* 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 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
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
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
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
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.