Contracts with suppliers would have to be modified with untold cost consequences, if automatic U.S. government budget reductions through sequestration become a reality in January, according to Lockheed Martin chairman and CEO Bob Stevens. That could affect anywhere up to 40,000 suppliers in the case of Lockheed Martin, a $46 billion civil, government and defense contractor.
In a speech in Arlington, Va., on June 19, Stevens echoed increasingly urgent warnings delivered by the Aerospace Industries Association and other aerospace and defense industry executives, including Boeing Defense and Security president and CEO Dennis Muilenberg, about the damage that would result from sequestration, a congressionally mandated reduction of $1.2 trillion in government spending over the next decade. Half of that amount would come from the defense budget, which is already being reduced by $487 billion over 10 years, compared with previously planned levels. Action by the U.S. Congress to avert sequestration is not expected until after the November presidential election.
Stevens said Lockheed Martin anticipates about a 10-percent across-the-board reduction in government spending due to sequestration. But the company does not have enough information to advise its concerned suppliers how this will affect contracts. “When we have a modification of our contracts, we’re going to reschedule up to 40,000 suppliers,” he said. “My sense is those suppliers will say, ‘That’s a business disruption, and we’re going to claim the adverse cost of the disruption from you.’ We’ll be compelled to pass that along as the prime contractor to our government customer.”
Lockheed Martin has been preparing for reduced U.S. defense spending for some time. The company has eliminated 1.5 million sq ft of facilities space in the last few years, and plans to remove another 2.9 million sq ft by the end of 2014, Stevens said. The workforce of 123,000 employees is 18-percent smaller than it was three years ago “and the pace of our hiring has slowed considerably,” he said.
In 2010, Lockheed Martin said it would close its Mission Systems and Sensors facility in Eagan, Minn., by 2013. Christopher Kubasik, who will succeed Stevens as CEO in January, said further consolidation is taking place in Fort Worth, Texas, and in Montgomery County, Md., home to the company’s Bethesda headquarters. If sequestration were to occur, “There would be additive numbers to that and locations yet to be identified,” Kubasik said.