Pentagon tells firms keep costs down to get bucks

Tue Feb 14, 2012 7:03pm EST

* Pressure grows for on-cost, on-schedule programs

* Officials insist they are not out to ruin company profits

By Andrea Shalal-Esa

WASHINGTON, Feb 14 (Reuters) - The Pentagon's acting acquisition chief Frank Kendall assured industry executives on Tuesday that there was still money to be made in defense, but said companies would have to deliver weapons within budgets and on time to be competitive.

Kendall, nominated to take over as the Pentagon's chief weapons buyer, said that over the past year he had cancelled some poorly performing programs, including Northrop Grumman Corp's unmanned Global Hawk plane.

"If you are not delivering on cost and schedule ... you are very vulnerable," Kendall, a lawyer and engineer, told a conference hosted by Aviation Week.

On Monday, the Pentagon released a fiscal 2013 budget plan calling for termination of five programs besides Global Hawk, postponing orders for Lockheed's F-35 Joint Strike Fighter, and delaying some ship orders.

Tighter budgets will increase competition for fewer programs, U.S. defense officials and industry executives said at the conference, held on Monday and Tuesday. They predicted that the number of bid protests would grow, and said companies would have to redouble their efforts to cut costs and overhead to be competitive.

Kendall said the U.S. military's budget would still put about $100 billion into procuring new weapons, and another $70 billion into research and development.

"There's still plenty of money to be made in defense," he said, echoing remarks he made last week in speeches and at a meeting with Lockheed Martin Corp executives.

"You're going to have to be leaner to be successful. You have to be competitive, and be smart about where the department is going, and you have to execute," he said.

Discord between the U.S. Defense Department and its suppliers has led to protracted contract negotiations, program terminations, and unease among investors. Some companies have opted out of competitions because of what they called onerous contract terms.

Last fall, over 100 executives signed a letter warning Defense Secretary Leon Panetta that the Pentagon's insistence on fixed-price development contracts and other measures could hurt profits, competition and jobs.

"We're not looking to put you out of business," Robert Hale, the Pentagon's top budget official, said at the conference on Tuesday.

Deborah Roty, manager for cost reduction on Raytheon Co's AIM-9X Sidewinder missile program, asked Hale about differences among Pentagon acquisition officials in their approach to estimating costs and negotiations with companies.

Hale said he was not opposed to tough contract talks, but added that the Pentagon would probably get better at negotiating with industry. "It's got to take into account that you've got to make a profit, otherwise you can't stay in business," he said.

Defense stocks were largely unchanged on Tuesday after making narrow gains on Monday as investors expressed relief that the budget proposal contained few surprises.

Standard & Poor's rating agency said on Tuesday that it planned no downgrades for arms companies as a result of the budget.

S&P credit analyst Christopher DeNicolo said budget cuts would likely result in "fairly moderate" declines in revenue and earnings for most contractors.

He said spending on procurement and development of new weapons was down, but operations and maintenance funding, also a source of business for defense contractors, would rise 5.9 percent to $209 billion in fiscal 2013, which begins Oct. 1.

Many defense companies are forecasting lower sales and earnings for 2012.

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