The top executives of defense contractors led by Lockheed Martin Corp. (LMT:US) told Congress they’re already slowing hiring as they anticipate across-the-board defense cuts set to begin on Jan. 2.
Robert Stevens, the chairman and chief executive officer of Lockheed, told members of the House Armed Services Committee today that the world’s largest defense contractor is holding back on recruiting as many employees as it would otherwise. His comments were echoed by officials of EADS North America and United Technology Corp. (UTX:US)’s Pratt & Whitney unit.
“We’ve slowed down on, I think, the very simple and logical premise that if we’re going to engage in significant reductions in the workforce in January it’s imprudent to bring people on for six months,” Stevens said at a hearing called by the Republican-led panel whose members want Congress and President Barack Obama to avert the cuts.
The defense reductions are part of $1.2 trillion in automatic, across-the-board reductions imposed for the next decade after talks failed last year on a bipartisan plan to curb the nation’s debt. The defense portion of the cuts amounts to $500 billion, and the reductions in 2013 will reach $55 billion once interest is included.
Stevens told the panel that the company’s recruiters are encountering skepticism from college students weighing a job at the Bethesda, Maryland-based company. They are questioning whether they will have a job next year if they come on board, he said.
Guidance on Cuts
Sean O’Keefe, chairman and CEO of EADS, said contractors need guidance about how the cuts, known as sequestration, will work.
“We’ve slowed down hiring as a consequence, indirectly, of sequestration,” he said. “What’s occurring now is requests for proposals, a range of different contractual activities, are all shifting to the right in the federal activity. It’s all been delayed.”
Companies have little choice but to start retrenching, said David Hess, president of Pratt & Whitney.
“Clearly, the threat of sequestration is tempering our decisions today with respect to hiring and capital investments,” Hess said. “And, quite honestly, we’ve seen companies in the past that have made decisions to invest and are suffering the consequences today.”
The three executives said the federal WARN Act requires them to send notices to workers whose jobs may be eliminated 60 days before the Jan. 2 start of the cuts unless they’re reduced or eliminated. That would mean the notices would be received days before the Nov. 6 election.
Stevens said his “back of the envelope” estimate is that Lockheed would have to cut 10,000 jobs if the spending reductions go forward.
“The question is, which employees would be terminated?” he said. “We don’t really know. We’d have to broaden the notification under WARN appropriately. We are very hungry for more guidance, very hungry for more information so we can narrow this and behave responsibly.”
O’Keefe and Hess offered no estimates of how many of their workers may be dismissed. Hess said it’s possible his company may be able to reassign enough employees to other duties to avoid mass staffing reductions because much of Pratt & Whitney’s work is for civilian customers.
“It’s not clear to us today that we would trip the thresholds involving implementation of the WARN Act,” Hess said.
Stevens said his company wants to be cautious and inform any worker who might be affected based on a past experience with termination of its VH-71 helicopter, which would have been used to transport the president.
Faced with the prospect of firing workers in Owego, New York, the company waited 45 days before sending out WARN Act notices while efforts were made to reassign some of the employees. He said the Defense Contract Audit Agency issued an opinion that contract costs in the 45 days “may well not be allowable” because Lockheed waited too long to decide.
The experience gives the company reason to think it shouldn’t delay notifying workers they may be fired when there is “ambiguity,” Stevens said.
Defense Secretary Leon Panetta is scheduled to meet July 23 with leaders of the Aerospace Industries Association, Professional Services Council and National Defense Industrial Association, spokesman Carl Woog said today in an e-mail statement.
Outside the committee room, partisan tensions were growing.
The Republican-led House voted 414-2 to require Obama’s administration to describe within 30 days plans to implement the defense and other domestic spending cuts.
In a floor speech, Senate Minority Leader Mitch McConnell, a Kentucky Republican, said Obama should “put a plan on the table for all to see now, rather than waiting until after the November elections.”
Senator Dick Durbin of Illinois, the chamber’s second- ranking Democrat, took to the floor to say McConnell and other members of the Senate leadership voted for the spending cuts.
”The message is clear,” Durbin said. “You voted for this so don’t keep coming to the floor and criticizing it.”
House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, told reporters the Democratic-controlled Senate hasn’t acted on a House-passed measure to replace the defense spending reductions with cuts in domestic programs including food stamps and federal workers’ benefits.
“The keys to the lock are in the hands of our Republican colleagues” who refuse to eliminate “special interest tax breaks” to help finance a postponement of the spending reductions, responded the top Democrat on Ryan’s committee, Maryland Representative Chris Van Hollen.
Michigan Senator Carl Levin, the Democratic chairman of the Senate Armed Services Committee, said senators in both parties are searching for ways to avert the cuts because they post “a real prospect of damaging our economy long before” they take effect.
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