UPDATE 1-U.S. defense officials urge dialogue with industry

* Cost, weight and energy efficiency critical factors

* Greater efforts by Pentagon to rein in requirements
(Adds comments from Navy Secretary Mabus, edits)

By Andrea Shalal-Esa

NATIONAL HARBOR, Maryland, April 11 (Reuters) – Top U.S.
defense officials said on Monday the tough budget environment
underscored the need for honest dialogue with the defense
industry, as well as greater discipline by the military
services in setting requirements for new weapons.

Assistant Marine Corps Commandant General Joseph Dunford
said growing concerns about U.S. budget deficits meant that
defense companies would need to focus more on cost, weight and
energy efficiency as they developed new weapons systems.

“Those three questions increasingly are important to us,”
Dunford told the annual Navy League conference. “We’ve got to
take a look at those capabilities that are most relevant.”

Dunford and officials with the U.S. Navy and U.S. Coast
Guard welcomed congressional passage of a stopgap bill funding
the federal government for another week and said they hoped the
fiscal 2011 budget would be finalized this week.

Industry executives are bracing for tighter budgets and
pressure on profit margins given the current climate.

Rob Stallard of RBC Capital Markets said he had modest
expectations for defense stocks as companies prepare to report
first quarter earnings, but said weak revenues and bookings due
to the budget impasse would largely be forgiven by investors.

“Despite the potential for soft toplines, we think cost
cutting and buybacks may help keep EPS (earnings per share) on
pace with consensus,” Stallard said in a note to investors.

Officials at the Navy League conference agreed that the
Pentagon faced increasing budget pressures in coming years and
said that meant industry and government needed to work closely
together to lower weapons costs and keep programs on schedule.

Navy Secretary Ray Mabus told participants that recent
missions such as the Japanese nuclear disaster and strikes on
Libya underscored the flexibility of U.S. naval assets.

He said he remained committed to growing the current fleet
of warships of 288 ships to a minimum of 313 ships and said
current budget plans would result in a fleet of 325 ships in
the early 2020s. But to achieve those goals, new ships needed
to be affordable and come in on budget and schedule.

The Navy found $42 billion in savings through 2016 while
working on the 2012 budget, which allowed it to fund 56 new
ships over the next five years, and those cost-savings efforts
were continuing, Mabus said.

He said he would not hesitate to cancel programs that are
“too expensive, ineffective or unneeded,” such as General
Dynamics Corp’s (GD.N: Quote, Profile, Research) Expeditionary Fighting Vehicle, which
was canceled in February, the only program he knew where the
test vehicles needed a service “life extension program.”

Mabus told reporters after his speech that the “obvious
candidates” among large programs had already been scrapped and
further cancellations would likely focus on smaller programs.

Dunford said the military was reforming the way it defined
its needs, noting that in the past senior leaders had largely
been “spectators” to that process. Now costs were increasingly
factored in as military requirements were being established.

“I’d appreciate frankness when we’re doing something
stupid,” said Navy Admiral Jonathan Greenert, vice chief of
naval operations, urging executives to speak up when officials
sought capabilities that could not be realistically achieved.

He said consolidation in the industry had left the military
with limited choices and urged industry to be more innovative,
particularly in the area of unmanned air and water systems.

Stable budgets and stable requirements were imperative, he
said, as well as good partnerships with industry, such as those
that had been able to drive down the cost of the Virginia-class
submarine and the DDG-51 destroyer.

Energy efficiency was also critical in the current climate,
officials said, noting that one Marine Corps battalion had just
returned from Afghanistan where it ran two bases that used zero
fossil fuels. The Marine Corps was now buying all available
equipment to equip additional battalions and was setting its
sights on better efficiency of ground vehicles, Dunford said.

Dunford said the Marines remained committed to developing a
new amphibious assault vehicle instead of the EFV.

Marine Corps Commandant James Amos was personally keeping
close tabs on the Marines’ version of the Lockheed Martin Corp
(LMT.N: Quote, Profile, Research) Joint Strike Fighter and officials were pleased with
progress seen on that program.

Amos’ approval was needed for any changes that added even a
pound of weight to the airframe, Dunford added.
(Reporting by Andrea Shalal-Esa; editing by Tim Dobbyn and
Andre Grenon)

UPDATE 1-U.S. defense officials urge dialogue with industry