Defense contractors mourn uncertain federal budget
"Sequestration" is the single worst word that defense contractors can think of as they look toward a federal defense budget that's likely to be billions less than was spent in the past or even expected for next year, executives said.
In short, sequestration is the official term for the automatic budget cuts — $500 billion over 10 years and $50 billion in 2013 — that will be factored into U.S. Defense Department budgets after Congress failed to reach a compromise last year on federal spending.
What it means is that midstate defense contractors are taking a hard look at their businesses, and in many cases where they can find new opportunities in the private sector to make up for the defense shortfalls in their revenue. But more than anything, they're mourning the uncertainty of how much of their business will fall to the ax.
"It's a frustrating environment because it's difficult to get information on what timing (for contracts and cuts) will be like," said Tom Mills, president of Gichner Systems Group in York County.
Gichner, a division of San Diego-based Kratos Defense & Security Systems Inc., makes large metal containers for shipping, electronics storage and soldier shelters. In 2010, the company had more than $19 million in federal government contracts, according to statistics aggregated by GovernmentContractsWon.com.
Most government contractors are confused and worried about sequestration, Mills said. Because the 2013 budget is facing major cuts and isn't yet finalized by Congress, individual military commands are unsure of their money and holding back on major purchases, he said.
BAE Systems, the London-based weapons systems maker with a York County facility, also is watching defense spending carefully, said Randy Coble, a spokesman for the company's West Manchester Township facility.
"It's expected that the next two years will be lean ones in the defense industry, and the York site will be no exception to that rule," he said. "It reflects the reality of the challenges that exist: for example, a still-sluggish economy and shifting national priorities in terms of federal spending."
BAE still is working on contracts with various branches of the military, including remanufacturing Hercules recovery vehicles through 2013, refurbishing Paladin mobile artillery prototypes with potential for large-scale production in 2015, manufacturing 138 medium mine-protected vehicles that will get under way in the second half of this year, and welding and machining work on a Navy missile launch system.
Over the past 10 years, BAE's York facility — a United Defense facility before BAE acquired that company in 2005 — was the largest military supplier in Central Pennsylvania, working on 233 contracts worth $12.5 billion, according to GovernmentContractsWon.com. In 2010, BAE had 20 contracts worth more than $880 million. However, that was down 32 percent from $1.3 billion in 2009.
In coming years, it's expected BAE will see a substantial drop in work on refurbishing Bradley Fighting Vehicles, one of its longest-running programs associated with the needs of the Iraq War, Coble said.
At the height of the war, BAE was refurbishing four Bradleys a week, he said. Today, it's down to less than two, and that's expected to decline further, meaning fewer jobs at the York facility, he said.
"(The defense sector slowdown) will impact the York site itself and have a ripple effect on the region and beyond, in terms of our supplier base," Coble said. "For example, the site spent more than $26 million in 2011 alone with 139 York County-based suppliers."
Large defense contractors such as BAE go through the cycle often, and it's just something they deal with, he said. But even during relative peace and defense budget cuts, there's still work the Pentagon needs to maintain its equipment and prepare for future threats, he said. BAE can capture some of those contracts, he said.
Other companies shift to the commercial sectors to find business, even if it doesn't replace the full breadth of work they did for the government.
"You need to expand your markets, both in the federal government and without it," said Tim Kenyon, chief financial officer of Cumberland County-based software and information technology firm Target Media Mid Atlantic Inc., also known as Target Systems.
The Silver Spring Township company has received 67 contracts worth $83 million from the federal government over the past 10 years, according to GovernmentContractsWon.com. In 2010, the company received 14 contracts worth $15 million compared with 15 contracts worth $14 million the year before.
Overall, the amount of work Target Systems has been doing for the federal government has been steadily increasing. The largest jump was from 2006 to 2007, when the company nearly tripled its work from four contracts worth
$6.7 million to 11 contracts worth $13.5 million, according to statistics.
Kenyon said he's glad Target Systems isn't on the weapons hardware side because applications software design transfers better to the private sector.
"Developing database-driven websites is something we do a lot of for the federal government, and we're doing more of it for the private sector, too," he said.
The company has been actively courting the expanding health care IT market, where technology, electronic medical records and information exchanges are creating a whole new niche industry, he said.
But any company working for the federal government, and particularly the Defense Department, has to keep up to speed on where spending will go in coming years, he said.
"Right now things are OK," Kenyon said. "There's still work to do, but the feds are taking a hard look at everything, and that goes for hardware and services."