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ATK Receives Contract from the MDA as Budget Execution Continues

Despite the “Fiscal Cliff” negotiations and the fact that the Federal Government continues to operate under Continuing Resolution Authority (CRA) the Department of Defense continues to execute contract options. Under CRA new ones cannot be awarded but options on existing contracts may be executed. That explains why a production option for the F-35 could be issued even though it is worth over $3 billion.

ATK (ATK), for example, recently received a contract from the Missile Defense Agency (MDA) related to the development of Modular Divert and Attitude Control Systems (MDACS) technology for the Navy’s SM-3 Block IIB interceptor. The SM-3 is a ship launched missile that ultimately places a kill vehicle outside the atmosphere to engage the enemy missile threat.

The recent North Korean launch highlighting potential threats that the SM-3 is designed to perhaps deal with. It was reported that the U.S. and Japanese Navy deployed ships with the SM-3 capability in response to the launch.

The contract has a value of almost $53 million.

Because the kill vehicles are based on ships they cannot use liquid propelled DACS so solid rocket ones must be developed. They are flown like miniature space ships using controlled thrust from little rockets to move them. ATK is working on extending the performance of the DACS systems already used on the SM-3 program.

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Raytheon Continues Light Weight Torpedo Production

The U.S Navy exercised an option with Raytheon (RTN) for the production of Mk 54 Light Weight torpedoes. This is the standard surface vessel and air launched system used by the Navy and some allied nations. The option had a value of a little over $45 million.

It provides for one years production as well as test and engineering services for the system. The Mk 54 is carried by the SH-60, P-3 and cruisers, destroyers and frigates. It just recently completed testing from the new P-8 maritime patrol aircraft that will eventually replace the P-3.

The Mk 54 is also used by the Australian Navy and will be by the Indian as well as they will operate several P-8I aircraft.

The Mk 54 has been in production for 8 years and replaced the Cold War era Mk 50 and Mk 46 systems. It is fired from the traditional Mk 32 launch systems in use for decades, the ASROC rocket as well as from aircraft.

Until the full effects of sequestration are decided upon by Congress the Pentagon continues to exercise their planned FY13 budget under the existing 6 month Continuing Resolution Authority.

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More Missile Defense Work for Raytheon

As the Fiscal Year 2012 comes to an end contracts continue to be awarded although they should dry up as the government moves to begin closing out the books on this year and begin executing next year’s budget. FY 2013 looks to start with an extended Continuing Resolution Authority (CRA) which could limit what can be done with available funds.

One program that has had steady awards is Raytheon’s (RTN) work producing the SM-3 missile for the U.S. Missile Defense Agency (MDA). The SM-3 is part of the ship based AEGIS system and is optimized to engage enemy ballistic missiles. Further versions are being developed to deal with more complicated and longer range threats but the SM-3 has been tested several times in Hawaii and is equipping the U.S. and Japanese AEGIS ships.

The most recent award was for 19 missiles and has a value of over $200 million. This follows a contract awarded in July worth almost a billion dollars for development effort for a new version of the missile.

Raytheon is building a new facility in Huntsville, AL to produce the SM-3 missiles.

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House Begins to Cut Defense Budget

The House Armed Services Committee (HASC) approved by a 60 to 1 vote their version of the 2012 Defense Budget. This is basically similar to what was requested by the Obama Administration and reflects the first real reduction to U.S. defense spending since the attacks of 9/11.

As in previous budgets it was split into three parts: first, the base budget which funds the U.S. military and its investment, production, training and support activities; second, the cost of “Overseas Contingency Operations” (OCO) which used to be called the Global War on Terror (GWOT) which are the costs associated with operations in Iraq and Afghanistan and finally it also includes money for the Department of Energy (DOE) support to the U.S. military which is primarily related to nuclear weapons.

The base budget was about $535 billion which was a slight increase on the $533.8 billion programmed in 2010 for such activities. Due to the fact that no 2011 budget was officially passed by Congress until late in the year the Department of Defense relied on continuing resolution which restricted spending to 2010 levels. When the final budget deal was struck funding the rest of the year total planned spending remained consistent with 2010 levels. The Obama Administration had requested $548 billion with almost $160 billion for OCO. This amount was not approved or provided.

