Will Trump invest in defense, or security?; Defense firms report mixed earnings; One-on-one with the former CAPE director; and more.

The question I get asked most often, by defense executives and Pentagon officials alike, is: Will President Trump increase defense spending?

As Trump has moved from campaign to transition to the first week on the job, the consensus has moved from “yes” to “yes, but he won’t sign a blank check” — and now there seems to be a new twist. His focus appears to have shifted from defense (spending on the military) to security (safeguarding the United States).

Let’s break down some new info from the White House. First, there’s a 360-word issue brief called “Making Our Military Strong Again,” which talks about eliminating defense spending caps. Sometimes called sequestration, the caps have since 2011 limited the Pentagon’s ability to invest in future projects. The paper also talks about improving missile defenses and cybersecurity.

Second, in his inaugural address, Trump said America has “defended other nation’s borders while refusing to defend our own.” Third, Trump on Wednesday visited the Department of Homeland Security to announce the construction of a wall along the U.S.-Mexico border.

Defense budget expert Todd Harrison of the Center for Strategic and International Studies notes that the issue brief does not talk about shipbuilding or increasing the size of the Army.

“If you take what Trump has said about foreign policy and our security commitments around the world, you don’t need a larger military, you need a much smaller military,” Harrison said at a CSIS event about the defense-spending outlook.

Said Mark Cancian, a former Office of Management and Budget official: “Trump on the campaign trail had talked about making allies pay more, maybe pulling back forces to the United States, less involvement overseas, less forward deployments. And if he really implemented that, that would certainly change the shape of your forces, and that would change your topline also.”

Perhaps we’ll learn more on Friday when Trump visits the Pentagon.

Earnings recap

Most of the large U.S. defense firms grew in 2016. Lockheed Martin and Raytheon had the biggest year-over-year gains, but remember Lockheed paid $7.1 billion for Sikorsky in 2015. Here’s a breakdown of 2016 results and projections for 2017.

Lockheed Martin finished 2016 with $47.2 billion in revenue, up 16.5 percent from $40.5 billion last year. Officials expect an even better 2017, with projected revenues of $49.4 billion to $50.6 billion.

Boeing’s defense revenue for 2016 was $29.6 billion, down from $30.4 billion in 2015. If you add in its commercial airplanes division, revenues fell from $96.1 billion to $94.6 billion. Things aren’t looking up in 2017; the firm is projecting revenue between $90.5 billion and $92.5 billion. Also, Boeing ate another $312 million pre-tax ($201 million after tax) on its KC-46 tanker program, bringing total money lost on the project to more than $2 billion.

United Technologies’ 2016 sales of $57.2 billion edged up 2 percent from $56.1 billion in 2015, and may do so again; the firm is projecting $57.5 billion to $59 billion. UTC’s Pratt & Whitney had $14.9 billion in 2016 sales, up from $14.1 billion the previous year.

Textron recorded nearly $13.8 billion in revenues last year, up from $13.4 billion the year before. The firm is forecasting revenues of $14.3 billion in 2017. Its Bell Helicopter division delivered fewer V-22 Osprey and H-1s in 2016 than it did in 2015.

Raytheon sales in 2016 were up more than 10 percent, closing the year at $27.8 billion compared to $25.2 billion in 2015. In July, Thomas Kennedy, the firm’s chairman and CEO, predicted a big year for the firm. Raytheon is projecting between $24.8 billion and $25.3 billion in 2017 sales.

Northrop Grumman’s strong fourth quarter brought 2016 sales to $24.5 billion, up from last year’s $23.5 billion. The company is expecting $25 billion in sales this year.

L3 Technologies closed 2016 with $10.51 billion in sales, up slightly from $10.47 billion in 2015. For 2017, the firm projects between $10.58 billion and $10.88 billion in sales.

Still left to report: General Dynamics and Honeywell on Friday, Jan. 27, and Booz Allen Hamilton on Jan. 30.

What CEOs had to say about Trump

Boeing’s Dennis Muilenburg: “I’m very encouraged by President Trump’s engagement. We had some targeted, well-publicized discussions on things like Air Force One and fighter aircraft. I think those were very productive discussions as well.… Whether it those kind of targeted discussions on programs, which I think have been fairly productive, or broader discussions on pro-business decisions around trade and tax reform and regulatory reform, those have all been excellent conversations. I give a lot of credit here to reaching out and directly engaging.”

Lockheed’s Marillyn Hewson: “The meetings that we’ve had [with President Trump] have been very productive, with very good dialogue. He asked excellent questions and he is really focused on making sure that that the cost comes down on the [F-35] program. And it is not about slashing our profit, it’s not about our margins when we have those discussions about how we get the cost of the aircraft down today and in the future.”

Welcome!

You’ve reached the Defense One Global Business Brief by Marcus Weisgerber, with help this week from Caroline Houck. Send your tips, comments, and random thoughts to mweisgerber@defenseone.com, or hit me up on Twitter: @MarcusReports. Check out the Global Business Brief archive here, and tell your friends to subscribe!


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Who’s running the Pentagon these days? redux

Last week, we told you who would be the acting secretaries of each service. Today we go deeper into the weeds. Here’s your cheat sheet of folks performing the duties of undersecretaries or in an acting capacity: Acquisition: James MacStravic; Policy: Theresa Whelan; Comptroller: John Roth; Personnel & Readiness: Anthony Kurta; Intelligence: Todd Lowery; Deputy Chief Management Officer: David Tillotson; General Counsel: Paul Koffsky. Read the full memo, which lists a lot more positions, here.

