Sequestration, shmequestration. Lockheed Martin on Thursday gave its forecasts for 2013. The biggest single supplier to the U.S. Defence Department gave projections on the assumption that across-the-board cuts in federal spending will not happen. As part of the early 2013 deal to avert the fiscal cliff, lawmakers delayed this so-called sequestration. But unless the warring factions of Congress compromise on a budget, the automatic belt tightening will hit in early March.
Should Lockheed have laid out the disaster scenario, as well? That could have just spooked investors when neither they, nor Lockheed, nor indeed Congress itself is in a good position to estimate the probability of a deal – or to know precisely where cuts would come within the military budget.
More importantly, cuts at the Pentagon are likely to show through in their suppliers' accounts only gradually. A fighter jet is not built in a day, and some appropriations are done years in advance. The exception is information technology – computing, biometrics and cyber security – which has a shorter cycle.
Military contractor General Dynamics, for example, on Wednesday announced a big writedown on acquisitions in the company's IT group, based on lower defence spending. At Lockheed, the information systems segment accounts for about a fifth of sales, and revenue in the segment fell in 2012, while sales in every other segment rose or held steady.
Whether Congress makes peace or not, defence spending, like all spending, is going to be under pressure. Even without the sequestration, Lockheed predicted that revenue would drop as much as 6 per cent in 2013, following a 1.5-per-cent increase in 2012. If Lockheed is to boost its profits, it will have to prove its own belt tightening will proceed at a faster pace than the government's.