Defense Market

Proposed defense budget of $708 billion for fiscal 2011 has been sent to Congress today. The budget request for the Department of Defense (DoD) includes $549 billion in discretionary budget authority to fund base defense programs and $159 billion to support overseas contingency operations (OCO), primarily in Afghanistan and Iraq. This proposal continues the reform agenda established in last year’s DoD budget request and builds on the initiatives identified by the 2010 Quadrennial Defense Review (QDR) and 2010 Ballistic Missile Defense Review (BMDR).

The 2010 Quadrennial Defense Review examines DoD strategies and priorities. It assesses the threats and challenges that the nation faces and re-balances DoD’s strategies, capabilities, and forces to ensure the U.S. military has the flexibility to address today’s conflicts and tomorrow’s threats. The Ballistic Missile Defense Review evaluates the ballistic missile threat to the U.S. and its allies and articulates policy. It determines the appropriate role of ballistic missile defense in the country’s national security and military strategies.

The fiscal 2011 base budget request represents an increase of $18 billion over the $531 billion enacted for fiscal 2010. This is an increase of 3.4 percent, or 1.8 percent real growth after adjusting for inflation. The fiscal 2011 OCO request will provide additional resources needed to sustain U.S. forces in Operation Enduring Freedom – in Afghanistan and elsewhere – and Operation Iraqi Freedom. Included are funds for pay and benefits, logistics and other support, force protection, continuing efforts to counteract improvised explosive devices, as well as funding to fully support the buildup in Afghanistan and to carry out a responsible drawdown in Iraq.

Also accompanying the 2011 budget proposal is a fiscal 2010 supplemental request of $33 billion to support the added costs of the President’s new strategy in Afghanistan and strengthen U.S. force levels with approximately 30,000 additional troops.

Key highlights of the proposed DoD budget are outlined in the attached summary and charts. For more information download the FY 2011 Budget Request Overview Book and Program Acquisition Costs by Weapons System.

UAV spending will more than double over the next decade from current worldwide UAV expenditures of $4.9 billion annually to $11.5 billion, totaling just over $80 billion in the next ten years – these are findings of Teal Group’s 2010 market study. The study suggests that the U.S. will account for 76% of the worldwide RDT&E spending on UAV technology over the next decade, and about 58% of the procurement. The 2010 study also provides 10-year funding and production forecasts for a wide range of UAV payloads, including Electro-Optic/Infrared Sensors, Synthetic Aperture Radars (SARs), SIGINT and EW Systems, C4I Systems, and CBRN Sensors, worth almost $3 billion in Fiscal Year 2010 and forecast to increase to nearly $6 billion in Fiscal Year 2019.

“Our dominance in conventional warfare has led adversaries to seek new avenues to challenge us,” William J. Lynn, Deputy Defense Secretary, told military and civilian attendees at the Institute for Foreign Policy Analysis-Fletcher Conference on National Security Strategy and Policy. The nature of armed conflict, Lynn said, has changed since the Cold War era, when military doctrine was developed to deal with an envisioned clash of massed conventional air and land forces on European battlefields. Today, insurgents in Afghanistan and Iraq employ low-tech improvised explosive devices “that penetrate even the most heavily defended armor,” Lynn said, while terrorists and rogue nations seek to acquire weapons of mass destruction. However, the U.S. military is employing new methods and technology to meet asymmetrical challenges, he said, pointing to the increased use of unmanned aerial vehicles in those theaters of operation.

For example, UAVs fitted with cameras can identify and track insurgent activities, such as the placing of roadside bombs. And, unmanned aerial platforms also can employ missiles to attack the enemy, while space-based satellites provide added intelligence information.

“Because of a significant investment in intelligence surveillance, surveillance and reconnaissance [capabilities], commanders receive actionable intelligence in minutes rather than in hours,” Lynn said. “Unmanned aircraft now combine surveillance with attack abilities.”

The rapid development and fielding of unmanned aerial systems to combat zones, he said, exemplifies “one of many shifts we have taken across the department to focus our resources on the wars we are fighting and the new threats that we face.”

