Defense industry CEOs vent about ongoing budget mess in Washington

Key Points
  • Lockheed Martin's CEO says "a further lack of budget clarity could have longer-term consequences"
  • Budget fallout already being felt with at least one major Army development program on hold
F-35 Lightning II
Source: Createordie | Flickr

Congress' failure to reach a 2017 spending bill brought fresh headaches for major defense contractors who say uncertainty over Pentagon funding hurts their planning and could have consequences for military readiness.

"There's a lot of frustration and uncertainty associated with the fact that we're now entering our eighth month of continuing resolution," said David Melcher, CEO of the Aerospace Industries Association, which represents more than 300 companies in the aerospace and defense industry.

Melcher said the defense industry depends on budgets to help them gauge how they're going to manage production and handle new programs that have been awarded by the Pentagon.

Experts say Friday's passage of another short-term spending bill, a continuing resolution known as a CR, may keep the government open for another week, but the damage is already done.

Indeed, he said an acquisition official for the U.S. Army disclosed this week that the development of a helicopter engine replacement for the Apache helicopter was put on hold since there's no funding for the development work.

"All it would take to fix this is passing a budget," he said.

The CR holds spending to prior-year enacted levels for the budget and stops any new programs that were previously not funded.

"Nobody would run a business this way," said Melcher, a retired Army lieutenant general who worked in the Pentagon and later ran an aerospace/defense business. "One has to wonder why we run our nation's security apparatus this way."

The CEOs of the nation's top defense contractors also vented this week on first-quarter earnings calls about the budget mess. Still, they remain generally upbeat about the outlook for U.S. defense spending and foreign military sales.

"We're in, at this point, one of the longest-running CRs that I can remember, which is unfortunate," said Wesley Bush, Northrop Grumman's CEO on Wednesday.

Added Bush, "It certainly does impact the timing of the customer's ability to get out there and actually make source selection decisions."

Earlier this week, all five of the prime defense contractors reported first-quarter earnings that beat analysts' estimates. Northrop also increased its full-year 2017 earnings per share guidance range, but Lockheed Martin trimmed its EPS range.

Lockheed CEO Marillyn Hewson spent a good portion of her earnings call Tuesday talking about the company's F-35 Joint Strike Fighter aircraft and its "unprecedented abilities." She noted that she expects about half of the orders made during the next five years to come from the international marketplace.

In fact, Lockheed Martin won a $1.38 billion contract related to its F-35 Joint Strike Fighter, according to a Pentagon announcement made late Friday.

While the company doesn't expect the CR to affect the F-35 program, Hewson expressed displeasure with the continued extension of the CR. "We feel a further lack of budget clarity could have longer-term consequences for our armed forces and our industry."

Boeing CEO Dennis Muilenburg echoed that sentiment during his own conference call.

"We're in the marketplace to compete, and we have opportunities, especially if the U.S. defense budget continues to strengthen," Muilenburg said. "But I will put that caveat on it: We need to see a long-term, stable, strong defense budget in the U.S."

Still, Muilenburg said the company is "seeing the potential for fiscal year 2017 funding increases on numerous Boeing programs, including the Apache, the F-18 Super Hornet, P-8 Poseidon and the V-22 Osprey. International demand for our offerings remains high as well, in particular for rotorcraft, commercial derivatives, fighters, satellites and services."

On Wednesday, Boeing reported earnings were above industry analysts' consensus, but its top-line disappointed. Boeing's defense, space and security division posted lower sales, and commercial aircraft deliveries declined from a year ago.

Muilenburg also talked up the potential for the company's foreign military sales, which include selling Chinooks to Saudi Arabia, Apaches to the United Arab Emirates and P-8 Poseidon aircraft to Norway.

"International interest in our fighters also continues to be strong, with the government of Canada releasing a letter of request for the sale of 18 F-18 Super Hornets," the Boeing CEO said. He also cited possible fighter sales to Qatar and Kuwait.