Lockheed Job Cuts Echo Through Industry as Budget Falls

Lockheed Martin Corp. (LMT), the biggest contractor with the U.S. government, has led the way in what may become a roster of companies shedding employees under pressure from reductions in Pentagon spending.

Lockheed said yesterday it would cut 4,000 jobs in four of its five business segments. Chief Executive Officer Marillyn Hewson cited “government budget cuts and an increasingly complex global security landscape” in a statement.

“You will see a contraction among large and medium-sized and possibly small defense contractors,” said Robert Nichols, who leads the government contracts practice group in Washington at Covington & Burling LLP. “I assume this is not the last headline to this effect regarding defense industry layoffs.”

The Defense Department faces budget reductions of about $500 billion over a decade under the automatic cuts called sequestration, including about $52 billion in the current fiscal year. That’s in addition to more than $400 billion in cuts over 10 years already included in the law that led to sequestration.

“They’ve been on a gravy train for a decade,” said Robert Levinson, an analyst with Bloomberg Government, referring to contractors such as Lockheed during an era of escalating defense outlays during the wars in Iraq and Afghanistan. “Now they’re living in a different world, and they’re adjusting just like any company would.”

Lockheed rose less than 1 percent to $138.29 in trading in New York yesterday and has soared 50 percent this year, compared with the 26 percent increase in the benchmark Standard & Poor’s 500 Index.

While some of the biggest U.S. defense contractors have been reducing their job rolls gradually in recent years, Lockheed’s move dwarfs announcements by others this year in sheer numbers.

BAE Cuts

The U.S. unit of London-based BAE Systems Plc (BA/) said last month that production of ground vehicles would cease at a Sealy, Texas, plant by mid-2014, eliminating about 325 jobs. It also said in September it would close a Fayette, Pennsylvania, facility where 78 employees and 35 contractors performed work tied to Army combat vehicles, said Kristin Gossel, a spokeswoman.

Natel Engineering Co., an electronics manufacturing company based in Chatsworth, California, has cut 30 of its 300 workers.

Lockheed’s reductions spare only its Aeronautics business segment, which accounts for 30 percent of the company’s sales and includes the F-35 jet, the Pentagon’s costliest weapons program at a projected $391.2 billion.

Among those affected are 600 workers at an information systems facility in Goodyear, Arizona, that Lockheed said it plans to close by early 2015. The site’s programs, which include development of radar technology, are expected to be shifted to Denver and Valley Forge, Pennsylvania, according to the company.

Hitting Home

Romina Khananisho, a spokeswoman for the city of Goodyear, called Lockheed’s action devastating. Lockheed is one of the community’s largest and best-paying employers, she said. The town of almost 70,000 residents is about 20 miles (32 kilometers) southwest of downtown Phoenix.

“Sequestration is starting to hit home,” Khananisho said. “The federal government’s inability to come together is really affecting everyday residents.”

Defense spending, once sacrosanct for its role in national security and its political appeal as a job creator, has increasingly become a target for lawmakers looking for ways to reduce the federal deficit without raising taxes or shredding the safety net for poorer Americans.

“It’s become hostage to the greater political struggle in Washington,” said Roger Zakheim, former general counsel for the House Armed Services Committee who is also now at the Covington firm. “Until you resolve the bigger questions, the mechanism will continue to have defense be the bill-payer.”

Anticipatory Cuts

Companies with multi-year contracts that are coming to an end are cutting overhead and employees in anticipation of future sending reductions, said Yair Reiner, an analyst with Oppenheimer & Co. in New York.

“Changes in the federal budget trickle down to contractors over an extended period of time,” Reiner said. “More than half of the revenue Lockheed Martin generates was allocated two and three years prior. When the cuts arrive, the company is already properly sized.”

Pentagon officials have managed so far to protect major weapons systems from deep cuts under sequestration, including by locking in some contracts for the F-35 before the automatic reductions took effect in March.

The F-35 Joint Strike Fighter accounts for about 15 percent of Lockheed’s revenue, said William Loomis, Baltimore-based managing director at Stifel Nicolaus & Co.

“Aeronautics will be touched in the future,” Loomis said of that business segment.

Maintaining Profits

For now, the biggest U.S. defense contractors have squeezed expenses to maintain profits even as sales fell.

While Lockheed reported last month that sales declined 4.4 percent to $11.3 billion in the third quarter, it said profit from continuing operations rose 16 percent from a year earlier and it raised its full-year earnings forecast.

Since 2008, Lockheed said, it has trimmed capital expenses and cut its workforce to 116,000 employees from 146,000.

“The government work is going to the low-price bidder,” said Brian Ruttenbur, an analyst with CRT Capital Group LLC in Stamford, Connecticut. “If your costs are out of whack, you’re going to wind up laying people off down the road anyhow.”

Contractors of varying size have urged Congress to come up with alternatives to sequestration. This week, the Aerospace Industries Association, a trade group based in Arlington, Virginia, arranged for representatives of smaller suppliers to lobby at the Capitol for Congress to pass a spending bill that would end the automatic cuts.

“The effects of sequestration are already affecting the supply chain,” Thomas McKee, a vice president of Natel Engineering, said in an interview during the lobbying trip. “We need Congress to do its job. Give us the certainty we need.”

Natel has cut 10 percent of its workforce.

To contact the reporters on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net; Kathleen Miller in Washington at kmiller01@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net

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