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U.S. arms makers see chance of interim U.S. budget deal
December 3, 2013 / 11:17 PM / 4 years ago

U.S. arms makers see chance of interim U.S. budget deal

WASHINGTON (Reuters) - Executives at U.S. weapons makers on Tuesday said they were cautiously optimistic that U.S. lawmakers would reach agreement on an interim federal budget to smooth out across-the-board cuts in military funding in fiscal 2014 and 2015.

Yorihiko Kojima (L), chairman of the board of Mitsubishi Corporation, wears the Boston Red Sox baseball cap given to him as a gift from William Swanson (R), CEO of Raytheon Corporation, as they pose for a photograph after Kojima delivered the keynote speech at the Boston College Chief Executives' Club of Boston luncheon in Boston, Massachusetts September 25, 2013. REUTERS/Brian Snyder

Chief Executive William Swanson of Raytheon Corp (RTN.N) and Chief Financial Officer Bruce Tanner of Lockheed Martin Corp (LMT.N) said on Tuesday they did not expect Congress to reach a comprehensive agreement on reducing the federal deficit, which would help the Pentagon avert the threat of $500 billion in military spending cuts over the next decade.

But they said a “small bargain” for a shorter period appeared increasingly likely, potentially good news for arms makers. Thousands of workers have been laid off as companies consolidated facilities in anticipation of spending cuts.

Tanner told a conference hosted by Credit Suisse that he saw a chance of lawmakers agreeing to a “short-term fix” that would at least retain spending levels since in fiscal 2013.

“There is an impetus clearly to get something done,” he said. “It’s not probably a complete aversion of sequestration for the next decade ... but I think there is a short-term one- or two-year fix that we are hopeful has some elimination or reduction of the planned sequestration cuts in FY14 and FY15 as part of that two-year short-term settlement.”

U.S. lawmakers on a 20-member Senate-House negotiating committee are aiming for a two-year deal that would ease severe across-the-board cuts required under a process called sequestration.

The Pentagon is facing about $37 billion in reductions from its projected base budget in fiscal 2014 when the second round of sequestration budget cuts take effect in January, with additional cuts expected every year through 2022.

“The grand bargain doesn’t seem in the cards to me,” Swanson told the Credit Suisse investor conference.

“There is some talk about a small bargain, and the small bargain is how do you minimize the dip in 2014 and 2015 ... People are working hard to see if they can come up with something in that regard,” he said.

Defense officials have said the cuts will be harder to absorb in fiscal 2014 than last year, when the military was able to use funds left over from earlier years to protect procurement programs and mitigate the damage from the cuts.

“That’s a one-trick pony. It’s gone,” Alan Estevez, the Pentagon’s No. 2 weapons buyer, told the conference. He said he hoped Congress would reach some agreement to avert the worst of the sequestration cuts next year and help provide more stability for budget planners and industry.

Swanson said he recently met with lawmakers in Washington, and detected more support for at least an interim solution.

“I believe there is a mood now that this has got to get sorted out,” he said. “If you look at approval ratings, they aren’t that good, and so if people care about them, then they have got to do something about it.”

Tanner said Lockheed is projecting its first year-to-year drop in revenues in 11 years in 2013, but could see some modest “upside” if Congress passes a two-year interim budget measure.

He said Lockheed, the Pentagon’s biggest supplier, also expected growing foreign sales of its F-35 fighter jet to help offset any reduction in U.S. orders triggered by budget cuts.

Tanner said a possible order of 40 jets from South Korea, plus new orders from Singapore and other unnamed countries, would add to the current projection of 539 jets to be ordered by the U.S. military and its allies over the next five years.

Tanner said Frank Kendall, the Pentagon’s top weapons buyer, had pledged to try to maintain F-35 orders to ensure the ramp up in production needed to lower the warplane’s cost.

But given the large number of combined orders expected, even a small deferral of additional U.S. orders would not be as significant, he said.

Reporting by Andrea Shalal-Esa; Editing by Diane Craft

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