* Lockheed sees possible claims worth hundreds of millions
* Says thousands of contracts would need to be renegotiated
* Uncertainty chills M&A activity in defense sector
By Andrea Shalal-Esa
WASHINGTON, June 19 Lockheed Martin Corp
, the Pentagon's largest supplier, said on Tuesday it
could face hundreds of millions of dollars in business claims
from suppliers if $500 billion in additional defense spending
cuts take effect in January, as currently mandated.
Lockheed Chief Executive Bob Stevens said further cuts
required under the process called "sequestration" would cause
massive disruption across the defense industry, resulting in
extensive layoffs, facilities closures and an erosion of
"From an industry perspective, the near-term horizon is
completely obscured by a fog of uncertainty," Stevens told
reporters on Tuesday, calling it a "fiction" that the U.S.
defense industry was robust enough to survive additional cuts.
Lockheed officials say they expect to complete within the
next few weeks their own assessment of the impact of the
additional budget cuts, which come on top of $487 billion in
cuts already slated to take effect over the next decade.
U.S. lawmakers are considering various ways to avert the
additional slashes, but no one has any clear answers for
Lockheed and other major U.S. defense contractors.
The additional defense cuts are part of $1.2 trillion in
U.S. budget cuts triggered after a congressional committee
failed to reach agreement on other ways to reduce the cavernous
Republicans want to slash federal spending on education and
other programs to trim the deficit, while Democrats have said
some tax reforms are needed. Lawmakers on both sides have said
they hope to avoid the mandatory defense cuts.
Stevens said the sequestration cuts could trim 10 percent of
programs across the board in just the first year, which would
carve about $3.8 billion from its annual total of $38 billion in
government contracts, potentially triggering thousands of claims
from its 43,000 suppliers.
Many of those smaller companies have signed fixed-price
contracts with Lockheed that would need to be restructured or
renegotiated if spending cuts took effect, he said. Lockheed
would then bundle those claims and bring them to the Pentagon,
"We're talking about very substantial amounts of money in
claims and requests for equitable adjustment for business
disruption," he told Reuters in an interview after delivering a
speech to reporters. Asked if the claims could total tens of
millions of dollars, Stevens said, "I think it's greater than
Stevens said the process would deliver a "blunt force
trauma" to the overall industry, hitting small businesses
especially hard and setting back the Obama administration's
drive to rebuild the U.S. high-tech manufacturing base.
"How much real savings is there going to be?" he asked,
noting that the government would ultimately have to bear the
cost of breaking thousands of contracts.
Additional budget cuts could also force Lockheed to lay off
about 10 percent of its current workforce of 123,000, Stevens
said, noting that current law requires the company to give
employees 60 to 90 days' notice of possible job cuts.
He said Lockheed had already reduced its workforce by about
18 percent over the past three years.
Given the current lack of information about which weapons
programs would be affected, the company could have to notify
every single one of its employees as early as October or
November - just before the U.S. presidential election - about
possible layoffs, he said.
Bruce Tanner, Lockheed's chief financial officer, said the
cuts could result in a total of 500,000 job losses next year
alone, including about half from the federal government and
100,000 to 200,000 across the defense industry.
Stevens said Lockheed was continuing to attack its overhead
costs, cut capital spending, reduce outlays for research and
development and consolidate facilities to prepare for leaner
Tanner told Reuters that Lockheed had in the past spent its
own money to maintain suppliers, when defense budgets were tied
up in Congress, but it would be increasingly difficult to
justify such spending given the uncertainty of sequestration.
He said the prospect of sequestration was also having a
chilling effect on mergers and acquisitions activity in the
sector, since companies were unwilling to make commitments to
buy or sell assets until it was clear whether the automatic
budget cuts could be averted.
"No one in their right mind should be doing a defense deal
between now and January 2," when the further budget cuts are due
to take effect, Tanner said. He added that he could not imagine
lawmakers allowing the cuts to take effect.