Tucson Tech: Looming defense cuts worry local firms

Now, with major defense cuts looming, company CEO Howard Stewart isn't so sure how long the company will be able to keep that record intact.

While Wall Street focuses on the fate of Raytheon, Lockheed Martin and other defense giants as the Pentagon looks to cut $350 billion from its budget over the next decade, smaller defense contractors like AGM face their own worries.

AGM makes control devices such as pressure valves for containers that hold things like missiles, engines and delicate equipment. It also makes devices that go onto missiles to protect guidance systems from moisture. The company also sells some container products for civilian use and also makes sophisticated wheelchair lifts for buildings.

But defense work makes up about 60 percent of AGM's business, and Tucson-based Raytheon Missile Systems is its biggest customer.

With the Pentagon required to initially cut at least $350 billion in defense spending over 10 years - with billions more in undetermined cuts - AGM's Stewart is bracing for the leanest of times.

"I don't have any concern about us surviving as a business - my concern is for my employees, and keeping them busy," said Stewart, whose parents started AGM in 1970.

Pentagon officials have said to expect significant cuts starting by the third or fourth quarter of next year, he said.

"It's something we can see down the line," he said. "I don't know what's going to happen, but I know I need to plan for a downturn that could be quite prolonged."

Diversity among AGM's products and customer base should help the company weather the budget storm, Stewart said. Besides the wheelchair lifts, the company makes equipment tie-down systems for military ships.

AGM has won a variety of business and workplace awards, including being named Small Business of the Year for 2009 by the U.S. Chamber of Commerce.

Whether the company can keep its workforce intact remains to be seen. The company, which had revenues of about $18 million last year, has about 115 employees. Ten of the company's 11 engineers are University of Arizona alumni.

AGM had been looking to hire four people for a new project but recently decided to drop those plans and handle those needs with existing workers, Stewart said.

It's too early to tell how the coming defense cuts will affect AGM. But even though the company has in the past used a 13-point plan to avoid layoffs, there's no guarantee they can be avoided amid deep program cuts, Stewart said.

BANKING ON UPGRADES

Another small local defense and aerospace contractor is trying to maneuver into a better position in the face of budget cuts.

David Crowe, president and CEO of Tucson Embedded Systems Inc., said his company is focusing on developing products to maintain and upgrade current systems, in the belief that no new major defense programs will be funded anytime soon.

"They can't afford to build new systems right now," said Crowe, whose company makes hardware and software embedded in electronic equipment for customers including Raytheon.

"We're banking on upgrades to current systems," he said, noting that the company has invested its own money in a new engine-control product line with that strategy in mind.

Tucson Embedded Systems, which also makes systems for the civilian aerospace industry, employs about 90 people, down from a peak of about 120 a couple of years ago.

Cuts to some Raytheon programs have affected Tucson Embedded Systems, said Crowe, who co-founded the company with three other engineers in 1997.

Crowe said he believes small businesses could play a bigger role in helping save taxpayer money, since they can often operate more nimbly than big defense firms.

"If our big companies can engage small businesses more to save money, small business could benefit, and we can get more for our dollar," he said.

Tucson Tech runs Tuesdays in the Star. Contact Assistant Business Editor David Wichner at dwichner@azstarnet.com or 573-4181.