About five years ago, defense contractors all seemed to be working off the same playbook.
Faced with a shrinking Pentagon budget, contractors from Lockheed Martin to Northrop Grumman were cutting their workforces and consolidating their facilities. They trimmed top executives and closed locations to find ways to preserve profit, even as sales dropped.
And even in the face of sequestration, the largest defense contractors continued to post solid earnings reports, in many cases achieving profit gains despite revenue contraction.
But with the threat of sequestration abated and a return to growth predicted, the largest contractors have begun diverging, staking out increasingly varied paths forward.
Companies are "making bets about where the growth is really going to be," said Andrew Hunter, a former Pentagon official who now heads the Center for Strategic and International Studies' defense-industrial initiatives group.
Declining budgets
In 2010, cost-cutting began to take center stage. That year, Lockheed Martin, the world's largest defense contractor, offered its executives a buyout package, a move that sent a signal to other contractors about the state of defense spending.
By fall 2010, Lockheed announced that more than 600 executives -- or about one-quarter of those eligible -- had taken the company up on its offer, accepting financial incentives to leave.
That same year, Boeing consolidated its military aircraft group and announced it would cut the unit's workforce, beginning with executives. BAE Systems too said it would consolidate its business lines.
"The early moves made by defense companies as the downturn unfolded followed a very similar pattern in terms of closing sites, reducing costs, eliminating some positions that were not essential," Loren Thompson, a defense industry consultant, told Inside Defense.
For years, this approach continued. In December 2010, Lockheed had 132,000 employees; four years later, it had shed 20,000.
Raytheon had 72,000 employees in late 2010. By 2014, it was down to 61,000. In 2010, Raytheon also consolidated four Washington, DC-area facilities in an effort to be more efficient.
As sequestration took effect, the cost-cutting efforts continued. Lockheed announced in 2013 it would reduce its workforce by 4,000 jobs and close operations in Newtown, PA; Akron, OH; Goodyear, AZ; Horizon City, TX; and four buildings in Sunnyvale, CA.
"When the budget was coming down . . . there was only one path," Hunter said. "Everyone really only had one course to follow."
Indeed, Roman Schweizer, an aerospace and defense analyst at Guggenheim Securities, said the companies were quick to react when the downturn became clear.
"They were early in recognizing that the downturn was coming, and they reacted to preserve their lines of business and margins," he said.
Readying for an upcycle
But with signs that the defense budget has hit bottom, analysts say contracting executives are predicting new expansion and seeking to position themselves to take advantage of it.
"Growth is returning back to the defense budget [and] it's going to start to flow through to the companies," Schweizer told Inside Defense. Contractors are "positioning for what appears by all accounts to be the next upcycle -- as modest as it may be."
Lockheed, for instance, has embarked on a two-part deal, buying Sikorsky from United Technologies and cleaving off its IT services business to merge it with Leidos in a $5 billion deal. Once the Leidos deal is complete, the company will be centered on military products, from the F-35 to the Littoral Combat Ship to helicopters.
In keeping with that approach, Lockheed sought to move into vehicles, pursuing the Joint Light Tactical Vehicle program. Though the deal was awarded to Oshkosh, it remains under contention in the federal court system.
Going a different direction, Raytheon last year finalized a complex deal to create with Websense a new cybersecurity business, aimed at both commercial and government customers. Company executives have said they're convinced that cybersecurity is going to be a significant market.
Since that deal was announced, Raytheon has further invested in the field, acquiring the Stonesoft next-generation firewall business as well as Sidewinder proxy firewall technologies and teams from Intel Security to add to the new business.
Northrop Grumman has grown far smaller in recent years by divesting its shipbuilding business and its TASC consulting business. Indeed, the company has generally moved away from leading major product programs. But it has now staked its long-term strategy on the Long-Range Strike Bomber, a program analysts have said could be worth as much as $100 billion over its lifecycle. The contractor beat out a Boeing-Lockheed team last year and is now waiting for the Government Accountability Office to rule on a pending protest.
Hunter said he expects Northrop, should it hold onto the win, to use the bomber contract to expand its work, moving into related technologies and services.
Thompson said the varied approaches are evidence that CEOs are "trying to put their particular imprint on the enterprise."
"The Raytheon decision to go full bore on cybersecurity -- both for federal and for the commercial sectors -- is quite distinctive," he continued. "Lockheed would seem to be moving in the opposite direction with an emphasis on systems engineering and systems integration."
Greg Dahlberg, the former top lobbyist at Lockheed Martin, told Inside Defense that there's only so far that companies can cut. "I think you're seeing a change in strategy to stay in the game, frankly, until we hit an upcycle," he said.
But Steven Grundman, a fellow at the Atlantic Council who has served as the Pentagon’s deputy under secretary for industrial affairs and installations, said what's surprising is the major differences among the new strategies. In the 1990s, he said, most of the large defense contractors went down the same path, seeking to increase their size and refine their focus on selling to the government.
The diversity, he said, "contrasts so sharply with the fairly uniform set of corporate development strategies that they undertook in the mid-'90s," he said. "The thesis was get big and get pure."
Grundman attributed this variety of approaches to both the financial health of the contractors -- which gives them greater options -- as well as the increased sophistication of the companies' management teams.
"Over nearly a generation, these have become sophisticated large-cap companies," he said. "They're not susceptible to simple ideas."
The next steps
But as companies plot their way forward, analysts said there remain some new factors to consider. Byron Callan, managing director at Capital Alpha Partners, told Inside Defense that contractors are still weighing how much they want their strategy to include commercial work. Raytheon has moved much further into this field, while Boeing and General Dynamics have long had commercial elements to their businesses.
However, both Boeing and General Dynamics last year divested their commercial cybersecurity businesses.
"Companies are really going to have to figure out -- are they going to try and match some of these commercial sectors? Or will they just say that’s not worth it [and] we can’t compete?" Callan said.
Hunter noted that the Pentagon has successfully refocused contractors on innovation with its Silicon Valley initiative. Companies are "locked in on: what does this mean?" he said. "We're a year in, and people are still listening."
As part of these overtures to Silicon Valley, Callan said, defense contractors are facing new competitors in technology start-ups.
"The game has changed," he said. Those start-ups are "not worried about, 'Did we miss or beat the quarterly earnings estimate?'"
"Those kinds of attitudes, I think, really represent, in some market segments, a dramatic change in the competitive landscape," Callan added.
As companies brace for a spending upturn, Grundman said a corporation's individual approach matters far more than it did during a downturn.
"Strategy matters again," he said.