Loomis and others say most defense contracts are prepared. “In the past when the defense cycle came down, like in the late ’80s to early ’90s, it came down fast,” he notes. “This one is more of a slow train wreck—in a good way. Defense spending peaked in 2008 at the height of the Iraq and Afghanistan wars, and has trended down modestly since. This means that defense contractors have had a lot of time to get ready. For the most part, they haven’t wasted this time.”
Adams concurs: “Their CFOs have really stepped up their game.” Here is a look at how the finance chiefs of five defense contractors are preparing for a new era of austerity at the Pentagon.
Lockheed Martin: Eyeing New Businesses
So far at least, the impact of sequestration on Lockheed Martin has been light. Earlier in the year CFO Tanner had projected a possible $825 million reduction in revenue for fiscal 2013—less than 2% of the defense giant’s 2012 revenues—but he has since backed off that estimate climate.
But Lockheed isn’t taking Pentagon cuts lightly. Over the past five years, the company has downsized its workforce by 20%, from 146,000 employees to 116,000, and introduced a supplemental executive retirement program targeting senior leaders, who accepted buyouts and were not replaced. Lockheed also optimized manufacturing capacity, closing a Minnesota manufacturing facility in 2010 that made communications systems used on military ships and aircraft. The same year it moved manufacturing at another facility in Maryland to Arkansas. And it shortened the terms on its lease agreements, given the favorable real estate climate.
Trimming expenses are one thing, but what about generating revenue? CFO Tanner concedes that reductions in government business, which represented 82% of revenues in 2012, are discomfiting. “When you have a customer that large and proportional to your portfolio, and it is projected to shrink its business, you need to look for other areas to grow or at least maintain that business,” he says.
In this regard, Lockheed has been eyeing adjacent new businesses like cyber security and cyber protection. “Companies have the same systems and networks that relate to the same Internet and the same threats and need for protections that the government has,” Tanner says. “For the right company and the right deal, we will commercialize the products we’ve provided the government.”
He adds that Lockheed has already sold such systems to several Fortune 500 companies, “but our clients don’t like to be named.”
Other adjacencies presenting new or additional sources of revenue include energy conservation, particularly in the area of smart grids for sale to utilities. For instance, Lockheed can make digital technology with two-way communications controlling appliances at consumers’ homes to save energy. “We’re also looking internationally for opportunities in our core markets that align with the security needs of our global allies,” Tanner says.