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SN Blog | Defense Contractors Put a (Mostly) Brave Face on Sequestration

Lockheed Martin Chief Executive Marillyn Hewson has told shareholders that sequestration is unlikely to occur. Credit: Lockheed Martin photo

WASHINGTON — Earnings season is in full swing and, as the Washington Post reported Jan. 30, some U.S. defense contractors are telling their shareholders not to worry about the deep, across-the-board spending cuts that take effect March 1 unless Congress defuses the ticking time bomb known as sequestration:

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 … 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.

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.

Not all defense contractors are as sanguine as Bush, Novakovic and Lockheed Martin Chief Executive Marillyn Hewson, who told analysts last week that Lockheed’s financial projections assume the sequester won’t happen.

In an earnings call earlier this week, Harris Corp. Chief Executive William M. Brown, said he was hopeful sequestration, if Congress allows it to happen, will be “relatively short-lived.”

But Brown was less upbeat than some of his peers about how broader budget uncertainty is playing out for business.

“Within the last few weeks, we've seen a marked change in behavior from several of our U.S. tactical radio customers as they've turned their attention to sorting out what they can afford to spend and where they need to preserve funding in the face of no budget, a possible expanded CR and even potentially bigger sequestration cuts,” he said.

“This sorting out of budget priorities — without having any clarity on what the ultimate budget will be — is causing procurement to slow. And while the deadline remains on the horizon, it sure feels to us as if our customers are starting to act like sequestration has already been triggered. And as you know, our prior guidance, which was initially set in April last year, didn't include sequestration.”

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