Budget cuts squeezing smaller defense firms

WASHINGTON Thu Sep 5, 2013 7:40pm EDT

Aerospace Industries Association CEO Marion Blakey attends the Reuters Aerospace and Defense Summit in Washington September 5, 2013. REUTERS/Gary Cameron

Aerospace Industries Association CEO Marion Blakey attends the Reuters Aerospace and Defense Summit in Washington September 5, 2013.

Credit: Reuters/Gary Cameron

WASHINGTON (Reuters) - Small companies that make components for everything from tanks to fighter jets and satellites are bearing the brunt of cuts in U.S. military spending with the first casualties already showing up, top U.S. industry and government officials told Reuters this week.

"The small companies don't have the same access to capital, they don't have the strong internal financials," Marion Blakey, president of the Aerospace Industries Association trade group told the Reuters Aerospace and Defense Summit on Thursday.

"We've had a couple say that they are going out of business," she told the summit.

Linda Hudson, chief executive of the U.S. unit of Britain's BAE Systems (BAES.L), said her company is keeping closer tabs on its suppliers than ever before, and has already stepped in to acquire one company to ensure an uninterrupted supply of cathode ray tubes for its electronics sector.

"We are monitoring our suppliers in a way we have never monitored our suppliers," Hudson told the Reuters summit, noting that her company was willing to invest in certain cases to "make sure a critical hole doesn't develop in our supply chain."

In June, BAE spent 1 million pounds to buy certain assets from Brimar Ltd, a Manchester, UK-based firm that entered bankruptcy proceedings in Britain in November of 2012.

U.S. industry executives and government officials have been warning for over a year that cutting $500 billion from U.S. defense spending over the next decade - on top of $487 billion in reductions already planned - would hit smaller players in the defense industry particularly hard.

Frank Kendall, the Pentagon's chief arms buyer, said the Defense Department had compiled a large, detailed database identifying suppliers by sector and tier that was helping track problems, especially among companies that produced critical technologies that needed to be preserved.

He said the Pentagon had a small amount of funding - just tens of millions of dollars - to intervene in specific cases, and was also careful to assess the fallout of its budget decisions on smaller firms.

"There are two or three separate accounts that we can draw from that give us some opportunity to protect people that we think are critical to us," Kendall told the summit.

Blakey said 88 percent of smaller suppliers surveyed earlier this year were feeling the effects of U.S. budget cuts.

Scott Thompson, who heads the aerospace and defense practice of PricewaterhouseCoopers, said uncertainty about U.S. military spending was taking a toll on the overall sector, and had stalled merger and acquisition activity for about two years.

He said there had been about $4.5 billion in deals in the global defense sector in the first six months of 2013, excluding the merger of two Chinese companies, which was about 50 percent below the rolling 10-year average.

Thompson said a slowdown in contracts was already putting pressure on smaller companies that had narrower margins, many of whom were sole source suppliers for bigger programs.

He said he expected more vertical integration in the lower tiers of the sector in coming years, with small and medium-sized firms acquiring even small "mom and pop" companies affected by declining volumes.

Executives at Lockheed Martin Corp (LMT.N) and Boeing Co (BA.N) echoed those concerns at the summit, saying there were keeping a close eye on their key suppliers, and had already helped some firms facing cash flow issues.

"We have a robust process to evaluate the health of our supply chain," said Dale Bennett, who heads Lockheed's Mission Systems and Training business, adding that his firm stood ready to buy a company's technology, inject cash or even acquire firms to safeguard the health of suppliers of key components.

Dennis Muilenburg, chief executive of Boeing Defense, Space and Security, said his company preferred to help suppliers with capital injections or even management help, rather than outright acquiring companies that were in trouble.

"Acquisitions for the sake of supply chain health is not something we try and do," he said.

Follow Reuters Summits on Twitter @Reuters_Summits

(Additional reporting by Paige Gance; Editing by Tim Dobbyn)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.