U.S. arms makers adjust to new realities

(Reuters) - The Pentagon's leading suppliers face a dangerous world on a tightening budget.

Lockheed Martin (LMT.N) and Boeing Co (BA.N) are culling their executive ranks and scouting acquisitions to plug gaps in the face of a U.S. defense budget that is growing far slower than in years past, company executives said.

"We are absolutely convinced in our company that we're looking at a new reality that will change the strategic operational and financial landscape of our business for the foreseeable future," Lockheed Chief Executive Robert Stevens told the Reuters Aerospace and Defense Summit in Washington, which continues on Wednesday.

For a graphic on Defense Dept procurement seelink.reuters.com/syr89n

Stevens said hundreds of executives could take buyouts at Lockheed. Boeing's head of defense, Dennis Muilenburg, said Boeing would trim management staff 10 percent at its military aircraft business, which makes fighter jets, cargo planes and refueling aircraft among others.

Another summit guest, the head of the U.S. unit of Australia's Austal (ASB.AX), Joseph Rella, skipped the usual car service for his appearance at Reuters' offices. He arrived in a rental car.

"We're watching our overhead," he said.

Rella isn't the only one watching overhead. In June, Defense Secretary Robert Gates launched a drive to squeeze $100 billion from Pentagon overhead over five years.

The Pentagon said it expects growth of 1 percent after inflation in President Barack Obama's fiscal 2012 budget request, despite cuts expected in other government accounts.

The outlook may spur more mergers and acquisitions, particularly among businesses specializing in cybersecurity, intelligence, surveillance, reconnaissance and unmanned vehicles.

For example, Boeing is "actively" looking at potential acquisitions and will not rule out a merger with another large defense contractor, Muilenburg said on Tuesday.

Both Lockheed and Boeing, the Pentagon's No. 1 and 2 suppliers respectively, hailed newly announced export control reforms, as well as new plans to extend and expand tax credits for research and development.

Lockheed said the loosening of export controls would help boost its international sales from the current 14 percent of overall revenue to a goal of about 20 percent over "the next few years."

"I think our customers are demanding newer levels of productivity and efficiency," Boeing's Muilenburg said. "We're fully supporting that initiative."

(Reporting by Deepa Seetharaman and Kyle Peterson)(http://www.reuters.com/article/idUSTRE6870ID20100908)