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Companies Show Little Change Ahead of Sequestration

Dec. 2, 2012 - 12:48PM   |  
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Without specifics on the impact of the automatic U.S. budget cuts on individual programs, and with guidance from the White House not to pre-emptively warn employees of potential layoffs, U.S. defense companies are holding out hope for a budget deal.

But they are doing very little to change their businesses.

With one month left before sequestration kicks in, contractors and Defense Department officials are preaching the harm of cuts, and lamenting the lack of clarity as to the industry’s financial future, but describe a situation where their hands are largely tied.

Company executives said the industry has been cutting overhead for several years in anticipation of an expected downturn, meaning that cost reduction is increasingly difficult. And without a clear path to savings, fear over the impact of the budget cuts rules the day.

“Everyone is nervous about what’s going to happen, or may not happen, on January 2nd, and I think uniformly both between the department and our industrial partners, it’s the uncertainty that’s the most problematic,” said Brett Lambert, the Pentagon’s industrial base chief. “The problem is, the law is very complex. This is not something the department does in a vacuum, this is a whole-of-government issue.”

Initially, industry responded to the impending cuts by declaring the need to issue Worker Adjustment and Retraining Notification (WARN) Act notices, with Lockheed Martin leading the charge in stating the notices would need to be sent before the election to numerous employees to maintain flexibility. But with guidance from the White House in late September that it would cover the cost of potential lawsuits, the most visible preparation for sequestration has evaporated.

“Our decision to delay sending sequestration-related WARN notices to our employees was based on the new information that clarified the timeline for implementing sequestration budget cuts,” Lockheed Martin said in a statement. “If sequestration occurs, we will adhere to the law and provide affected employees the full notice period required by the WARN Act at the appropriate time.”

Aside from preparing for layoffs, companies can do little in the way of adjusting individual programs.

“We still don’t have much information to work with,” said Rob Doolittle, a spokesman for General Dynamics. “It really is almost impossible to anticipate what the impact will be on any given program. Since so much of how we manage things is on the program level, it makes it really difficult to do any planning.”

Doolittle said the company will continue to advocate for a budget solution, but won’t make any significant changes to its business ahead of the cuts. “We don’t have any plans at this point to make any dramatic changes,” he said. “We have continued to focus on performance on the contracts we have on hand.”

That interest in maintaining performance has been repeated by nearly every defense contractor in recent months.

“As in any business environment, we plan for all contingencies with a focus on agility,” Raytheon said in a statement. “We continue to plan for a range of potential outcomes should no alternative course of action be followed and sequestration is enacted.

“Today, we are focused on business initiatives driving real value for our customers, such as program performance, adapting proven technologies and developing new capabilities where needed, shortening timelines, and implementing efficiency initiatives across the company,” Raytheon said.

There has been some movement from several companies to realign divisions to reduce the ranks of costly executives. Both Lockheed and Boeing have announced plans to save the companies millions, but both have said the shifts are part of long-term strategy and not driven by sequestration.

Separating whether recent moves have been caused by sequestration is difficult as companies have declined to assign blame for the cuts, have no obligation to and are pushing contractors to slice anyway.

The Aerospace Industries Association (AIA) has seen no theme when it comes to actions by its members, association spokesman Dan Stohr wrote in an email.

“AIA has not seen any particular pattern in those decisions — each company must respond to its fiduciary duty and the requirements of the law in the manner best suited to its individual circumstances,” he wrote. “Our companies are making their own decisions on how to best prepare for sequestration on a case-by-case basis, according to their individual business plans.”

With no obvious solutions for planning ahead of the cuts, companies have turned their full attention to press campaigns, pressuring elected officials to strike a deal.

“We remain firm in our conviction that the automatic and across-the-board budget reductions under sequestration are ineffective and inefficient public policy that will weaken our civil government operations, damage our national security, and adversely impact our industry,” Lockheed Martin said in its statement. “We will also continue to work with government leaders to stop sequestration and find a more effective solution.”

Lambert said that while uncertainty remains, DoD is confident that a deal will be struck.

“We get glimpses of hope every so often, and then days and weeks of despair as they go through this process,” he said. “And that’s no way to plan a defense budget, and that’s no way to do capital planning at a company. We are convinced that there will not be a sequestration.”

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