AAI Corporation, an operating unit of Textron Systems, is expanding its fee-for-service unmanned aircraft systems (UAS) capabilities for U.S. Department of Defense (DoD) customers, as well as civil and scientific organizations. Fee-for-Service model covers everything from systems to total life cycle support, training and in-field services. Contractor-owned, contractor-operated UAS services allow customers to secure just the data they require, even under a wide variety of operational conditions, without incurring the personnel cost or equipment, training and maintenance investment demanded by a UAS fleet.

Customers, including NASA, the U.S. National Oceanic and Atmospheric Administration, the University of Colorado and Australia’s Defense Science and Technology Organisation, have benefited from thousands of fee-for-service flight hours using AAI’s fleet of Aerosonde small unmanned aircraft systems. Most recently, the University of Colorado outfitted the Aerosonde Mark 4 aircraft with specialized instruments to capture extensive data on coastal winds in Antarctica. Despite heavy winds and temperatures as low as -38 degrees Celsius, four Aerosonde aircraft logged more than 130 flight hours and flew nearly 7,000 miles during their 16 flights. These aircraft also have proved their robust design amid desert sands, Arctic chill and dangerous, hurricane-force winds.

General Dynamics Electric Boat has been awarded a $118 million contract modification by the U.S. Navy to continue concept studies, engineering and design of a Common Missile Compartment for the United Kingdom’s Successor ballistic-missile submarine and the U.S. Ohio replacement submarine. Electric Boat is a wholly owned subsidiary of General Dynamics (GD).

The award modifies a $76 million contract announced in December 2008 for engineering, technical services, concept studies and design of a Common Missile Compartment for the next-generation ballistic missile submarines under development for the Royal Navy and the U.S. Navy.If all options are exercised and funded, the overall contract would have a value of more than $600 million.

CACI International Inc signed an agreement to acquire SystemWare, Inc. SystemWare designs, manufactures, and provides state-of-the-art signals acquisition and analysis systems that enable users to monitor and detect cybersecurity and physical security vulnerabilities and enhance operational security. Founded in 1988, SystemWare is headquartered in Camarillo, California, near CACI’s Oxnard facility, with East Coast operations directed from Elkridge, Maryland, where CACI also has a strong presence. More than half of the company’s employees hold Secret-level security clearances and above, and its clientele includes the Department of Defense (DoD), the Intelligence Community, federal civilian agencies, and U.S. allies. SystemWare solutions include proprietary technologies that combine advanced software and analytical toolsets with cutting-edge, customizable hardware configurations to deliver industry-leading counterintelligence systems. Its quality management system has been awarded ISO 90002:2000 certification, assuring clients of high-quality software development. SystemWare’s revenue in calendar year 2009 was $16 million. The acquisition is expected to be accretive to CACI’s earnings per share during its first 12 months.

In late 2009, BAE Systems partnered with the National Oceanic and Atmospheric Administration to complete the first test flight of the Coyote unmanned aircraft system. The Coyote deployed, as designed, from a 3-foot-long sonobuoy dropped from a P-3 aircraft. The test marked a significant milestone in the development of the system for military uses and scientific research. NOAA says the Coyote demonstrated potential to provide researchers with valuable observations during high-wind environments, such as hurricanes and tropical storms.

The Coyote is a small, electric-powered unmanned aircraft system. Initially designed with funding from the U.S. Navy, it weighs only 13 pounds and has a 58-inch wingspan. Once deployed, it can cruise faster than 60 knots for more than an hour, conducting research or performing intelligence, surveillance, and reconnaissance missions.

Deloitte’s latest Aerospace and Defense (A&D) industry outlook report finds that, by comparison to 2008, 2009 was both uneven and not nearly as good a year.

According to the Deloitte report, merger and acquisition activity in the A&D sector in 2010 will likely accelerate. Consolidation among suppliers will result in benefits as they gain scale economies and increase industry asset utilization. The large prime contractors will be unlikely to merge with one another due to anti-competition laws, concentration of technology and other anti-trust matters. However, it is likely that large original equipment manufacturers (OEMs) may continue to acquire smaller companies to fill capability gaps in homeland security, defense electronics, intelligence, IT services, command and control, alternative energy and cybersecurity.

