Uncertainty clouds outlook for weapon makers: BAE executive

WASHINGTON, Tue Sep 4, 2012 – Uncertainty about $500 billion in additional U.S. defense budget cuts slated to start taking effect in January is “wreaking havoc” on weapons makers, threatening 1 million jobs, jeopardizing the health of suppliers and slowing acquisitions, Linda Hudson, the top U.S. executive at Britain’s BAE Systems Plc, told Reuters.

BAE Systems may have to warn all of its 30,000-plus U.S. employees just before the Nov. 6 presidential election that the budget cuts could lead to about 4,000 layoffs, said Hudson, chief executive officer of the U.S. arm of Britain’s largest defense contractor.

“The environment is wreaking havoc on all of us and our ability to do rational things,” Hudson said in an interview last week, noting that uncertainty about the budget outlook was compounded by the presidential election and U.S. tax rates.

“If everything is cut across the board, we may end up having to send notices to all of our employees that work on government contracts because we can’t pinpoint a location that would be affected, or a program that would be affected,” she said.

Hudson’s comments came about a month after the U.S. Labor Department said the circumstances surrounding the planned cuts were too uncertain to require defense and other federal contractors to comply with a law calling for employees to be notified 60 days before major layoffs or plant closures.

Honeywell sees defense, space sales down 4 to 5 percent

MORRISTOWN, N.J. – Diversified manufacturer Honeywell International Inc. said it expects sales at its defense and space business to fall by 4 percent to 5 percent this year as the United States pares back its military spending.

The world’s largest maker of cockpit electronics said on Tuesday the forecast decline follows a 2 percent drop in 2011. It looks for defense revenue to stabilize in 2013 and resume slow growth the year after.

This forecast was included in its previously disclosed full-year earnings target of $4.25 per share to $4.50 per share, up 5 to 11 percent from 2011.

The U.S. Defense Department’s aims to cut spending by $487 billion over the next decade by eliminating 100,000 ground troops as it winds down from major operations in Afghanistan and Iraq and aims for a smaller, more mobile force.

Boeing says it will close a Wichita plant by end of 2013

SEATTLE ―¸ Boeing Co. said it would close a Defense, Space & Security facility that employees more than 2,160 workers in Wichita by the end of 2013.

The plant is the base for the company’s Global Transport & Executive Systems business and its B-52 and 767 International Tanker programs.

Boeing said in a statement that the site does not have enough sustainable business on the horizon to create an affordable cost structure to maintain and generate new business.

“In this time of defense budget reductions, as well as shifting customer priorities, Boeing has decided to close its operations in Wichita to reduce costs, increase efficiencies, and drive competitiveness,” said Mark Bass, vice president and general manager for BDS’ Maintenance, Modifications & Upgrades division in the statement.

Bass said Boeing does not anticipate job reductions as a result of this decision until early in the third quarter of 2012.

Boeing announced the decision after completing a study of the plant. The plane maker’s defense business has about 64,000 workers.

Boeing shares were down 17 cents, or 0.2 percent, at $74.05 on the New York Stock Exchange.

Boeing defense CEO: braced for deep spending cut over 10 years

SEATTLE ―Boeing Co’s. defense unit is bracing for the “worst case scenario” — a trillion-dollar U.S. defense budget reduction over 10 years, the chief executive of the company’s Defense Space and Security business said on Thursday.

Speaking on a webcast of a Bank of America Merrill Lynch forum, Dennis Muilenburg said the company must be realistic about the budget outlook.

“Now from an operational standpoint, productivity standpoint, we are assuming that worst case scenario,” Muilenburg said. “So we are designing our cost structure to accommodate a trillion-dollar budget reduction.”

The congressional panel created over the summer as part of the U.S. agreement to raise the debt ceiling must recommend $1.2 trillion in spending cuts later this month. If it fails to reach a deal, automatic cuts of that amount would kick in, to be split equally between defense and non-defense programs.

