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Analysts Say Pentagon Suspension Of GE Won’t Seriously Hurt Company

March 29, 1985

WASHINGTON (AP) _ General Electric Co. officials and independent analysts said Friday the company’s temporary suspension from bidding on new military contracts probably won’t seriously curtail its defense work or imperil earnings.

″I think this is more cosmetic politicking than real punishing,″ said Peter Aseritis, vice president and defense industry analyst for E.F. Hutton & Co. in New York. ″You just can’t eliminate one of your top 10 contractors.″

Air Force Secretary Verne Orr announced Thursday he had temporarily suspended GE ″from obtaining any new contracts with the Department of Defense″ because of the company’s indictment in Pennsylvania on charges that it defrauded the government of about $800,000 on a nuclear warhead system.

That was the first such action against a major defense contractor in history. But while it stirred front-page headlines and triggered a drop in the price of GE stock, Aseritis and others said it was unlikely the suspension would stick for long, or cut significantly into the company’s defense earnings, which account for 15 percent to 20 percent of overall GE’s profit.

In 1984, GE said it earned $2.9 billion on sales of $27.9 billion.

Orr said the suspension could last ″pending completion of the legal proceedings initiated by the indictment,″ which could take years. But he gave the company an out by specifying that he was giving GE 30 days to demonstrate why his decision should be reversed.

GE has denied any wrongdoing. Larry Vaber, a corporate spokesman in Fairfield, Conn., said Friday: ″We feel the issues can and should be resolved promptly. We anticipate no significant impact on the company’s financial results.″

Vaber said he was unaware of any contracts that GE might stand to lose in the short run because of the suspension, though ″We’re always negotiating something with the government. It’s difficult to say.″ The Air Force was asked by reporters on Thursday to cite examples of work that might go to other contractors in coming weeks, but officials were still unable to do so by Friday afternoon.

GE is the nation’s fourth-largest defense contractor, and received, according to Defense Department figures, $4.5 billion in military contracts in fiscal 1983.

Orr, in a separate action, also asked GE on Thursday to pay back $168 million in alleged excess profits arising from the manufacture of aircraft engine parts over a six-year period. Similarly, the Air Force asked Pratt & Whitney, a prime competitor, to refund $40 million in profits for jet engine work.

GE indicated it would contest that claim, saying that while costs on the contracts in question had come in lower than expected, there was ″no overcharging. The government didn’t pay one cent more than it contracted to pay for the parts in question.″

The company said it was entitled to keep the larger-than-projected profits, since it didn’t request the government to pay more on other contracts where margins were lower than forecast.

As for the indictment charging that GE illegally claimed more than $800,000 in labor costs on an Air Force contract for Minuteman re-entry vehicles, GE noted it hasn’t been convicted but indicated it is willing to reimburse the government if the charges are found improper.

Aseritis compared the Pentagon’s action against GE to its earlier suspension of $30 million in payments to the General Dynamics Corp. ″What’s $30 million, for a company doing $700 million a month in defense work?″ he asked. ″It’s not going to kill them.″

″What you have to keep in mind,″ he said, ″is that for 10 years the Air Force had one source of jet engines - Pratt & Whitney. It’s worked so diligently to get some real competition, it can’t really punish GE too much.″

GE makes jet engines for the F-14, the F-15 and F-16 jet fighters, as well as the B-1 bomber, and has entered a partnership with a French company to upgrade the engines on the KC-135 tanker. It also competes with Raytheon Co. in radar sales, and with Westinghouse Electric Co. on a number of other electronic parts.

Aseritis said GE might find that the Air Force will lean toward other manufacturers in cases where the bids and designs were virtually identical. But ″if GE has a superior design and the price is good, I don’t think the Air Force will tear off its nose to spite its face.″

Another analyst, William McCoy Jr., vice president of Kidder, Peabody & Co., told the Wall Street Journal that the government ″won’t find a huge can of worms″ at GE. He also questioned whether the suspension would have any real effect on GE earnings, since the company already has large backlogs of defense orders.

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