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Defense Chiefs Pessimistic on Fiscal Cliff Deal by End of Year

Nov. 28 (Bloomberg) -- The heads of defense contractors Northrop Grumman Corp. and Exelis Inc. said they’re not optimistic the federal government will reach a deal by the end of the year to avoid the so-called fiscal cliff.

While early signs of a potential budget compromise emerged between Congress and the White House, they’re still a long way from an agreement, said Wes Bush, chief executive officer of Falls Church, Virginia-based Northrop Grumman, maker of Global Hawk surveillance drones.

“I’m not yet optimistic about getting to a deal before the end of the year,” Bush said today at an investor’s conference in New York organized by Credit Suisse Group AG. “I hope we do. I think it is a national imperative that we do. But I’m concerned about actually getting there in the next few weeks.”

Bush was joined by other defense chiefs in New York as corporate leaders met with President Barack Obama at the White House to press for a resolution to the fiscal cliff, a combination of spending cuts and tax increases set to begin in January.

The Pentagon’s top weapons buyer, Frank Kendall, took a more optimistic note than the contractors, saying at the conference, “I do believe that it won’t happen.”

The automatic cuts, known as sequestration, would begin Jan. 2 and total $1.2 trillion over a decade, with half coming from national-security programs. Signed into law last year as a last resort to reduce the budget deficit, the action would cut about $54.7 billion, or 9.4 percent, from government-wide defense programs, including $52.3 billion from the Defense Department’s fiscal 2013 budget request of $614 billion, according to the Pentagon Comptroller.

The White House has exempted from any cuts the $149 billion in fiscal 2013 military personnel and pay accounts.

Contractor Shares

While a compromise to avert or slow the reductions is likely, “it may not happen before the cliff occurs,” said David Melcher, CEO of McLean, Virginia-based Exelis. “It could happen a couple of months after the cliff.”

Since the Nov. 6 presidential election, shares of the Pentagon’s top five contractors have declined 1.3 percent, compared with a 2 percent drop in the Standard & Poor’s 500 Index.

Raytheon Co., the world’s largest missile maker, sees the fiscal cliff issue as a “speed bump,” according to Bill Swanson, CEO of the Waltham, Massachusetts-based company.

“Literally, you’ll go into it slow, you’ll go over the top of it and you’ll come out of it as quickly as you possibly can,” he said. “It’s not a guillotine.”

Funded Backlog

Raytheon’s funded backlog of orders is as high as it has ever been, Swanson said. The company receives more than 25 percent of its $24.9 billion in annual revenue from foreign military sales that aren’t affected by the budget debate in Washington, he said.

Mike Petters, CEO of Newport News, Virginia-based Huntington Ingalls Industries Inc., the Navy’s sole builder of aircraft carriers, said lawmakers will be working hard to reach a deal through the rest of the year.

“I’m not sure that I have a crystal ball that’s clearer than anybody else’s in the room,” he said. “I don’t know that you can handicap how that’s going to play out.”

Huntington doesn’t anticipate sequestration affecting its operations and forecasts earnings growth through fiscal 2015, Petters said.

‘Fairly Confident’

Kendall said he is “fairly confident” of avoiding sequestration. “There’s a fair chance we will have some type of temporary postponement,” he said.

If the cuts are triggered, “it’s not a cliff,” Kendall said. “We get a 10 percent cut” that affects the entire fiscal year 2013 budget and prior-year dollars that haven’t been placed on contract.

In some cases, multi-year contracts will have to be renegotiated, he said. Continuing production programs could see lower quantities, he said. “There may be some issues with things like ships,” Kendall said.

Still, he said, “we are not going to terminate a lot of contracts” and will use “as much as we possibly can” of unobligated dollars from the current and past fiscal years to offset any cuts “if it comes to pass.”

“We have not done detailed planning,” Kendall said.

The impact “isn’t going to be instantaneous massive layoffs,” Kendall said. “It’s going to be an adjustment” and “we will have to work our way forward.”

“It’s a devastating thing to do to the department. but it’s not something that happens overnight,” he said.

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