied the potential impact of such cuts.
"We've got to be smaller, we've got to be more efficient. We'll get the job done," he said.
Raytheon, he said, was well positioned, given prospects for continued sales in the missile defense, intelligence, surveillance and reconnaissance, and cyber security areas.
International sales -- likely to account for 30 percent of Raytheon's bookings in 2011 -- would help the company offset the downturn in U.S. defense spending, he said.
Swanson cited arms sales already in the works or soon to be completed, naming Saudi Arabia, Taiwan, Kuwait, Turkey and Oman.
"We got a lot of activity in the pipeline," he said, noting that in addition to solid demand from the Middle East and Asia, Raytheon was also eyeing new orders from India, Brazil and other countries in South America.
The Navy's No. 2 acquisition official said the service had not yet been asked to plan for additional budget cuts, and there was no "convergence" within the Pentagon on how to deal with the possible additional cuts.
Vice Admiral Mark Skinner, principal military deputy to the Navy's acquisition chief, said budget plans submitted by the Navy and other military services to Pentagon leaders addressed only the initial round of cuts, not the additional $600 billion now on the table.
The Navy's share of the initial cuts is $9 billion to $10 billion in fiscal 2013, Skinner said.
"Sequestration is bad," he said, referring to the additional budget cuts required because a congressional "super committee" failed to agree on at least $1.2 trillion of deficit reduction over 10 years.
The cuts would affect all Pentagon programs across the board and could result in violations of existing multi-year contracts, he said. "We're going to break a lot of china," he told conference participants.
Shay Assad, the Pentagon's director of pricing, said the department was continuing its efforts to trim waste and improve oversight of billions of dollars of contracts.
He emphasized that the effort was not aimed at squeezing corporate profit margins, but said well-run companies deserved better results than those whose programs were over budget and behind schedule.
"We're raising the bar and the expectations of our workforce, and we expect the companies to do the same on their side of the table," Assad told the conference.
Swanson welcomed Pentagon efforts to reform the way it buys weapons and said Raytheon was continually trying to reduce its costs and safeguard its healthy profit margins.
But he said industry was also vigilant about taking on too much risk on new development programs, especially on bigger programs.
(Reporting by Andrea Shalal-Esa and Karen Jacobs; Editing by John Wallace and Gunna Dickson)
Copyright 2011 Thomson Reuters. Click for Restrictions.
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First Posted: 12/01/11 08:44 AM ET Updated: 12/01/11 08:44 AM ET