Pentagon says cost-cuts not aimed at profits

* Pentagon says it is not aiming at profits

* Officials want to incentivize productivity gains

* Industry officials see pressure on profit margins

By Andrea Shalal-Esa

NEW YORK, Dec 1 (BestGrowthStock) – The Pentagon’s chief arms buyer
underscored on Wednesday the Defense Department’s drive to cut
costs, but sought to reassure investors the initiative was not
aimed at cutting industry profits.

“A profitable defense industry is in the national interest
and we recognize that,” Ashton Carter, defense undersecretary
for acquisition, technology and logistics, told an investment
conference hosted by Credit Suisse and Aviation Week.

“The idea that you save money by cutting profit is not only
illogical, it’s backwards,” he said, noting that defense
acquisition officials were looking for ways to incentivize
defense companies to improve productivity and cut costs.

The Pentagon is setting up a “superior supplier” program to
reward companies with good performance on weapons programs and
also wants to do more to support independent research efforts
funding by companies themselves, he said.

“Profit is the way to incentivize productivity. That’s the
way we’re thinking about it,” he said.

Carter took aim at the Pentagon’s biggest weapons program,
Lockheed Martin Corp’s (LMT.N: ) F-35 fighter program, saying
more work was needed to get that program’s costs under control
and ensure its total cost never reaches the $382 billion
projected by Pentagon cost estimators.

“There isn’t going to be ever more money,” Carter said.

The Defense Department had already gotten rid of most
weapons programs that were not performing well or were no
longer needed, although a few terminations could still be
announced.

“We’re getting to the point where we have what we want and
need,” he said.

The Pentagon was working hard to ensure that new weapons
programs would be more cost-efficient than in the past, given
mounting pressure on the defense budget.

Carter cited the replacement for the Ohio class submarines
that carry nuclear missiles that was initially expected to cost
an unaffordable $7 billion.

Engineering changes had already lowered the cost to around
$6 billion and the Pentagon’s goal was to drive the price down
to $4.9 billion.

He said a new presidential helicopter, a new set of
capabilities for long-range strike and the Army’s new ground
combat vehicle would all be carefully structured to avoid the
rampant cost growth seen on earlier weapons programs.

Carter hoped Congress would approve a plan by the Navy to
buy new coastal warships from both Lockheed Martin and the U.S.
unit of Australia’s Austal Ltd (ASB.AX: ) after both teams
proposed lower than expected prices. The Pentagon rejected the
initial pricing, deciding to buy just one ship, but changed its
mind after the most recent bids were submitted, he said.

Michael Strianese, chief executive of L-3 Communications
Holdings Inc (LLL.N: ), said the defense industry welcomed and
supported the Pentagon’s increased focus on productivity and
appreciated the department’s collaborative approach.

He told the conference the current defense budget
environment was challenging, but “not going off a cliff.”

At the same time, he did express some concern about
pressure on industry profit margins as a result of Pentagon
cost cutting and said his company would skip bidding for some
contracts — including a big linguist services contract — if
profit margins got too low.

“There are areas where the margins have contracted to the
point where we are reacting to it with no bids … and shifting
away,” he said. “If we don’t think the margins aren’t worth it,
we won’t do it.”

He said the result would be that some contracts would shift
to smaller companies that might not be qualified to handle the
projects.

Overall, he said L-3 was well-positioned for the current
environment because it did a lot of low-cost upgrades and
offered maintenance and services that would be needed more in
coming years, especially if there were delays in new aircraft
programs such as Lockheed’s F-35 fighter program.
(Reporting by Andrea Shalal-Esa; editing by Andre Grenon)

Pentagon says cost-cuts not aimed at profits