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Defense budget cuts: preparing for the worst

Sequestration's uncertain impact on jobs

Lockheed Martin Corp. (NYSE: LMT) reacted to a challenging defense budget by cutting hundreds of jobs this year, but now the contractor won’t warn employees if their jobs are at stake because of the possibility of sequestration.

The highly feared concept will cut $1.2 trillion over 10 years from planned federal spending, including more than $500 billion from defense, starting Jan. 2.

By law, certain employers need to tell the Department of Labor when layoffs are coming. The Worker Adjustment and Retraining Notification Act (WARN) requires most companies with 100 or more employees to give a 60-day notice of plant closings or “mass layoffs,” affecting 50 or more workers, or at least 33 percent of the work force for companies under 500 employees.

That means the flurry of sequestration-related notices would hit the public domain on Nov. 2, just days before the presidential election.

In a rare -- yet calculated -- move, the White House Office of Management and Budget told companies last month not to bother reporting impending cuts tied to sequestration.

"The Labor Department said, 'We will give you guys a pass. It’s inappropriate to consider the automatic cuts as a certainty, and so to the extent that it does happen, you are not going to be liable,'" said Lonny Zilberman, partner at Wilson Turner Kosmo LLP in San Diego, whose practice focuses on the defense of employment litigation and counseling.

That means the government will protect the companies by essentially picking up the tab for any costs, penalties or damages associated with violating the act.

"The administration is looking to get re-elected and doesn’t want to have to send out thousands of potential layoff notices," Zilberman said. “A lot of these workers would be based in Virginia, which is a swing state. Republicans are screaming that is not right and these companies should send out the notices."

On Oct. 1, the day Lockheed announced plans to refrain from handing out notices, House Majority Leader Eric Cantor called out the political motives behind waiving the law.

"America’s role as a global leader, our national security and millions of jobs will be jeopardized if the sequester goes forward,” said Cantor, a Virginia Republican, in a statement. “The brave men and women who help defend our country deserve the respect and certainty to adequately prepare for their future.”

From a company's perspective, it's not in their best interest to share the pessimistic news with their employees, points out Zilberman. Talented employees could jump ship and look for another job if they got word that their position could be eliminated.

“I think companies want to avoid having to give [the notices] out, because as you could imagine, it’s kind of a morale buster,” said Zilberman.

But that silence can be deafening at a time the public wants answers to an uncertain issue. Officials from Northrop Grumman Corp. (NYSE: NOC) and shipyard General Dynamics NASSCO rejected invitations to speak at a Sept. 25 panel at the University of California, San Diego about how sequestration could impact their business.

They explained to conference planners that if they discussed the topic in an open forum, employees would start worrying about their jobs.

Some senior military officials, who have been directed to refrain from openly talking about the classified topic, also declined to attend.

Before sequestration looked like a likely possibilty, companies started shaving staff this year in preparation for the existing budget cuts that kicked in this month.

President Barack Obama's defense budget proposal for fiscal 2013, which started Oct. 1, calls for defense spending over the next 10 years that is $487 billion lower than previously planned.

In early April, Bethesda, Md.-based Lockheed (NYSE: LMT) said it needed to slim down staff in its Mission Systems & Sensors business as part of an effort to react to a troubling defense budget environment.

As promised, 20 local Lockheed Martin employees in the unit got word in July they no longer have a job at the company. That is in addition to 12 employees who participated in a voluntary layoff program earlier this year.

The locally affected employees worked in Scripps Ranch at a site that creates software and sensors for helicopters to jets bought by the government.

The total number of employees affected by the voluntary and involuntary program totalled 740, shrinking the total work force of the business unit by about 5 percent.

Other mammoth-sized defense contractors have already made moves to prepare for a choppy future in the public sector.

Computer Sciences Corp., a Falls Church, Va.-based defense contractor (NYSE: CSC), laid off a local business development executive in charge of Navy and Marine Corps accounts this spring.

“There will be some restructuring as we begin to align our costs to our revenue,” promised Mike Lawrie, CSC CEO and president, in an April 11 conference call with analysts. “We're going to implement a leaner, more efficient operating model with clear lines of accountability.”

CSC, which is two-thirds in the commercial space and one-third in the public space, knows commercial work will be the more consistent and dependable segment. That realization will affect the allocation of corporate resources down the road.

“We are diverse and disperse and we are seeing who gets to rule the roost and it’s not going to be the defense side in coming years,” said Tony Nufer, senior program manager at CSC, during an industry roundtable at The Daily Transcript in April.

Behind the scenes, contractors are likely preparing for the worst.

Dave Grundies, now vice president at El Cajon-based GET Engineering, has experience working for large-scale government contractors, including CSC and CACI International Inc. (NYSE: CACI).

“Large companies have more bureaucracy to go through to lay people off and eliminate positions than a small company would, so they are hunkering down,” said Grundies. “If [sequestration] is truly happening in January they need to be a quarter ahead of things.”

At a town hall-style forum with Rep. Duncan Hunter at University of San Diego in June, a senior official at General Dynamics NASSCO had said personnel actions could kick in Oct. 1 if sequestration appears likely.

It's unclear how companies would calculate how many job losses there could be due to the automatic spending cuts, which would likely delay or terminate contracts.

If thousands of employees on one project team are tasked on a government contract to build a drone, for example, their jobs could be at risk.

“Then potentially you’ve got thousands of workers laid off unless they can somehow reshuffle the deck and transfer people into different jobs,” said Zilberman.

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Tony Nufer

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