One-on-one with the just-departed Pentagon budget analyst

Jamie Morin spent two-and-a-half years running the Cost Assessment and Program Evaluation office, the Pentagon shop that analyzes military projects and spending, better known as CAPE. But before he left the Pentagon last Friday, I met up with Morin in his office to get his thoughts on the budget climate and his advice for the Trump administration.

CAPE has left the Trump team a budgetary database based on the Obama administration’s defense plans. While the outgoing administration’s 2017 budget proposal came in under federal spending caps, its projection for 2018 and beyond were above those caps.

“I think we got there. I think we have a good balanced recommendation,” Morin said. “If it turns out that there’s significant additional money available, there will be plenty of room for adds that will reduce risk.”

Since federal spending caps remain in place through 2021, Congress must repeal or amend the law in order to make large increases in defense spending. If it cannot come to an agreement, it can use the Pentagon’s war budget — known as Overseas Contingency Operations, or OCO — which is not capped. Despite Republican control of Congress, there are fiscal hawks — including Mick Mulvaney, Trump’s pick to run the Office of Management and Budget — who are not fans of the latter method.

“We have a list of all sorts of things we could do if there were more resources available,” Morin said.

A looming questions has been: what happens to the Third Offset, the effort spearheaded by Deputy Defense Secretary Robert Work to develop technology that can deter conflict and give the American military a wartime advantage?

Turns out Morin’s CAPE office conducted a “strategic portfolio review explicitly tied to the Third Offset and we were able to identify a bunch of program recommendations to start turning it into an operational and budgetary reality,” he said.

Q. What are those recommendations?

A. A mix of new technology and modifying existing weapons. “There’s both the ‘do clever new things with stuff you’ve got’ or by modest extensions of the things you have,” Morin said, referring to the work done by the Strategic Capabilities Office.

Q. What’s the biggest risk you see in the 2018 budget?

A. “The biggest risk is that there’s not an enduring, political solution to the fiscal challenge facing the country. The fundamental questions there of how much revenue should the government raise and how should we balance our spending between the needs of retired people and the needs of the next generation and the needs of the generation in the workforce today, and across the defense and civilian sector? None of those issues is there a clear and coherent political majority for. While [President Trump] has said clearly he wants to repeal [the Budget Control Act caps], that was the policy of the last president too and we weren’t able to get a deal through the Congress on anything other than a one- or two-year basis. It still remains to be seen: how does that play out? I think we’ll get something, but the Department of Defense is an entity that needs, whenever possible, long-term stability and this succession of one- and two-year deals is deeply, deeply disruptive. My advice to the incoming team is focus on getting a long-term deal that will stick early on and that puts the nation on a good fiscal course.”

Q. The Trump administration and Congress are supposedly preparing a defense supplemental spending bill that would boost military readiness in the near term. What do you make of that?

A. “There are unquestionably needs within the department where we could improve with some additional money. Our facilities — we’ve taken a lot of risk maintaining and modernizing them to focus on direct warfighting and readiness-type issues. Over time, that builds up. There are plenty of programs that we could more efficiently buy if we had a little more money. We could buy more quantity and get potentially better prices over, a least, a couple of year horizon. A lot of that you can’t turn on and off within one year. You need to have a multi-year plan. I would recommend to the incoming team that they try to keep as tight a link as possible between what they’re trying to do in fiscal year 2017 and what they’re trying to do in fiscal year 2018 and across the 2018-to-2022 program because you don’t want to make disconnected decisions or else you’ll end up out of balance [between force structure, modernization and readiness].”

Q. Did you ever run the numbers to see whether it would even be possible to get rid of the OCO fund?

A. “I think the department has a good sense of what the OCO needs are. Both the department and the Congress and the interested public can look at all the budget documents associated with OCO and understand exactly what’s being funded in there. There are things that are funded in there that I think everybody acknowledges are expenses that are likely going to continue even if operations wound down in the Middle East. Much of the expenditure to operate are enduring bases in the Middle East. That’s likely to persist.… Whatever’s likely to endure, we would want to move into the base budget, but senior leadership has been very clear: the things that that would crowd out of the base in the context of continued BCA caps, the consequences of that are not good. So we’ve grudgingly gone along with the current distribution of the costs with some of those things covered in OCO. If BCA is repealed, my recommendation would be, as a first priority, take those things and put them in the base.”

The services fight for cash

As already mentioned up top, we still don’t know where and how Trump administration plans to grow the military, but the Army is making sure it and lawmakers know what it wants if the money comes in. It is circulating a white paper with $8.2 billion it says it needs for weapons, training, sustainment and base upgrades. The money would pay for the additional the 16,000 troops lawmakers added to the Army’s end strength in the 2017 National Defense Authorization Act. Among the weapons, Abrams tanks, Stryker vehicles, Chinook helicopters, Apache helicopters, light-utility helicopters, Grey Eagle drones and PAC-3 missile interceptors. The other services, I’m told, are updating the unfunded priority lists they sent to Congress last year. Typically, the services send these types of lists to the House and Senate Armed Services committees after the Pentagon’s budget proposal goes to the Hill. But little is going typically these days.

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