19/11/2012 17:45:00

Honeywell Planning for U.S. Defense Cuts

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Honeywell International Inc. (HON) said Monday it expects the bulk of looming U.S. defense cuts to be implemented, and in a sharp break with rivals said it welcomes the reductions.

The diversified U.S. industrial and aerospace group said it is planning for 80% of the cuts triggered by budget sequestration on Jan. 2 to happen, though they won't really start to bite until 2014 and could involve the shape of the armed forces returning more to the profile seen before the terrorist attacks of September 2011.

Big U.S. defense contractors have spent months lobbying fiercely against the sequestration cuts that see almost $500 billion removed from military spending over the next decade, doubling the existing measures contained in the Budget Control Act.

Vocal opponents such as Lockheed Martin Corp. (LMT), the largest Pentagon contractor, have warned sequestration would be a "disaster" for U.S. military capabilities and domestic manufacturing and lead to thousands of job cuts.

"We recognize these cuts are going to happen," said Mike Madsen, president of Honeywell's defense and space unit. "We're not really fighting these -- they need to occur," he said at an investor meeting.

Honeywell Chief Executive Dave Cote has been among the business executives consulted by President Barack Obama over future spending and tax priorities, attending a White House summit last week, and Mr. Madsen said the company's view of defense priorities reflected the broader need to address the fiscal budget crisis.

Most large U.S. defense contractors have indicated they expect a compromise to be reached on defense sequestration, though in recent weeks many executives have dialed back some of the more dire warnings about the immediate impact on spending and program cuts.

Honeywell has gone a step further, incorporating sequestration in its public planning and attempting to outline the impact on particular parts of the military budget.

The sequestration process would trigger a 10% across-the-board cut in defense spending, but Pentagon planners have started to provide more indications to contractors about how they would seek to prioritize expenditures.

Mr. Madsen said the "mix" of armed forces that emerges will be more akin to that seen before 2011, as ground troops are withdrawn from Iraq and Afghanistan and the Pentagon pursues the priorities for a more nimble military with a greater focus on potential threats in Asia Pacific.

Defense contractors with greater exposure to what he called "enduring" platforms -- aircraft carriers, long-range bombers and fighter jets -- as well as security systems -- are seen by analysts to be less vulnerable to whatever level of cuts finally emerges.

The Pentagon is already accelerating efforts to crimp escalating costs by pushing tougher contract terms on suppliers and sharing more risk under the banner of the Better Buying Power 2.0 initiative unveiled by the department last week.

Mr. Madsen said one impact would be more focus on fuel efficiency -- the Pentagon is the country's largest consumer of fuel -- and trimming maintenance costs, which could help bolster programs for new aircraft and vehicle engines.

Honeywell's defense and space unit is expected to have revenue of around $5.1 billion this year, and ranks 14th among global military contractors by sales, according to Defense News.

-write to Doug Cameron at doug.cameron@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

November 19, 2012 12:45 ET (17:45 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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