Lockheed Warns Government Shutdown Could Delay Equipment, Inflate Costs

By Doug Cameron Features Dow Jones Newswires

Lockheed Martin Corp. said Saturday that the government shutdown could inflate acquisition costs and delay critical equipment as defense contractors hunkered down for continuing uncertainty over the military budget.

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Lockheed, the world's largest defense company by sales, and peers such as Boeing Co. and Raytheon Co. said they have triggered contingency plans to keep programs running to compensate for any furloughs among the Defense Department's civilian staff.

The defense sector has already been working for months under a series of temporary budgets -- known as continuing resolutions -- that effectively freeze spending at the prior year's level and prevent the start of new programs.

Contractors and Pentagon leaders have long warned that the budget problems will raise costs and affect military readiness at a time when the U.S. is embarking on a major refresh of equipment and buying practices, as well as new priorities laid out in the National Defense Strategy published on Friday.

"This shutdown negatively impacts hundreds of ongoing government programs and thousands of our employees across the U.S.," Lockheed said in a statement. "The shutdown could result in costly schedule delays and breaks in production that will increase overall program costs and interrupt the delivery of critical equipment to our U.S. government customers."

Lockheed, maker of the F-35 Joint Strike Fighter and Black Hawk helicopters, and its peers didn't detail any immediate effect on their operations as contractors prepare to report their fourth-quarter financial results and 2018 outlooks within the next two weeks.

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The 16-day shutdown in 2013 led some contractors to outline plans to furlough thousands of staff, only for most of the plans to be rescinded when then-Defense Secretary Chuck Hagel ordered civilian Pentagon staff to return to work.

"A shutdown of a week or two would have an impact on DoD and potentially on contractors, but this also depends on how the shutdown is treated," said analyst Byron Callan of Capital Alpha LLC.

The shutdown's fallout hinges on the length and the treatment of crucial government departments. Furloughs at the Defense Contract Audit Agency, which supervises Pentagon contracts, contributed to problems for contractors in 2013. Most staff at the Defense Contract Management Agency, which inspects work at plants producing such equipment as the F-35 jet fighter, were also furloughed for several days in 2013.

The Defense Contract Management Agency said Saturday that staff should report as normal on Sunday and Monday, awaiting developments. "If the government is still shutdown, DCMA will follow orderly shutdown procedures," it said in a statement on its website.

The Defense Contract Audit Agency didn't immediately respond to a request for comment.

However, Lockheed and other defense contractors are also exposed to agencies beyond the Pentagon. Most of the staff furloughed by Lockheed in 2013 were tied to nondefense work for the government, such as performing nuclear cleanup for the Energy Department, modernizing air-traffic-control systems and supporting scientists in Antarctica.

"We have deployed contingency plans to minimize the impact to our employees affected by the shutdown," Lockheed said. "The specific impact to our workforce and subcontractors is dependent on individual contract terms."

Write to Doug Cameron at doug.cameron@wsj.com

(END) Dow Jones Newswires

January 20, 2018 19:26 ET (00:26 GMT)