The Pentagon has survived the Battle of 2013: sequester, furloughs and even a government shutdown. However, 2014 could make 2013 look like a mere skirmish. The good news is that defense contractors have been battle-tested and are adept at working through downturns. In fact, if only some defense programs had as few hiccups as company balance sheets.
Job cuts won't slow down.
Defense companies continue to try to stay ahead of budget cuts with cuts of their own. Lockheed Martin alone has reduced its workforce by 20 percent since 2008, with more cuts and closures planned over the next year. This won't be the end of it. As one analyst said, in 2013 the Pentagon managed to make up for the sequester by finding "loose change in the couch." All that loose change has been spent. The Department of Defense estimates its budget for the fiscal year will be $628 billion, down from $676 billion last year. It is projected to fall another $24 billion next year. Goldman Sachs believes we are closer to the bottom than the top of the budget cycle and that "margins will prove much more resilient than expected." One way to keep those margins resilient is to cut personnel.
(Read more: 2014—The year the economy clicks)