Defense Contractors Can’t Yet Gauge Cost of Scandal

Some of the nation’s leading defense contractors said Tuesday that the defense procurement scandal could end up costing them, but that it’s too soon to estimate how much.

Under prodding from the Securities and Exchange Commission, the companies this week are making the most detailed disclosures yet of their roles in the scandal and its possible consequences.

In the worst scenario--indictments, suspensions or a ban on new government contracts--the companies are warning investors that the ramifications could be severe. But without exception, the firms say in required quarterly filings with the SEC that it is too early to guess the ultimate significance.

“No real surprises so far,” said Lawrence M. Harris, a defense industry analyst with Bateman Eichler, Hill Richards, a Los Angeles brokerage. “Until we see indictments or contracts lifted, we’re dealing right now in the world of hypotheticals.”

Some of the disclosures have brought to light new information about the federal investigation of possible bribery, influence peddling and conflicts of interest in defense procurement. The SEC reminded companies early this month of their obligation to make such disclosures.

Among the first to comply were defense contractors Northrop, McDonnell Douglas, Martin Marietta, Unisys and Varian Associates.

In a filing Monday, Century City-based Northrop said its Washington office and its precision products division in Norwood, Mass., had been subpoenaed by federal investigators. Officials said the records requested, like those sought in a mid-June search of a Northrop unit in Newbury Park, related to the firm’s consulting contracts with targets of the federal probe.

On Tuesday, Palo Alto-based Varian Associates disclosed that an internal investigation of its Continental electronics division in Dallas had uncovered “certain irregularities . . . which could impact upon the company.” Varian declined to elaborate on its disclosure.

FBI documents made public in the investigation prompted the Pentagon last month to suspend the division from federal contracting--the harshest commercial consequence of the investigation to date. According to the FBI affidavits, based on wiretaps, a Continental executive allegedly plotted with a Washington defense consultant to swap money for crucial, secret procurement data.

New Requirement

In a statement typical of those included in the disclosures filed with the SEC, Varian said: “The company is not able to determine at this time what changes, if any, will be required in its operations in response to these irregularities or the impact of the changes, if any, on its future operating results or financial condition.”

McDonnell Douglas, whose dealings with former Asst. Navy Secretary Melvyn R. Paisley are a central focus of the federal investigation, disclosed concerns about the financial consequences of a proposed Pentagon requirement that its military aircraft division certify the propriety of its bids on defense contracts.

The Defense Department announced last month that it would require 16 companies whose names had surfaced in the procurement investigation to certify in contract competitions that they had not obtained pre-bid data from any source but the official Pentagon contracting officer. Violations could result in the loss of 10% of the profit from any contract obtained with the use of information from other sources.

“These uncertainties and new procedures could delay award of contracts, reduce near-term cash flow and increase (the company’s) need for additional borrowings,” McDonnell Douglas said. But the St. Louis-based company said it doubted the certification requirement would materially affect its financial performance.

Unisys--a number of whose employees and consultants are subjects of the federal inquiry--said it hoped its full cooperation with investigators and extensive self-policing efforts could mitigate the legal and financial consequences of the probe.