The risks and rewards of military contracts

Polkton Manufacturing knows how good military contracts can be for a company.

As the sole supplier of the Navy's blue polyester working uniform, the family-owned company had a steady stream of orders over 40 years. The Navy never changed the uniform, Polkton produced several thousand shirts and pairs of pants every week, and payments came on time.

Then came the “Dear John letters,” said Aaron Efird, the company's vice president.

The Navy was replacing the work blues with a new grey-and-blue camouflage uniform in 2009, and was going with companies that could provide the clothes at a lower price.

The case of Marshville-based Polkton Manufacturing shows both the opportunity and risk that come with military contracts – an area that companies and communities are pursuing more aggressively in today's weak economy.

U.S. military supplies must be made in America, giving a boost to domestic plants – from major corporations to small operations – as some commercial manufacturing has migrated to other countries in recent years.

Defense and security companies are now a target for the Charlotte Regional Partnership, the region's business recruitment group, which hosted about 70 local business owners last week at a forum to discuss growth opportunities. Companies in Charlotte and 16 nearby counties last year secured more than 1,600 contracts with the Defense Department – four times as many as in 2000 – worth nearly $450 million, according to data from the partnership.

But as Polkton's experience shows, companies can see the well run dry when the government looks at bottom line for cost – a bigger risk as competition for contracts increases.

“It's a great niche business to be in, but it comes with some very tough business arrangements,” Efird said. “As a government contractor there is no real business relationship.”

An attractive customer

The Defense Department issued more than $146 billion in contracts last year, with more than $5 billion going to Carolinas companies.

Those deals, though, usually end up elsewhere than Charlotte. In the past eight years, less than 13 percent of contracts won by N.C. and S.C. companies were by Charlotte-area businesses, according to data from the regional partnership.

It's time that Charlotte got a bigger piece of the pie, said Ronnie Bryant, the group's president. “We have to be proactive and aggressive,” he said, “and that's what we are planning to do.”

It helps that defense contractors are thriving despite the downturn. On Thursday, Charlotte-based Goodrich Corp., which makes aerospace and defense products and systems, reported a 50 percent jump in second-quarter profits. Also this week, General Dynamics, which makes armament systems and other products in Charlotte, posted a 25 percent profit for the quarter.

Smaller-name companies also have seen the benefits of defense contracts. ORO Manufacturing in Union County turned to the government as commercial demand for the company's machine parts slowed, said Pat Engel, the company's vice president.

Last year, ORO – which has 35 employees – secured more than $1.1 million in defense contracts. While contracts for the company's lightweight airplane and helicopter seats used to make up half of the company's business, they've been about 85 percent of sales in recent months, Engel said.

ORO likes working with the government, Engel said, compared with commercial customers who sometimes make bidders bend over backward to close a sale.

“With the government you have a commitment to a specific delivery time and a specific price,” Engel said “It's cut and dry. With commercial customers, it is not always that easy.”

Costs and competition

That cut-and-dry attitude can have a downside, however. With a commercial customer, a company can renegotiate if the price of materials rises, Efird said. The government has dropped most economic adjustment clauses, he said, making it tough to calculate costs for contracts that typically span several years.

“You really have to have a crystal ball,” Efird said. “How in the world could anyone have anticipated that oil would have gone the way it has?”

At its best, Polkton Manufacturing brought in nearly $30 million a year, with one plant in Wadesboro making shirts and another in Robersonville in Eastern North Carolina making pants.

But Efird's smile was tinged with sadness as he surveyed the Wadesboro plant floor last week. The decline in U.S. textiles jobs has led the remaining companies to chase military contracts even harder, he said. More competition means lower bids, he said, which cuts into profits and – in Polkton's case – has cost them a key contract.

With the Navy changing uniforms in April, Efird expects Polkton's sales to start slowing this fall. Beyond that, he said, the company may have to close two plants and lay off up to 240 employees, who average about 17 years of service.

Commercial customers could help fill the void. But with no made-in-America requirement for those contracts, Polkton would be competing with lower-cost clothing manufacturers overseas – a daunting prospect.

“Anyone left in this industry,” he said, “wants to be working for the government.”