Lockheed braces for program cuts, delays due to U.S. budget woes

WASHINGTON Tue Sep 3, 2013 2:25pm EDT

Lockheed Martin Executive Vice President for Mission Systems and Training, Dale Bennett, is pictured at the Reuters Aerospace and Defense Summit in Washington, September 3, 2013. REUTERS/Jason Reed

Lockheed Martin Executive Vice President for Mission Systems and Training, Dale Bennett, is pictured at the Reuters Aerospace and Defense Summit in Washington, September 3, 2013.

Credit: Reuters/Jason Reed

WASHINGTON (Reuters) - Lockheed Martin Corp (LMT.N) is bracing for cuts and delays next year in major weapons programs, including a new coastal warship it builds for the U.S. Navy, unless Congress acts to reverse mandatory reductions in U.S. military spending, a top company official said Tuesday.

Dale Bennett, executive vice president of Lockheed's Mission Systems and Training division, said the company was already seeing a slowdown in programs and declines in contract awards as result of spending cuts required under a process known as "sequestration," and the situation could worsen next year.

Bennett told the Reuters Aerospace and Defense Summit the Pentagon had largely achieved the cuts required in fiscal 2013 through furloughs of non-military employees and by reducing operations and maintenance spending, but weapons programs would likely take a bigger hit going forward.

It will also be difficult for the Pentagon to start any new development programs.

"The impact of sequestration will be felt more acutely next year," Bennett said, noting the Pentagon could not cut personnel costs quickly enough to achieve the required cuts, which was forcing them to make difficult choices about programs.

Lockheed and other arms makers have been laying off workers and consolidating facilities to brace for a downturn after the end of the Iraq war, and the drawdown in Afghanistan. But the budget cuts now planned - about $1 trillion over the next decade - are more far-reaching than many companies or defense officials expected.

In an interview published Monday, Pentagon acquisition chief Frank Kendall told the Washington Post that officials were looking at delaying and canceling programs in coming weeks as result of the automatic cuts. He did not name specific programs.

Kendall is due to speak at the Reuters summit on Wednesday.

Bennett said Lockheed was focused on keeping its programs within budget and on schedule, and making sure it delivered the technical capabilities it promised.

"All the programs are on the table to be discussed," Bennett said. "The programs that are performing will have a higher probability of proceeding forward."

Bennett said Navy and Pentagon officials had not notified Lockheed about possible cuts to the Littoral Combat Ship (LCS) program despite reports that officials could halt the program at 24 ships, instead of the 52 units now in the Navy's plan.

Lockheed and Australia's Austal Ltd (ASB.AX) are building two different models of the new smaller warships for the Navy.

Defense officials said the Navy is working through several scenarios to achieve another 10 percent cut in military spending, including options that could reduce the total number of LCS ships that it would buy, but no decisions had been made.

The Navy Times newspaper reported on Monday that top Pentagon leaders support the idea of limiting the total LCS buy to 24 ships to achieve the needed budget reductions, while Navy officials were arguing for no less than 32 ships.

Pentagon spokeswoman Maureen Schumann said no decisions had been made. She said Defense Secretary Chuck Hagel had told reporters at the end of July that more analysis was required before he made any force structure or program decisions. "That remains our current position," she said.

Navy spokeswoman Lieutenant Caroline Hutcheson said the Navy was continuing to evaluate future demand for forces and the right way to balance fiscal and operational risk, and no decisions had been made on reducing the planned LCS purchase.

"We remain committed to a 52-ship LCS program," she said. "This number accurately and appropriately captures the requirement for capacity and capabilities."

Bennett said Lockheed remained convinced the LCS class of ships, which are smaller and require less personnel, offered the Navy the best way to increase the size of its fleet, which is now at historic lows.

He said a decision to more than halve the expected purchases could have consequences for the companies building the ships and their suppliers. Current contracts will keep production of the Lockheed LCS ship running through 2018, he said.

"It's always problematic when you're at the front end of a program and you're making those investments ... and you later find out that the budget doesn't support those kind of quantities," he said.

He said Lockheed remained in discussions with Saudi Arabia and the United Arab Emirates about possible sales of the new ships, and was looking at licensing the design for production in other countries.

An initial sale could emerge for the program in coming years, he said.

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(Editing by Tim Dobbyn)