The Daily Item, Sunbury, PA

Fiscal Cliff

December 29, 2012

Defense Contractors' Shopping Lists on Hold Ahead of Budget Cuts

(Continued)

WASHINGTON —

Shares of Kratos have fallen 11 percent during the same period even as analysts have predicted the company's sales will increase. The contractor's revenue is projected to rise 5 percent to $1.02 billion in fiscal 2013 from $971 million this year, according to estimates compiled by Bloomberg.

While Kratos is still investing in areas such as drones and cybersecurity, it has reduced research and development by about 25 percent, DeMarco said.

The company has delayed buying new plant equipment, including robots that stitch circuits onto computer chips. After completing its July acquisition of Composite Engineering Inc., the target-drone maker based in Sacramento, Calif., Kratos plans to stop buying other defense companies until the second half of 2013, DeMarco said.

Kratos in fiscal 2011 derived 74 percent of its revenue from U.S. government contracts, down from 86 percent in 2009. The company is hedging against the downturn in defense spending by increasing sales of security systems for civilian use, DeMarco said.

While DeMarco said he's optimistic about the firm's future, he says companies face heightened competition over a smaller pool of federal contract revenue.

"When the pie is shrinking, the only way companies can grow is by stealing others' work," he said.

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