The Daily Item, Sunbury, PA

Fiscal Cliff

December 29, 2012

Defense Contractors' Shopping Lists on Hold Ahead of Budget Cuts

WASHINGTON — Kratos Defense & Security Solutions Inc. in July bought a company that makes drones used for military target practice. Then the contractor put further acquisitions on hold.

With Washington's budget impasse threatening $500 billion in automatic defense cuts over a decade, Kratos's chief executive officer said the firm didn't know where to place its bets. In the past year, the maker of security and surveillance systems has also halted equipment upgrades and trimmed research spending.

"Guys like us are going to hold a good portion of their cards until there's some budget clarity," Eric DeMarco, the company's CEO, said in a telephone interview.

Military suppliers already have been preparing for a leaner decade by stockpiling cash, cutting jobs and slowing spending.

The automatic cuts would come on top of $487 billion in defense reductions planned over 10 years. The latest round is scheduled to begin next week if Congress and the White House don't reach an alternate agreement to shrink the nation's deficit or delay the whole process of automatic cuts and tax increases known as the fiscal cliff.

"The fiscal cliff in my mind has already been here," said Robert Burton, a partner at the law firm Venable LLP in Washington. "It arrived some time ago."

Companies in recent months have seen federal contracts canceled, delayed and scaled back because of agencies' uncertainty about future budget levels, Burton, who represents federal contractors, said in a phone interview.

In response to the risk of tax increases and budget cuts, satellite equipment maker Comtech Telecommunications Corp. this month lowered its profit forecast for fiscal 2013.

"We believe that the U.S. government's failure to resolve the 'fiscal cliff' has resulted in increased uncertainty throughout our customer base," Fred Kornberg, chief executive officer of the Melville, New York-based company, said in a Dec. 6 statement.

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