That would force the U.S. Defense Department to take steeper additional cuts on top of the $350 billion in spending reductions it has already set over the next decade.

Defense contractors are reducing headcount and shedding non-core units in preparation for leaner global budgets.

Boeing, which splits its business between defense products and commercial airplanes, believes that while defense spending is shrinking in the United States, opportunities remain in international markets, Muilenburg said.

He said he sees especially strong budget growth in the Middle East and Asia Pacific regions.

“We like the position of our portfolio in that tough environment,” he said, noting a backlog worth $59 billion for the Defense, Space & Security unit.

Shares of Boeing were up 0.6 percent to $64.93 on the New York Stock Exchange.

Bigger firms seen in next U.S. defense consolidation as takeovers increase

WASHINGTON ― United Technologies Corp’s. interest in acquiring Goodrich Corp. marks the start of a more active consolidation phase in the U.S. aerospace and defense industry that could ultimately winnow the current field of five or six prime contractors.

Industry executives expect more takeovers of second- and third-tier defense suppliers in coming months and say there could even be changes in the top tier, depending on the depth of defense spending cuts mandated by U.S. budget deficits.

For years, experts ruled out further consolidation among the biggest arms makers after the mega-mergers sparked by the end of the Cold War. But the prospect of deep spending cuts and continued pressure on companies to generate profits have revived the specter of bigger mergers.

Deals in recent years have been smaller, punctuated only by the $5 billion takeover of U.S. defense contractor DRS Technologies by Italy’s Finmeccanica SpA in 2008.

If United Tech prevails in its bid to acquire Goodrich — a deal likely valued at around $12 billion — that would probably be the harbinger of other large deals.

“This changes the whole spectrum,” said one senior defense industry executive. “Everything’s on the table now. I’m not saying it’s going to happen, but it’s a whole new ballgame.”

Another senior executive agreed, saying, “This feels like the early 1990s again. We’re in for some turbulent times.”

The biggest companies in the U.S. defense market are Lockheed Martin Corp., Boeing Co., Northrop Grumman Corp., General Dynamics Corp. and Raytheon Co., as well as Britain’s BAE Systems.

After a decade of sharp growth in defense spending, the U.S. Defense Department is now scrambling to cut at least $350 billion from previous spending projections, and that could rise to $900 billion unless Congress finds at least $1.2 trillion in deficit cuts by year-end.

Budget pressures have already scaled back new weapons programs, and lawmakers have taken aim at additional projects in recent weeks — leaving less work for defense companies to divvy up. Many companies have shifted into services, and that trend will continue. Others are looking to diversify into more commercial work to offset the drop in government orders.

“You have a lot of defense companies that are cash-rich and are looking at ways to move into adjacent areas; it’s possible that they would expand what they do in commercial aerospace,” said Philip Finnegan, director of corporate analysis for the Teal Group, an aerospace consultancy in Fairfax, Va.

Defense Undersecretary Ashton Carter and other officials had tried for the past year to assure industry executives that they would be able to stave off big spending cuts.

But those hopes have been overtaken by a new reality, said defense analyst Loren Thompson of the Lexington Institute. “What Secretary Carter told the defense industry about its future prospects just isn’t panning out,” he said.

Brett Lambert, deputy assistant secretary of defense, manufacturing and industrial base policy, this month acknowledged the toll that uncertainty was taking on the sector.

Given the difficult economic climate, the Defense Department fully expects more mergers, acquisitions and spinoffs in coming years, mostly in the supplier base, Lambert told the Reuters Aerospace and Defense Summit in Washington.

While the Pentagon was comfortable with the current number of prime contractors, it was not “ruling anything out,” he said.

Adam Palmer, who manages aerospace and defense investments for the Carlyle Group private equity firm, told Reuters that defense officials might rethink their opposition to big mergers if spending cuts gut the market for certain types of weapons.

Carter, nominated for the No. 2 job at the Defense Department, is no stranger to defense consolidation, having attended the 1993 “Last Supper” where his friend and mentor, then-Deputy