The HASC bill approved amounts to a reduction as the OCO funding was reduced to only $119 billion from the $130 billion in 2010 and the $160 billion proposed in 2011. Total spending in 2012 based on the HASC will be $690 billion including the DOE funding of $18 billion. This is a net increase over 2010 but almost $20 billion less then the planned spending in 2011.

What does this all mean for defense contractors? If the House totals hold, and after the work with the Appropriations Committee and the Senate there may be many changes in what the money is spent on, it will be the first net reduction in U.S. defense spending in 10 years. This will mean that some contracts won’t get funded and some companies will see their revenue and earnings reduced.

The cuts to OCO mean those companies heavily involved in providing support and equipment for Iraq and Afghanistan will see the first cuts. The Army’s LOGCAP IV contract provides much of this support for deployed forces and companies like DynCorp International, Fluor and KBR have received large contracts as part of it. The reduction to OCO may affect LOGCAP and those companies involved in it.

It will also mean less bullets, beans and gas will be bought to support the troops in Iraq especially. Suppliers of basic items may see reductions in the amount of items purchased from them. This includes ATK who make ammunition as well as the various gasoline refiners and providers. As the fighting in Iraq and Afghanistan winds down the DoD will be concentrating on making new weapon systems and repairing and refitting the equipment used by the military in those operations.

If and when all of the U.S. and Allied forces return from the fight there will be no need for OCO funding at all. This seems to indicate that the base U.S. defense budget will sink to about $500 – $600 billion a year. This will provide opportunities for those companies providing new, advanced weapons as well as supporting the U.S. military in its bases in the U.S., Asia and Europe. The next round of cuts though will be to this base budget. That will affect the entire U.S. defense industry and may lead to reductions in the number of contractors either through M&A or just moving to other business lines.

Defense spending has been a major prop to the U.S. economy as a whole as it supports businesses and jobs across all of the states. If the civil market has not recovered sufficiently cuts to this money will have a negative effect on many local economies across the U.S. already being experienced as some contracts are eliminated or reduced.
This HASC vote may be the first step into a period like the Nineties which saw wholesale changes to the U.S. defense industry and the countries’ industrial base as a whole.

Photo from David Paul Ohmer’s Flickr Photostream.

Article first published as House Begins to Cut Defense Budget on Technorati.

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JSF Dueling Engines Continue Duel As Defense Issues Stop Work Order

March 25, 2011 by · 1 Comment
Filed under: Editorial 

The ongoing struggle over the alternate F136 engine for the Joint Strike Fighter (JSF) between the Department of Defense and General Electric (GE), Rolls-Royce (RR:LSE) and their Congressional supporters took another twist with DoD sending a stop work order effective for 90 days. Because there never was a FY11 budget passed work could continue under the multiple Continuing Resolution Authority (CRA) passed by Congress.

Long a target of DoD and the U.S. Air Force the F136 has survived as competition to Pratt & Whitney’s, a United Technologies (UTX) company, F135 primary engine through the largesse of Congressional adds and direction. Seen to some as a prime example of waste and duplication both the Bush and Obama administrations tried to end the program by not requesting funding only to see Congress add money back into the defense budget for the system.

Supporters argue that it is a necessary risk reduction for the F35 program to build several thousand new fighters for the Air Force, Navy and Marine Corps and several allied countries. Pointing to the struggles of the development of the advanced aircraft overall some say that a second engine minimizes some risks in development of the F135 and offering a second source provides competition to drive down costs as engines are ordered to support the full production of the aircraft.

In the past similar attempts to halt the second engine program have failed as ultimately Congress leaves funding in although right now the version of the Defense budget proposed by both the House and Senate does not include that funding. GE is so confident that funding will ultimately be received that it is paying itself for work to continue during the 90 day period.

