February 18, 2014

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Sequestration Shockwaves

Cuts Still Causing Turbulence in Utah’s Aerospace and Defense Industries

By Gaylen Webb | Photos Courtesy of Hill Air Force Base/U.S. Air Force

February 18, 2014

Call it a morale killer, a disruptor, a delayer, an imbroglio. Call it sequestration—across-the-board federal budget cuts that hurt everywhere, but especially the nation’s aerospace and defense industries.

Nationally, sequestration forced a $500-billion cut to federal contracts in the aerospace and defense industry, which accounts for 3.53 million jobs, $38 billion in tax revenue and $89.6 billion in exports, according to the Aerospace Industries Association. Locally, it was particularly painful for Utah’s aerospace and defense industry, which took the 2013 sequestration-forced budget cuts on the chin.

The fact that Congress has since postponed additional sequestration-forced budget cuts for the next two years hasn’t diminished the pain, either, especially for those workers supporting the mission of Hill Air Force Base (HAFB).

Sequestration forced the furloughs of 11,500 civilian employees on the base and wiped out 8.5 percent of their annual salaries. Those lost wages totaled somewhere between $40 million and $50 million, according to estimates by the Utah Defense Alliance.

Says one civilian employee on the base: “The furlough cost me about $7,000. … It was hard. That was money I would have used for my kids’ tuition, for Christmas and for family trips.”

Civilian employees report that morale is low on the base, with many worried about losing their jobs. “The Air Force has said it will lay people off rather than furlough anymore. In our group, we are looking at a 10 percent cut in manpower this year,” says another employee. His group lost about 40 percent of its budget last year and he anticipates another 25 percent cut for 2014.

“We have less money to do our work than ever before, which means we don’t have the supplies or parts we need to do our jobs,” he says.

Doom and Gloom

The sequestration shockwave radiated throughout the aerospace and defense industries. Anywhere there was a contract with the federal government there was likely an impact, though many companies didn’t want to talk about those impacts for this story. ATK warned in its 2012 annual report that “any contract modification as a result of funding changes or sequestration, could materially delay or terminate the program. This could have a material adverse effect on ATK’s operating results, financial condition, or cash flows.”

Another company with Utah operations, Exelis Aerostructures, based in Salt Lake City, has seen only minimal impacts, says Mike Blair, vice president and general manager. “We’ve maintained a healthy balance between military and commercial contracts, which provides stability during the uncertainty of the defense budgets.”

Diversification seemed to be the key for minimizing the impact of sequestration. Exelis has received significant contract awards over the last six months, the latest being the contract to supply composite components to Boeing for the 787 Dreamliner.

Still, the Air Force Materiel Command, which governs HAFB, wasn’t lying when it warned that aircraft maintenance would be reduced because of sequestration. Since October 2012, Logistic Specialties, Inc. (LSI), headquartered in Layton, has received $5.6 million in contract terminations on its landing gear prime vendor contract.

“The reason for all of the terminations was the same: ‘over-procurement due to reduction in flying hours,’” says LSI’s Senior Vice President of Business Development Catherine Slatter. “To understand the magnitude of these cancellations, we received just over $7 million in awards during that period.”

Looking forward, Slatter says LSI’s forecast for task orders has been reduced in some cases by as much as 70 percent, which not only affects LSI’s revenue significantly, but also the small manufacturing companies where LSI purchases its parts. Just under $1 million of LSI’s awards were going to be subcontracted to Alpine Industries, a small manufacturing company in Logan that reports under $5 million a year in revenue.

“Our contracts require that a lot of the parts have to be purchased from small businesses, so sequestration has had a significant impact on those small manufacturing companies,” she says. “We have seen multiple layoffs and multiple office closures in Layton and Ogden because of cuts at the base.”

LSI has been able to adjust because the company is well diversified, but some of the small manufacturers that depend on the government contracts as their primary source of revenue have had to lay off employees, Slatter says. Overall, the reduction of aerospace and defense work at HAFB “is causing a panic and a general feeling of despair.”

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