這應該也是個訊息和機會?唉!
U.S. defense industry girding for predicted slump
By Andrea Shalal-Esa
WASHINGTON |
Fri Sep 3, 2010 2:51pm EDT
(Reuters)
- After years of predictions of a downturn that never materialized,
U.S. defense companies are now bracing in earnest for leaner times,
lower profit margins and tougher negotiations about government
contracts. Defense
Secretary Robert Gates has launched a major efficiency drive to trim
$100 billion out of the Pentagon's bloated overhead accounts from 2012
to 2016 to help avert cuts to modernization programs or funding for
troops. The
Pentagon insists it expects to get growth of 1 percent after inflation
in its overall budget in the fiscal 2012 budget request, despite cuts
expected in other government accounts. But
much of that will be eaten up by rising personnel and health costs,
leaving far less money for weapons programs than during years of double
digit growth in defense spending after the September 11, 2001, hijacking
attacks. That
has left industry executives with a growing sense of apprehension about
the future, especially given the end of combat operations in Iraq and
yawning deficits that have even some normally hawkish Republican
lawmakers calling for cuts. "The
contractors are finally waking up and realizing that Gates is serious,"
said Jim McAleese, a Virginia-based defense consultant, adding he did
not foresee big program cancellations until the fiscal 2013 budget
cycle, which begins next spring. The
Pentagon's efficiency and acquisition reforms are pressuring companies
across the industry to make their organizations leaner and sell off
unprofitable units. Many will also have to accept more risk and lower
profits on the shrinking number of defense contracts that are up for
grabs. Across
the board, prospects for flat defense budgets have prompted companies
to step up overseas arms sales, hunt for attractive acquisitions and
move into adjacent markets. Executives
from the largest defense companies will map out their strategies for
weathering the storm at the annual Reuters Aerospace and Defense Summit
in Washington next week. GRAPPLING WITH SOFTENING DEMAND "Everybody
in the sector knew that one day there would be a downturn. Now it has
finally hit the industry and companies are determining what concrete
steps they must take to deal with softening demand," said Loren
Thompson, chief operating officer of the Virginia-based Lexington
Institute. Recent
news of delays in the U.S. Army's multibillion-dollar ground combat
vehicle program and an even bigger U.S. Navy warship program -- two of
the few new Pentagon programs out for bidding -- deeply unsettled
industry executives. The U.S. Air Force still plans to award a new refueling plane deal valued at up to $50 billion to either Boeing Co (BA.N) or its European rival, Airbus parent EADS (EAD.PA), this fall, but says that could mean a deal as late as mid-December. And
the Pentagon has taken months longer than expected to finalize a
contract with Lockheed for the next batch of F-35 fighters, evidence of
the tighter scrutiny being given to any contracts amid the Defense
Department's new war on waste. MINING THE BACKLOG Thompson
said most companies have a solid backlog of orders from Bush
administration years that would last for some time, although many
companies are now trying to "mine the backlog," and get more out of the
orders they already have. That means layoffs, tougher negotiations with suppliers and customers, and efforts to cut expenses across the board. Some companies like Lockheed Martin Corp (LMT.N) and Northrop Grumman Corp (NOC.N)
have already taken more strategic steps to adjust their portfolios and
sell off units that weren't a good fit in the current budget
environment. Others that played a big role in supplying vehicles for the Iraq and Afghanistan wars, like BAE Systems (BAES.L), Oshkosh Corp (OSK.N) and General Dynamics Corp (GD.N),
could face some headwinds, as could companies that were heavily
dependent on big military networking programs that are going out of
vogue. Mergers
and acquisitions activity is expected to pick up, given low valuations,
ample cash reserves and the industry's need to continue generating
growth for shareholders. "Last
year we were saying 'Flat is the new up.' This year and next, the
headline is, 'M&A is back,'" said Tom Captain, global aerospace and
defense sector leader for Deloitte LLP. Defense
stocks have declined 1 percent so far this year and could face further
downturns in coming months, analysts say, although they note the
November U.S. congressional elections or a major extremist attack could
dramatically change the story. Richard
Aboulafia, vice president of the Virginia-based Teal Group, said
defense stocks still represented a refuge for investors, given mounting
fears about a double-dip recession. "Defense
companies would be in serious trouble if the economy weren't so
uncertain. It's a safe haven compared to what else is out there," he
said, adding "It's as close as you can get to guaranteed returns." But
he said many lawmakers appeared to be suffering from "defense spending
fatigue" and it was uncertain how long the Pentagon would be able to
maintain a steady budget topline, given the fact that Gates is already
flagging his retirement. Lawmakers
are still willing to fight for some programs, like the second Lockheed
F-35 fighter engine, being built by General Electric Co (GE.N) and Britain's Rolls Royce (RR.L), a program Gates has tried repeatedly to kill. GE
and Rolls are fighting hard to maintain the contract and avoid handing
Pratt & Whitney, a unit of United Technologies Corp (UTX.N), a monopoly stake in an engine market valued at around $100 billion over the longer term. Even
if the budget does decline somewhat and profit margins come down from
current rates around 10 to 12 percent, Aboulafia said the overall level
of defense spending would remain high. "You're still talking about an
awful lot of money and relatively low risk in an economy with relatively
few robust opportunities," he said. As
defense companies face tamer growth, their commercial counterparts are
poised to benefit as air traffic improves from the two-year downturn and
production of Boeing's 787 Dreamliner plane ramps up. "We're
going to see three, four, five years of considerable topline growth and
that will benefit not only Boeing's earnings but earnings and revenues
for the suppliers," said Paul Nisbet, an analyst with JSA Research and
longtime aerospace watcher. "The commercial side from all indications, if we don't have a real bad world economy, is in for some very good years." (Reporting by Andrea Shalal-Esa; Additional reporting by Karen Jacobs in Atlanta; Editing by Phil Berlowitz)
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