Supporters of the F136 also always complain that ending the program will cost high quality jobs during a recession. GE is doing a great deal of work at their Lynn, MA plant and within hours stories were appearing in the local press with the Mayor of Lynn stating that the decision was “blow to GE, the workers and the city of Lynn.” This quote from a story in the Boston Herald about Senator Kerry (D-MA) immediately sending a letter to the Defense Department saying that the decision undercut Congress’ authority on the budget even though right now Congress won’t continue funding the program.

That does not mean GE is out of engine work. They just received a contract to build engines for the latest batch of F/A-18 and EF-18 aircraft ordered by the Navy. That is a $247 million effort and much of the work will be done in Lynn. Although as the JSF ramps up its program production of the F/A-18 for use by the United States will end.

The second engine for the JSF and the continued production of the Boeing (BA) C-17 transport were the two most recent illustrations of where Congress continued programs through annual earmarks against the request of the Executive Branch. That did not mean the extra aircraft could not be used it just was not a priority for the service. It may end up that the few billion dollars spent on the F136 may provide benefit to the JSF program and U.S. military capability but it also may join a long list of programs ended before fruition due to budget pressures and decisions.

Photo from nordicdesign’s flickr photostream.

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Gas Prices Will Affect U.S. Military Operations Eventually

The U.S. military is currently involved in Iraq, Afghanistan and now what looks to be like Libya. They are also deployed in the Pacific and Europe which includes ships and aircraft on patrol. They also conduct large amounts of training in the U.S. and elsewhere. As such they are one of the biggest consumers of petroleum products (POL) in the world. This fuel is managed and provided through the Defense Logistics Agency’s (DLA) Energy Support Center (DESC) group.

As the price of oil and gasoline increases as it has over the last six months it will eventually begin to affect the ability of the U.S. to pay for and conduct its missions. DLA is able to lock in at certain prices as they award long term contracts but as these expire and new ones are issued the price effect will slowly appear. This means that more funds must be expended on fuel then originally planned and budgeted for at the beginning of the Fiscal Year. In the current budget structure where the Department is operating under Continuing Resolution and without a 2011 budget it also limits funding to 2010 levels which also may reduce the amount of money available to buy fuel.

The DLA issues hundreds of contracts each year for fuel. An example is one that was signed last week with the South Alabama Regional Airport Authority to provide fuel to support Army helicopter training at FT Rucker. This is worth about $11 million. If there end up being limits on how much funding may be spent on these types of contracts then it may affect training hours and flight time which slows the ability of the Army to produce new aviators who fill a critical need on the battlefield.

The U.S. military has also begun investing heavily in research to develop non-oil based fuel. These include the use of biofuels for aircraft power generated from plants or algae. The Air Force and Navy have both flown aircraft powered by such fuel even though there are some who feel the investment is not cost effective right now.

DoD is also investing in solar power and fuel cell technology to provide battlefield power beyond gasoline powered generators or from vehicles.

Even if in the short term it is more expensive it makes sense not only from an economic point-of-view but also logistically to try and reduce the amount of POL that is moved around via truck and aircraft.

Right now the price of oil seems to be going up due to pressures from unrest in the Middle East and North Africa. Eventually most likely sooner then later these increases will begin to affect the U.S. military. Either operational will need to be curtailed or money will have to be moved to buy POL at the cost of other programs or budget priorities.

Photo from roger4336 flicker photostream.

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Republican House Successfully Cancels JSF Second Engine Where Previous Administrations Failed

As part of their continuing resolution providing funding for the Federal government for the rest of Fiscal Year 2011 the Republican led House of Representatives struck funding for the F136 engine planned for the Joint Strike Fighter (JSF) program. The overall bill includes several billion in cuts to the Defense Department as well as much more for Federal spending overall. The second engine is being developed by General Electric (GE) and Rolls-Royce (RR:LSE) while the primary one by Pratt & Whitney, a United Technology Company (UTC).

The idea of having a second source for this critical hardware as risk reduction is sound but for the last several years the Pentagon and Bush and Obama Administrations had requested no funding as it was felt an unnecessary program. Congress through its power over the budget kept funding in each year.

