Hundreds of Pentagon-related companies large and small are preparing to lay off thousands of employees as Congress takes a recess this week, so far unable to agree on how to undo automatic military spending cuts set to begin March 1.
BAE Systems Inc., a global giant that provides an array of goods and services for the military, estimates that it will have to lay off as many as 4,000 workers this year, including technicians who work on aircraft, ships and vehicles and who earn an average of $50,000 a year.
Meanwhile, Ammcon Corp. of Portland, Ore., which makes pipe joints and flanges for aircraft carriers and submarines, says it will have to lay off about 25 percent of its 45 employees if the defense spending cuts begin March 1.
These and other defense contractors are bracing for automatic, across-the-board spending cuts known as sequestration — which could lead to as many as 1.2 million lost jobs, according to an estimate by Stephen S. Fuller, director of the Center for Regional Analysis at George Mason University.
Under sequestration, the Pentagon would be required to cut $46 billion from its budget by Sept. 30 and as much as $500 billion from its 10-year spending plan.
In addition, the continuing resolution that funds the Pentagon has held spending at 2012 levels and is due to expire March 27, when Congress must renew the resolution or approve a defense budget bill.
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“The cloud of uncertainty from sequestration already has had a profound impact on the way our industry is able to deploy its capital and invests in facilities, jobs and new product development,” said BAE spokesman Brian Roehrkasse.
Under the Worker Adjustment and Retraining Notification (WARN) Act, most companies with more than 100 employees are required to give a minimum of 60 days’ advance notice of mass layoffs and plant closings.
But smaller companies that are not required to give advance notice could be the ones most affected by sequestration.
Deputy Secretary of Defense Ashton Carter told a congressional hearing last week that “60 to 70 cents of every dollar that we contract ends up in a subcontractor, and many of these are small businesses that don’t have the capital structure to be able to withstand blows.”
Contractors and subcontractors
Sequestration also is driving some jobs overseas.
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First Line Technologies of Chantilly, Va., makes cooling vests for troops to wear underneath their body armor and employs about a dozen people. Having experienced rapid growth last year, it was readying to hire about a dozen more workers before the uncertainty over sequestration developed, company President Amit Kapoor said.
Now, First Line Technologies is looking to market its products overseas and will hire employees abroad. Its strategy is to move quickly into overseas markets to avoid layoffs or having to close.
“The biggest killer for us last year was the uncertainty,” Mr. Kapoor said. “Even if there’s an eleventh-hour deal made [on sequestration], it’s probably going to kick the can down the road.”
He also noted that military spending cuts will hurt subcontractors: “A lot of our small businesses that we deal with, they’re needing a lot of the money upfront. It’s a trickle-down effect. As it affects us, it’s going to affect our subcontractors and business partners.”
Military leaders have said sequestration will force the Pentagon to lay off or furlough thousands of civilian workers; delay maintenance on ships, aircraft and vehicles; cancel contracts for new weapons; and postpone troop deployments.
The effects of such actions can rock the companies and the communities where they are located.
Budget uncertainty has forced the Army not to issue any orders for depot maintenance beyond January, an Army spokesman said.
Many of the depots are in small towns, such as the Letterkenny Army Depot at Chambersburg, Pa. According to the depot’s website, it is the largest employer in Franklin County, with more than 3,600 employees.
Gen. Raymond T. Odierno, Army chief of staff, told Congress last week that fewer orders at military depots would result in layoffs for 10,000 civilian workers across the country.
Loss of expertise, experience
Gen. Odierno said the Army would have to reduce purchase orders to more than 3,000 small companies and “our assessment tells us 1,100 of those are then at moderate to high risk of bankruptcy if we have to execute [defense cuts] this year.”
Defense contractors and military leaders say the effects of sequestration will extend beyond job losses.
If defense purchases of certain products that meet military specifications halt, the manufacturers of those items might have to discontinue making them, company officials say.
“I am concerned, and our industry partners are concerned, that some of them just aren’t going to make it, and then you don’t have a supplier for a critical component,” Mr. Carter testified last week.
Milwaukee Valve Co. Inc. of New Berlin, Wis., makes bronze valves for aircraft carriers and other ships that play critical roles in controlling the flow of water or fuel throughout vessels.
Two weeks ago, the Navy announced that it was delaying a major overhaul for the aircraft carrier USS Abraham Lincoln. Under sequestration, construction for the aircraft carrier USS John F. Kennedy would be delayed.
“Carriers are just massive and need lots and lots of pipe,” Milwaukee Valve President Rick Giannini said, adding that one carrier requires as many as 10,000 valves.
Meeting Navy specifications requires time, testing and inspection, and lower-quality products could cause huge problems, he said.
“You can’t just take a product off the shelf and say it’s similar because it’s got to meet all of those specific specifications,” Mr. Giannini said, adding that a major slowdown in ship repairs or construction occurs would force his company to focus on products it makes in other countries.
Darrell Grow, chief operating officer of the flange-making firm Ammcon Corp., said it would take months and tens of thousands of dollars to replace specialized welders. Each welder takes at least six months of training and testing, and costs about $10,000 to become certified to work on Navy ships, he said.
“When I need them to come back to do future work, they’re not going to be there for me and I have to start over,” Mr. Grow said.