Pentagon says "lot of money" still to be made in arms business

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Published November 28, 2012

| Reuters

The Pentagon's chief weapons buyer on Wednesday reassured industry executives and investors that there was still "a lot of money" to be made in the defense business, despite mounting budget pressures that will limit spending on new arms programs.

Frank Kendall, defense undersecretary for acquisition, technology and logistics, said the budget outlook had clearly changed after a decade of continuous increases in U.S. military spending.

But he said the Pentagon's annual budget remained quite large -- and even a worst case scenario that would cut defense spending by an additional $50 billion or around 10 percent in fiscal year 2013 -- was "not the end of the world."

"We're going to work our way through this," Kendall told an investor conference hosted by Credit Suisse. "There's a lot of money still to be made."

He said the U.S. military's new strategy which sees a pivot to the Asia-Pacific region, and calls for increased investment in cybersecurity and space, would result in new growth opportunities for defense companies.

The department was also mindful of the need to maintain critical design skills in aerospace, he said.

"We're in this together. The health of the industrial base is very important," he said.

Kendall told participants that the department's latest "better buying power" initiative factored in feedback from industry, and vowed to better align profits paid to defense contractors with improved performance.

He insisted the department was not out to cut industry's profits, saying that the Pentagon viewed weapons makers as part of its overall "force structure" and was looking for more "win-win" deals that save money while rewarding good performance.

The Pentagon unveiled the initiative earlier this month, saying the U.S. military needed to "wring every possible cent of value" from the dwindling dollars in the U.S. defense budget.

Lockheed Martin Corp , Boeing Co , Northrop Grumman Corp , General Dynamics Corp , Raytheon Co and other defense firms are carefully watching the Pentagon's approach to contracts as they brace for lower defense spending after more than a decade of growth.

President Barack Obama and Congress agreed last year to cut projected national security spending by $487 billion over the next decade. The Pentagon faces another $500 billion in across-the-board cuts beginning in January unless Congress can agree over the next month on an alternative.

Kendall said he expected Congress to avert the additional budget cuts, but added that even if they kicked in as scheduled, they would not result in massive, instantaneous layoffs.

"It's a devastating thing to do to the department, but it is not something that happens overnight," he said.

Wes Bush, chief executive of Northrop Grumman, said he welcomed the Pentagon's new initiative, and was encouraged by the overall tone of Kendall's remarks at the conference.

"I think they've made a really positive step forward here," Bush told Reuters after Kendall's speech. He said he was particularly encouraged by the Pentagon's focus on maintaining a technological edge, even as budgets declined.

"We can't let go of technological superiority in a tougher environment," he said.

Michael Strianese, chief executive of L-3 Communications Holdings Inc , said Congress was likely to avert the full brunt of the budget cuts that are due to take effect in January.

"I think there'll be a much smaller version that gets enacted -- orders of magnitude smaller," he told Reuters.

(Reporting By Andrea Shalal-Esa; Editing by Michael Perry)

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