While the House has cut the funding there is still a chance that the Senate will leave it in and the final decision will be made in Conference. One of the primary arguments that occurs each year with budget deliberations is how many jobs would be lost if programs like this were ended. That of course is not supposed to be a rationale for defense spending but carries a lot of weight in Congress. Already stories such as this one “Cut engine wold have meant 200 new jobs in Terre Haute” will be appearing in newspapers, blogs and on TV stations across the U.S. today.

GE released a statement thanking their supporters but obviously turning their eyes to the Senate in an attempt to keep the program going. They wrote “While we are disappointed at the outcome, the debate to preserve competition will continue.” The company also pointed out that studies show that the competition between the engines would save billions over the life of the program.

The F-35 JSF is the largest defense acquisition program in U.S. history and has suffered from schedule delays and cost growth over the last decade. The aircraft will equip large parts of the U.S. Air Force, Navy and Marine Corps while also being used by U.S. Allies such as Great Britain, Canada, Australia, Norway and Holland among other countries. With the program’s cost increases the second engine has seen as an expensive luxury.

If the cancellation holds only as the program plays out will it be seen as a wise or premature move. If P&W supports the program effectively and the engine causes no delays or cost increases then the lack of a second source will not matter. If the opposite occurs then there will be finger pointing and recriminations.

Photo from Dysanovic’s Flickr photostream.

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Air Force Plans Award Before April 1st

Despite the current issues with defense funding the Defense Department and Air Force reportedly said that they hope to award the KC-X aerial tanker contract within a month. The budget sent forward for 2012 on Monday stated that the planned contract was valued at around $35 billion.

It sounds like that even with the Pentagon acting under a continuing resolution rather then an official budget that at least the winner will be announced. There is some concern that without a 2011 budget resolution from Congress a new contract of this magnitude might not be able to be awarded. This means that the Air Force will have to wait until October 2011 to have initial funding for the purchase of the new tanker.

The KC-X saga is heavy with political overtones as supporters of both Boeing (BA) and EADS (EADS:P) in Congress continue to lobby OSD and threaten problems if their preferred source is not chosen.

The Air Force has been trying since early in this decade to buy a new tanker and this award may be the last step towards doing that. Although the chances of a protest by the loser remain high and the current budget situation between President Obama and Congress may make it difficult to get the funding resolved anytime soon.

Both Companies Submit Final Proposals But Will Continuing Resolution Allow Award?

It has been confirmed that both Boeing (BA) and EADS North America (EADS:P) submitted their final proposals for the KC-X aerial tanker program. The Air Force had asked that they be submitted by today and both companies turned them in early.

One pressing question that remains is if the Department of Defense remains under Continuing Resolution (CR) for the rest of the year rather then Congress passing a proper budget is it possible to award the new contract? It looks like the Republican controlled House is planning on doing CR until the new Fiscal Year (FY) starts in October. There has not yet been any statement from the Government on this question.

One would think that even if the source selection is carried out and a winner chosen with the caveat that the contract award would have to wait until the next FY it might affect the pricing. Having a requirement to guarantee the pricing for several months has not been identified yet and it would have some effect on each company’s bids.

As everything with this program nothing is easy and it seems this third attempt may be even more complex and controversial than the first two.

House Plans Continuing Resolution for Rest of FY11

Based on this press release from the House Appropriations Committee released yesterday it is clear that rather then try to pass a 2011 Defense Appropriations Act or any other part of the Fiscal Year 11 budget the Congress will use Continuing Resolution (CR) language for the remaining seven months of this FY.

Under CR funding will be capped at FY10 levels and it severely limits new contract awards and new program initiation. For example even if the U.S. Air Force announces in the next few weeks a winner for the KC-X aerial tanker program they may not be able to award the contract as the funding and language was not in the FY10 budget. This would potentially push that off to FY12.

One of the benefits to those wanting to reduce spending by the Federal Government by this approach is it holds spending at the FY10 level meaning that there is no growth in total spending. In fact the HAC release details over seventy programs that are being cut a total of over $70 billion.

