Like many local defense contractors, Eaton Corp. is waiting to see how military spending fares as the incoming Obama administration looks to revive the larger economy.
The Cleveland-based company, which has its aerospace headquarters in Irvine, makes parts for military planes, including hydraulic pumps, generators, motors and control systems.
Eaton plans to carry out work on already approved contracts through 2009, amid speculation about potential defense cuts and competing priorities,namely the financial bailout and a brewing economic stimulus package.
“There is some concern about the bailout and what it could mean for contracts in 2010,” said Lasse Ostergaard, director of strategic planning for Eaton in Irvine.
Big defense projects and the wars in Iraq and Afghanistan have fueled military spending for much of this decade. But now declining tax revenue and potential tax cuts to stimulate the economy could strain the Pentagon’s budget, some observers say.
Eaton’s contracts are covered mostly by the Pentagon’s general budget, which last year was about $500 billion, according to Ostergaard.
The company shouldn’t be hurt by a suspected cut in the budget for the wars in Iraq and Afghanistan, which was about $150 billion last year, he said.
Eaton plans to maintain its 400 local employees, including manufacturing workers in Costa Mesa.
The company signed a 10-year lease last fall for 140,000 square feet in the Irvine Spectrum where it will consolidate its aerospace headquarters and operations for Argo-Tech Corp., a subsidiary that makes fuel pumps for military jets that Eaton bought in 2007 for $695 million.
For 2007, Eaton’s aerospace unit did $1.6 billion in sales, including non-defense work. In November it won a contract for work on Boeing Co.’s CH-47 Chinook helicopter.
Change in Strategy
Some aren’t expecting many contracts for big ticket items, since many believe the federal budget is swinging from aircraft toward research and development.
“There’s a priority for strategy,” said Hector Cuellar, president of Costa Mesa-based investment bank McGladrey Capital Markets LLC, a unit of Kansas City, Mo.-based H & R; Block Inc.
Programs for intelligence, security and information gathering, such as unmanned planes, radar and satellite systems, stand a better chance of getting funding, Cuellar said.
ThalesRaytheonSystems Co., a venture of Waltham, Mass.-based Raytheon Co. and France’s Thales with its U.S. base in Fullerton, recently was awarded a $217 million radar contract.
Eaton could gain contracts to make parts for unmanned planes, such as Los Angeles-based Northrop Grumman Corp.’s X-47B, which is designed to operate from aircraft carriers.
Cuellar said he believes the government won’t likely cut spending, as equipment used in Iraq likely will be replenished for Afghanistan.
“No administration would approve a significant drop,” he said.
But defense companies still are bracing for some fallout.
Chicago-based Boeing, which employs about 8,000 workers here, has been planning for a flattening of the defense budget for some time, a spokesman said.
The company has said it could offer less expensive weapons based on existing technology to meet budget constraints.
“It is too early for anyone to know what the impact of a new administration, financial rescue plans or the global financial crisis will have on defense spending or specific military programs,” the spokesman said.
