* Firms eye growth in commercial sales, defense exports
* Pentagon "raising the bar" for arms contracts
* Budget uncertainty adds risk to financial guidance
By Andrea Shalal-Esa and Karen Jacobs
NEW YORK, Nov 30 U.S. weapons makers told
investors this week they are doing all they can to prepare for
leaner and more uncertain U.S. defense budgets, including
redoubling their efforts to cut costs, drum up export sales and
sell more goods to commercial clients.
Industry executives and Pentagon officials say they are
still sorting out the potential impact of an additional $600
billion in defense cuts over the next 10 years, on top of some
$489 billion in cuts already being absorbed.
Even if those additional cuts can be averted, as
Republicans hope, the industry is facing pressure on profit
margins and a dearth of new programs after more than a decade
of strong growth, industry executives and analysts agreed.
The Pentagon's No. 2 budget official, Mike McCord, told a
conference hosted by Credit Suisse and Aviation Week that the
fiscal 2013 defense budget proposal now being finalized already
included cuts in the $40 billion-range from previous plans,
following a cut of around $25 billion in fiscal 2012.
He said the White House had not ordered the Pentagon to
revamp that plan to reflect another $50 billion in cuts, and it
would be difficult, if not impossible, to do that in the few
weeks before the budget documents must be completed.
"We're a little bit in the dark like everybody else is
about the future of sequester," McCord said.
Clay Jones, chief executive of Rockwell Collins Inc , a flight-controls supplier and subcontractor on many
key weapons programs, said commercial sales would account for a
growing share of his company's revenue as government orders
"It's been a great ride," he told the conference. "The
Rockwell Collins expects sustained double-digit growth in
its commercial business but says its outlook for government
sales is clouded by lingering uncertainty about the U.S.
defense budgets for fiscal 2012 and beyond.
Bill Swanson, chief executive of Raytheon Co , said
he was hopeful that Washington could avert the additional $600
billion in defense cuts but said his company had studied the
potential impact of such cuts.
"We've got to be smaller, we've got to be more efficient.
We'll get the job done," he said.
Raytheon, he said, was well positioned, given prospects for
continued sales in the missile defense, intelligence,
surveillance and reconnaissance, and cyber security areas.
International sales -- likely to account for 30 percent of
Raytheon's bookings in 2011 -- would help the company offset
the downturn in U.S. defense spending, he said.
Swanson cited arms sales already in the works or soon to be
completed, naming Saudi Arabia, Taiwan, Kuwait, Turkey and
"We got a lot of activity in the pipeline," he said, noting
that in addition to solid demand from the Middle East and Asia,
Raytheon was also eyeing new orders from India, Brazil and
other countries in South America.
The Navy's No. 2 acquisition official said the service had
not yet been asked to plan for additional budget cuts, and
there was no "convergence" within the Pentagon on how to deal
with the possible additional cuts.
Vice Admiral Mark Skinner, principal military deputy to the
Navy's acquisition chief, said budget plans submitted by the
Navy and other military services to Pentagon leaders addressed
only the initial round of cuts, not the additional $600 billion
now on the table.
The Navy's share of the initial cuts is $9 billion to $10
billion in fiscal 2013, Skinner said.
"Sequestration is bad," he said, referring to the
additional budget cuts required because a congressional "super
committee" failed to agree on at least $1.2 trillion of deficit
reduction over 10 years.
The cuts would affect all Pentagon programs across the
board and could result in violations of existing multi-year
contracts, he said. "We're going to break a lot of china," he
told conference participants.
Shay Assad, the Pentagon's director of pricing, said the
department was continuing its efforts to trim waste and improve
oversight of billions of dollars of contracts.
He emphasized that the effort was not aimed at squeezing
corporate profit margins, but said well-run companies deserved
better results than those whose programs were over budget and
"We're raising the bar and the expectations of our
workforce, and we expect the companies to do the same on their
side of the table," Assad told the conference.
Swanson welcomed Pentagon efforts to reform the way it buys
weapons and said Raytheon was continually trying to reduce its
costs and safeguard its healthy profit margins.
But he said industry was also vigilant about taking on too
much risk on new development programs, especially on bigger