Of course the problem for DoD with the CR is that they may need growth in funding for some parts of their budget including money for operations in Iraq and Afghanistan. The use of CR for the entire fiscal year may affect activities such as training as money is moved from stateside accounts into overseas operational ones.

Secretary of Defense Gates is still hoping to get Congress to pass a defense budget so that these types of choices do not have to be made and the U.S. military can meet its commitments.

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Latest CRA Allows Navy to Use Multiple Sources for LCS

In the on again off again tale of the Navy’s new small combatant Congress approved the revised acquisition strategy of using multiple sources for the next twenty ships. In the latest Continuing Resolution Authority (CRA) passed by Congress Tuesday and signed by President Obama the Navy is given permission to buy ten Littoral Combat Ships (LCS) from Lockheed Martin (LMT) and Austal America (ASB:AU).

Lockheed will team with Marinette Marine Corp. of Michigan while Austal originally worked with General Dynamics (GD) for the first four LCS but for this round of bidding submitted their own. General Dynamics had decided that for future contracts they might bid by themselves.

Ten days ago the Navy had asked the two bidders to extend their prices while asking Congress for this change in strategy from the plan to buy the next batch of LCS from a sole source. The prices offered were so good that the Navy had decided to try and return to the original LCS acquisition strategy of multiple sources.

Because the plan is to buy fifty or more of the ships the idea of having two or more builders of the small ship would maximize the number being delivered. While the two hull designs are very dissimilar the overall combat load out is the same. The LCS will be optimized for fighting close to shore and be able to carry different equipment so that it may carry out missions such as mine sweeping, anti-piracy as well as fighting other ships and submarines.

The decision is a boon to the U.S. ship building industry as it guarantees work at least for the next few years to two yards rather then one.

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University of Alaska Computer Center May Be Victim of Budget Struggles

For a variety of reasons the Democratic controlled current Congress has yet to pass any spending bills. The government is operating under a Continuing Resolution now through the 18th of this month while they attempt to work out some sort of omnibus spending bill. The new Republican House and stronger Senate are not supporting the notion of passing one bill rather then the eleven or so required normally.

Because of this a line in the Senate Defense Appropriations bill inserted by Senator Mark Begich (D-AK) will not be passed. This would prevent the Defense Department from spending any money closing the six super computer centers it funds at college campuses across the country including one at the University of Alaska Fairbanks. The Department had wanted to stop funding some of these including this one when their current contract expires at the end of next May.

The loss of Defense funds for this center would basically end the centers work as over ninety percent of their money comes from DoD.

The Department is under pressure to make its spending more efficient both from Secretary of Defense Gates as well as outside groups including some in Congress. If they feel the next contract will not have enough work for the six centers then some will receive less or no funding. The Defense Department did say the center will be allowed to bid on future work but that will not be soon enough.

Over the last ten years the U.S. has invested a lot of tax dollars in not only the equipping of troops for and operations in Iraq and Afghanistan but also in new capabilities and facilities. As the budget retrenches some of that investment will have to end or be adjusted and other places will begin to feel the effect as Fairbanks seems to be.

The current political situation only adds to the problems and the next Congress may be less likely to support Democratic Senators and some of their spending priorities.

The defense budget looks like at best it will stay flat for the next few years forcing more cases of prioritization such as this with a potential loss of jobs and a negative effect on local economies.

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Air Force Buys Five Global Hawks

Despite the debate in Congress over how many Global Hawks could be ordered with the 2010 money the Air Force went ahead and used their Continuing Resolution Authority (CRA) money to buy five. The House had written into their version of the Defense Appropriations bill that only three could be purchased due to concerns with delays in the program. The Senate had said five. The bill currently is in Conference as the two versions are reconciled. It is proving to be a long process as their are several key differences between the two.

Northrop Grumman was awarded a contract worth a little over $300 million for the five aircraft plus supporting equipment.

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Continuing Resolution Coming?

September 22, 2009 by · Comment
Filed under: BNET 

The Congress will not get the required funding bills passed by 1 October. This will require the use of a Continuing Resolution which has an effect…

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