Sequestration remains a mystery
By
Nick Wakeman
Quarterly reports from Northrop Grumman, Lockheed Martin and General Dynamics make it very clear that the impact of sequestration hasn't been fully felt yet, with the consensus being that 2013 might not be so bad, but 2014 might be a very different story.
Listen to the earnings calls from Northrop Grumman and General Dynamics, and they will closely follow the themes struck by Lockheed Martin the day before: When it comes to sequestration, the impact so far is minimal.
But the key part of that question is “so far.”
The fact of the matter is, no one knows yet what sequestration will mean.
“Getting the full year 2013 budget was a major upside for our planning, but the final sequester impact by program has not been communicated by our customers,” is what GD Chairman and CEO Phebe Novakovic said on a call with analysts.
“Uncertainty remains on the implementation of sequestration,” said Northrop Chairman and CEO Wes Bush, during his analyst call.
The likely scenario is little impact in 2013, but 2014 is a different story. While Lockheed Martin put a $850 million price tag on sequestration in 2014, GD and Northrop only said it will have a negative impact. In other words, revenue will likely go down.
Some interesting observations:
Information systems businesses are considered shorter-cycle businesses compared to the aerospace and defense businesses. Shorter cycle means a quicker impact from sequestration, but also a quicker rebound when the market picks up.
Troubled programs, as well as programs that are in the developmental phase, are generally the first targets of cuts in a down market. The lesson here: The focus has to be on performance.
The hunt to suck out costs at all levels continues and is intense. This means more layoffs are possible.
The third and fourth quarters of 2013 – which are the fourth and first quarters of the government’s fiscal 2013 and 2014 – should bring more clarity to sequestrations impact.
Other factors that might have a negative impact on budgets include the upcoming debt ceiling debate expected this summer, and Defense Sec. Chuck Hagel’s strategy review.
The big takeaway for me is that sequestration is here, but what it means isn’t clear other than that people know it will have a negative impact. Those are tough conditions to run a business in.
With the diversity of their businesses, Lockheed, Northrop and General Dynamics might have more of a cushion right now in regards to sequestration. Some parts of their business may counteract cuts in other parts. As CACI, ManTech, NCI, SAIC and the other more IT focused companies report their earnings in the coming weeks, we should get a clearer picture of the potential impact of sequestration on the IT market.
But then again, maybe not.