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Uncertainty Looms Over Mass. Defense Industry

BOSTON — Damocles had a sword dangling by a thread. Companies doing business with the federal government have the sequester. Half the mandated budget cuts this fiscal year — about $43 billion — have to come from the Pentagon. So, hanging by a thread is the fate of thousands of Massachusetts defense contractors waiting to hear just where the budget cuts will fall.

Massachusetts has a venerable history in defense contracting, but it was World War II that transformed the state’s military-industrial complex, adding education to the mix. By the end of the war, the Massachusetts Institute of Technology had become the nation’s largest research and development contractor, spinning off defense companies by the dozens.

“The Department of Defense is a huge economic driver,” said Joseph Donovan, a lobbyist with the Boston law firm Nelson Mullins Riley & Scarborough who represents many Massachusetts defense companies, from Pittsfield to Provincetown. “In 2012, Massachusetts companies secured more than 14,000 contracts totaling more than $13 billion.”

That’s direct spending. According to a recent UMass Amherst Donahue Institute study, the Pentagon’s total economic impact on the state is $25 billion a year — and 130,000 jobs.

“If that funding were to get cut we should all be concerned,” Donovan said.

The prospect of Pentagon cuts looms large, Donovan says, but with just half a year left to the federal fiscal year, defense contractors still don’t know what is being cut. Donovan likens the situation to melting ice.

“If you’re watching that ice melt you may not see the change tomorrow or next week but you’ll start to see it in nine months and 12 months,” he said. “If that ice melts, the large defense contractors will be able to manage; small businesses, in my opinion, they’re panicking.”

Donovan says the big contractors will be able to absorb the cuts and shift priorities. Just five defense contractors receive more than 60 percent of the Pentagon’s funding in the state, so an economic meltdown is unlikely, but — and it’s a big but — a quarter of defense spending here pays for innovative, cutting-edge research done largely at thousands of smaller companies.

“The Massachusetts advantage is that we’re always at the leading edge of these innovations,” Donovan said. “The sad irony is that cutbacks in R&D funds from the Department of Defense could affect our ability to innovate and could potentially impact the Massachusetts advantage.”

Small Cuts, Big Consequences 

In other words, even small cuts can have big consequences for defense contractors — like Woburn-based Aptima Inc., which gets over 90 percent of its business from the Department of Defense.

The company’s 80 Massachusetts employees are experts in what’s called human-centered engineering. The company creates a variety of software products, including one that teaches robots how to work with soldiers. Another is designed to help win hearts and minds.

“To address this complex problem, Aptima introduces SCIPR, a social analytics platform for understanding the effects of kinetic and non-kinetic events,” an ad for the software says.

It’s heady, high-tech stuff requiring a wide variety of expertise.

“SCIPR provides analysts with better information so they can make better predictions,” the ad continues. But predicting Aptima’s budget in the face of pending Pentagon cuts has been difficult, says company president Michael Paley.

“The uncertainty associated with sequestration had the effect of just stopping the contracting process,” Paley said. “So we’re not able to do the work that we’ve been selected to do. New requests for proposals are being held up because there’s uncertainty as to how much money is going to be there, and then finally some money gets pulled back.”

The stress has been intense, Paley says, but so far Aptima has avoided furloughs and layoffs. In fact, because its products deal with counterinsurgency and robotic warfare — which are still high on the Pentagon’s priority list — Paley plans to boost research and development spending using earlier profits.

“We’re trying to identify where our strengths are and focus on those and get ready for when things become next to normal,” he said.

A Waiting Game

In Somerville, it’s still business mostly as usual for defense contractor MagiQ Technologies.

Ninety-five percent of MagiQ’s business is for the Department of Defense and related federal agencies. The money mostly funds development of military products based on high-level physics — the weird subatomic world of quantum mechanics.

“Based on the Heisenberg uncertainty principle, if someone observes that photon in transit it changes state, and so we can detect that and therefore guarantee secure key delivery from one point to another,” said Andy Hammond, vice president of business development for MagiQ.

The labs at MagiQ are lined with white boards filled with blue-sky thinking — ways to combat IEDs and detect motion down to the atomic level.

Sixteen people work at this small defense contractor. They come from all over, attracted to Massachusetts’ world-class universities. They stay for cutting-edge research jobs.

But uncertainty in physics is one thing, in finance another. Steve Steele, MagiQ’s accountant, says the sequester’s uncertainty is taking its toll.

“I’m seeing a decrease in contracts that are being approved,” Steele said. “It seems to be there are more people bidding on similar contracts and the success rate is dropping off.”

And Pentagon payments are coming in slower, so MagiQ is tapping on the brakes. While it’s not laying off workers, it isn’t hiring either, and that, says Hammond, could affect the company and the commonwealth’s future.

“We want to keep those best and brightest,” Hammond said. “This is the brain state and a lot of those people will leave because there won’t be entry-level job opportunities.”

Massachusetts defense contractors are devising strategies to fend off sequester cuts this year and the years ahead, but it’s a waiting game, says Donovan.

“I hear a lot of people are saying, and I tend to agree, 2013 is a mess, 2014 is going to be hard and 2015 gets normal,” Donovan said.

Maybe. This is just the first year in a decade of mandated sequester cuts. The Pentagon budget battle in Washington — and Massachusetts — has only just begun.

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