Defense Companies Starting to Feel Effect of U.S. Government Shutdown

As the partial government shutdown moves into its third week, some American defense firms are starting to get multi-million-dollar IOUs instead of payments.

Even though Pentagon projects are unaffected — the Defense Department is already funded for fiscal 2019 — the shutdown is squeezing contractors who do work for NASA, the Department of Homeland Security, Federal Aviation Administration, and other federal agencies. Many companies aren’t getting paid, even as they continue to pay the salaries of employees shut out of closed government offices.

Take SAIC and Engility, two of the government’s largest service contractors. Executives for the soon-to-merge companies say the payroll for workers idled by the shutdown comes to $10 million every week. And just three weeks into the freeze, they say, the government is some $40 million to $50 million behind in payments.

“If [the shutdown] continues, that number could increase,” Charles Mathis, SAIC’s chief financial officer, said Monday at an investor conference.

In the short term, this isn’t a huge deal for most affected firms, because the government will eventually make good on its debts. But Wall Street never looks favorably on companies whose cash flow continues to falter.

And for SAIC, whose quirky fiscal year ends in about three weeks, the shutdown couldn’t come at a worse time. The unpaid contracts could leave the company short of its revenue predictions  for fiscal 2018.

That’s why SAIC officials gave Wall Street a heads-up about the situation, and are speaking out about the shutdown more loudly than their colleagues at other firms.

“If we get through this [shutdown] quickly, they can catch up on the cash side and the revenue — we think we could catch up there as well — but that would need to happen within the next week or so,” Mathis said.

SAIC is also watching to see whether the shutdown will affect bidding and awards on new work, COO Nazzic Keene said at the conference.

Other companies, like Lockheed Martin, ended their fiscal years on Dec. 31. The shutdown, eight days old at that point, had minimal effect on their earnings because it largely coincided with companies’ Christmas-to-New Year’s break.

Such firms “will have the rest of the quarter [first quarter of fiscal 2019] to pick it up and adjust for it,” SAIC CEO Tony Moraco said in an interview Monday.

Bloomberg estimates that government contractors could be losing as much as $200 million per day. Thirteen federal agencies have been closed since Dec. 22, when President Trump declined to sign a spending bill, passed by a Republican-controlled Congress yet lacking partial funding for a wall along the border with Mexico. Democrats, who took over the House on Jan. 3, have been even more resistant to wall funding.

When the entire government shut down in 2013, Lockheed and other defense firms initially said they planned to furlough thousands of employees. But those widespread furloughs never came to pass. That’s because most U.S. Defense Department employees who were furloughed themselves were returned to work, albeit without pay, while lawmakers negotiated a budget deal.

And though some 800,000 federal workers have been furloughed, or are working without pay, as 2019 opens, there’s little danger — so far — of mass furloughs for defense-industry employees this time around. The Pentagon isn’t closed; Congress passed its fiscal 2019 budget on time. (For much of the past decade, DOD arrived at January still in a state of financial limbo, operating under a so-called continuing resolution that allowed operations to continue only at levels set in the previous year’s budget — a stopgap measure that kept the government open while lawmakers negotiated spending for the rest of the fiscal year.)

“The fact that we’re mid-year and this year with a CR on a limited number of bills, is actually a more favorable environment than we’ve seen,” SAIC’s Moraco said at the investor conference. “We’ve got a full year of appropriations for a significant amount of the government.”

So far, SAIC has not furloughed any of its employees, Moraco said in the interview.

“We use a combination of administrative leave and paid time off,” he said. “We typically try to recover as much as we can through billing, but we have not furloughed anyone.”

But many defense companies, like SAIC and Engility, also have government business outside of the Pentagon — at NASA, the FAA, and DHS. And everything gets shakier the longer the shutdown continues.

So far, the shutdown “has not had a material impact on Boeing to date,” company officials said in a emailed statement. “However, if the shutdown continues for an even more extended period of time, the effects may begin to weigh on our operational efficiency and pose other challenges for our business.”