Small Contractors Often Spared : Surviving the Defense Budget Wars

When deficit-conscious politicians start slashing the defense budget on Capitol Hill, military contractors often have sleepless nights. But not John Firth.

That’s because Firth, president of Eldyne Inc., a San Diego-based electronics contractor, knows his company recently secured five multiyear contracts from the Navy, worth nearly $50 million, to provide a variety of services, including engineering for an anti-submarine warfare combat system.

Usually when spending is slashed, costly new military projects such as weapons systems or aircraft are the first to go, Firth said. As a result, major contractors associated with such projects can face an abrupt and severe loss of business.

Spared the Ax

But small contractors such as Eldyne that provide special technical services that have become indispensable to the military are often spared by the budget ax, he said. Eldyne is an example of how a military contractor can carve a niche in the market and remove itself from Capitol Hill’s budget wars.

Eldyne reported revenue of $18.5 million in the fiscal year ended July 31, Firth said, and, for the fiscal year ending next July, it expects sales of $23 million to $24 million. The company is profitable, Firth said.

“When defense spending is flat, the people who get hurt are those connected to major programs. It’s those big programs that get whacked off. Right now, for example, there’s a lot of attention on the B-2 bomber program. If that were to be dropped, somebody like Northrop would be hurt pretty bad.

“When programs get (completely axed), it doesn’t hurt us at all,” Firth said. “That’s because we’ve focused on certain niches where we have the expertise to provide for an ongoing need. We’re not (manufacturing) a fancy new toy. We might not make the megabucks, but we’ll always get our $20 million or so.”

Eldyne, founded in 1979, employs more than 300 people and occupies a 40,000-square-foot facility in Kearny Mesa that serves as corporate headquarters and engineering services department. The company also has a 6,000-square-foot manufacturing plant nearby.

Also Maintaining a Niche

Humphrey, a San Diego military contractor that makes gyroscopes for guided missiles, is also maintaining its niche in the defense market, according to President Paul Humphrey. The company recorded $11.2 million in revenues for 1988 and projects 1989 revenues to exceed $17 million, executives said.

“When defense spending gets trimmed, it clearly affects the multibillion-dollar contractors, but it doesn’t really bother us,” Humphrey said. “We produce more consumable goods that are always in demand. Sure, a few missile systems get cut or aren’t renewed, but there’s always some other contract coming our way.”

Humphrey manufactures its gyroscopes for both the United States and foreign militaries. For example, Humphrey is supplying Rockwell, which is manufacturing the Hellfire missile for the U.S. Army and the Swedish navy. Humphrey has 270 employees based at its corporate headquarters and two manufacturing plants, all in San Diego.

Eldyne designs and installs a variety of electronic systems, including communications, navigation, satellite communications, radar and sonar systems, for naval fleets and shore facilities, Firth said. The company specializes in establishing “electromagnetic compatibility”--allowing several communications systems packed into close quarters, such as those in a submarine, to work together without being disrupted by each other’s electrical signals.

“When you have so many systems together, it’s very easy for one system’s signals to clutter or mask the signals of another,” said Ron Lewis, Eldyne’s business development manager.

Sales Have Increased

Eldyne’s electronic design service accounts for 90% of the company’s business, Lewis said. The company also makes communication antennas and antenna tilting mechanisms.

Since it was spun off from parent company Electro-Design, Eldyne has increased its sales by an annual rate of 35%, Lewis said.

“Electro-Design was split doing two kinds of work,” he said. “The owner of Electro-Design was more interested in doing hardware design and manufacturing his own products, rather than the engineering service that we were providing. That’s why we decided to part and make each side a separate business.”

Under the newly won Navy contracts, the services to be provided by Eldyne will also include correcting electromagnetic interference on Navy ships and supplying the Navy with new communication antennas.