Sequestration On Contractors

Northrop Grumman executives painted a worst-case scenario for their investors today after being asked about what sequestration would mean for the company's 2013 earnings.

During a conference call on Northrop's 2012 third-quarter earnings, investors asked how the company planned to proceed under the shadow of sequestration and what the financial fallout would be from an across-the-board cut of about $500 billion from the Pentagon's budget. Sequestration, which was carved out in the 2011 Budget Control Act, was designed to motivate Congress to work with the White House on trimming the budget. Congress has so far been unable to chisel out a financial plan for how to curb the deficit, which means the policy could be implemented in less than 70 days.

Wes Bush, chairman, president and CEO of Northrop, and Jim Palmer, the company's corporate vice president and chief financial officer, told investors that while Northrop -- and the Defense Department -- would feel the effects of sequestration rather quickly, so would a broad range of government agencies.

"This is a broader set of national issues and national concerns than just the defense community," he said.

Northrop Grumman would be hit hard by sequestration because the contracting base of the military services has a higher turnaround rate, prompting those services to spend their obligated amounts within a set time frame, Bush said.

"Long-term, I don't think I have to speculate in saying the impacts would be profound and very, very negative," he said.

The uncertainty about whether sequestration will happen has made it difficult for Northrop to prepare the way ahead, Bush said. "We all know there is a substantial deficit situation and there are some tough decisions that lie ahead regarding the outcomes for each component of that budget," he said. "So it's a little unclear today from where we are to predict how that's going to go."

Jim McNerney, Boeing's president and CEO, said during his company's third-quarter earnings call this morning  that if sequestration does not hit, Boeing would still not see the same level of defense business in 2013 as in 2012. The company this year has seen large growth in its international defense portfolio, with 38 percent of its current $71 billion backlog representing sales outside of the United States.

"Even without sequestration, it would be hard to beat that next year," McNerney said. "It would be a challenge because of the absolute strength of this year."