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US shutdown: Bad for Pentagon workers, not so much for defense firms

Lockheed Martin's F-35.
Getty Images
Lockheed Martin's F-35.

The government shutdown will have an immediate impact on the Pentagon, where half the Defense Department's civilian employees—400,000 people—will immediately be furloughed without pay. If the shutdown lasts more than a week, the Marine Corps Times says, paychecks to military personnel due Oct. 15 will be delayed.

But for the nation's biggest defense contractors? It's not a problem right now.

"We will continue to conduct business with a constancy of purpose, a steadfast commitment to our employees and a continuing focus on serving our customers," Lockheed Martin's Jennifer Allen said in a statement to CNBC. "Unless we receive guidance from our customers, our facilities will remain open, and our employees will continue to receive their pay and benefits."

Randy Belote at Northrop Grumman said the company is "working to identify programs and operations that could be affected by a government shutdown, assess implications for employees and suppliers and understand what we need to do to continue meeting our commitments and minimizing disruption."

The defense industry has already been operating under cuts mandated through sequestration, a situation that has not seemingly had much effect on share prices. All the major players have outperformed the market this year, and most saw stock values hit all-time highs in September.

Even as the Pentagon curtails spending, these companies have been able to maintain profit margins, largely due to cost-cutting.

That has often meant cutting jobs. UBS estimates that overall revenue for the big defense players is down 5 percent from its peak, but job positions are down 17 percent: "We have been surprised by the magnitude of headcount reductions relative to the drop in revenues."

UBS said Lockheed Martin has cut 19 percent of its staff, "well ahead of their revenue declines," while companies like General Dynamics, Northrop Grumman, and Raytheon "have reduced headcount more in line with revenue declines." .

The threat of a government shutdown did not stop the Pentagon from continuing to award billions of dollars in contracts. Friday, Lockheed Martin won two multibillion dollar contracts for missile defense and to build more F-35 jets. Northrop Grumman was awarded 10 contracts topping $10 billion. Monday, hours before the shutdown, the Pentagon awarded United Technologies' Pratt & Whitney $2.5 billion for spare parts.

"It appears that large cap defense prime contractors can not only continue to survive, but also thrive in this environment," said a KeyBanc report.

Thrive how? By continuing to cut costs, bring more sourcing in-house, and support existing programs. "Sequestration is here to stay ... through perhaps 2016," KeyBanc said.

While a shutdown will end bidding for new programs, and while sequestration means the future will remain challenging, KeyBanc believes it unlikely that the sector will suffer the pain of the past.

"Industry consolidation will be a non-event compared to the 'Last Supper' of the 1990s," the firm said, making reference to a meeting in 1993 when the Defense Department told contractors bluntly that they should start consolidating.

—By CNBC's Jane Wells. Follow her on Twitter @janewells.

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