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click on www.reuters.com/summit/Aero13)
* Some small companies going out of business
* Prime contractors stepping in to help
* Pentagon has some resources for firms in trouble
By Andrea Shalal-Esa
WASHINGTON, Sept 5 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, 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
Executives at Lockheed Martin Corp and Boeing Co
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.
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(Additional reporting by Paige Gance; Editing by Tim Dobbyn)