Lockheed Martin Corp. said Thursday it is preparing for what it has warned would be a devastating impact on the industry from steep cuts in Pentagon spending under the so-called U.S. budget sequestration process.
The world's largest defense contractor by sales also warned that the outlook for temporary spending fixes remained uncertain, and is also contending with a strike by workers at its main fighter jet plant in Texas.
The multiple headwinds facing Lockheed were highlighted as Chief Executive Bob Stevens announced he would step down from the role next January, though planned to remain chairman for a further year.
Stevens, 60 years old, said on a call with reporters that the challenges facing the sector would last far beyond his tenure if he were to stay on until the company's mandatory retirement age of 65. He said that prospect encouraged him to launch a transition that will see President Chris Kubasik assume the CEO role.
U.S. defense contractors have struggled to define the future size and shape of their businesses due to uncertainty over Pentagon budget cuts. Lockheed is viewed as one of the most vulnerable to cuts because of its role in large projects such as the Joint Strike Fighter, or JSF. Lockheed last year said it would shed thousands of jobs amid the expected belt-tightening cuts.
Stevens said Lockheed has started to sketch out its response to sequestration, which would trigger an additional $500 billion in military spending cuts, doubling the level already agreed—though the company expects Pentagon funding to continue under a continuing resolution mechanism that involves less drastic trimming.
While many analysts believe sequestration can be avoided, some defense executives said the impact is already being felt on contract awards.
"These issues will almost certainly escalate as we move into the summer months and election campaigns roll into high gear," said Jay Johnson, chief executive of General Dynamics Corp., GD -0.75%on an investor call Wednesday.
U.S. contractors are responding by focusing more resources on winning overseas contracts. A contest to provide fighter jets to South Korea is expected to open in the next few weeks, and Lockheed expects a final decision by the end of the year.
This story first appeared on WSJ.com
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