“This past year was certainly a challenging year for many companies. For 2010, we have muted optimism for the A&D industry. We are mindful that the innovations this industry has produced have enabled widespread and affordable air travel, produced technologies that contribute to global security and enabled some of the most iconic moments in human history from the Wright brothers first flight to efforts in responding to natural disasters around the world. We are upbeat about the A&D industry in the long term, despite the challenges that we are all well acquainted with,” said Tom Captain, vice chairman and Deloitte’s A&D sector leader.

In assessing 2010, Deloitte sees continued moderation in the financial performance of the domestic A&D industry, with this year representing the trough of the commercial airplane order cycle, the beginnings of improvement in business jet orders and production and increased earnings pressure for defense programs.

Write-offs on large programs due to cost over runs, declining supplier revenues due to program delays, reductions in orders for large military platforms, program cancellations and falling Maintenance Repair Overhaul (MRO) revenues due to reduced passenger and freight travel all contributed to the uneven year.

The recently announced decision to send an additional 30,000 U.S. troops to Afghanistan will also have an impact on the Aerospace&Defense industry, according to the Deloitte report, and provides opportunities for non-active duty personnel from companies that specialize in logistics, transportation, civilian police training, camp building, translation services, border surveillance and other non-military capabilities.

“The A&D industry is likely to see opportunities based on troop increases, from supplying vehicles, generators, transport aircraft and helicopters to providing innovative new solutions to key problems, such as improvised explosive devices (IEDs) and energy use. Companies that can rapidly develop, test and deploy new technologies will likely be winners in 2010,” said General Charles Wald (USAF Ret), director and senior advisor in Deloitte’s A&D sector.

In-flight photo of AOptix R3.1 “Skyball” air node terminal for secure long distance gigabit-per-second optical data transmissions. Inertially stabilized gimbal mounted to a P68 “Observer” aircraft.

AOptix Technologies, Inc., a developer of ultra-high bandwidth laser communication solutions, and NuCrypt, a developer of technology for ultra-high security over optical communication networks, announced completion of a first-of-its-kind quantum encryption test over free space optical (FSO) links for the United States Air Force Research Laboratory. Flying at 10,000ft with distances of up to 20km, AOptix provided long-distance 2.5 gigabit per second lasercom links for the series of encryption tests. AOptix applied their patented bi-directional Adaptive Optics correction to the wavefront distortions, caused by atmospheric turbulence. This high speed closed-loop control system insured link stability so that all of the encrypted light was inserted with minimal loss back into the fiber; a key fundamental element in the success of the tests. In previous FSO link tests without AOptix terminals, NuCrypt experienced dramatic power fades due to turbulence and pointing errors, representing a significant, if not impossible, challenge. Teaming with AOptix provided a robust link solution that preserved the integrity of the encoded signal for this type of encryption over a wireless optical connection.

NuCrypt’s proprietary “AlphaEta” quantum-noise randomized, physical-layer encryption technology represents a new paradigm in ultra-secure, high data-rate optical communications. Not only does AlphaEta bring elements of physics and traditional cryptography together to enhance security, it does so in a way that is robust and compatible with current optical communications infrastructure whether long distance fiber or FSO links.

The AOptix wireless bi-directional optical terminals utilize a unique patented, single aperture, adaptive optics method of beam control to compensate for real-time atmospheric turbulence while maintaining lock between two terminals. Video, voice and data is transmitted through the air over a single invisible, low power, eye-safe, FSO laser link.

“This new capability adds to the impressive low probability of detection, low probability of interception (LPD/LPI) that only a lasercom link can provide. NuCrypt has transformed physical-layer security for free space optical lasercom. Lessons learned will be applied to much longer link distances in the future,” says Dean Senner, President and CEO of AOptix Technologies.

“It is a testament to the robust nature of the AlphaEta encryption method and the capabilities of the AOptix free-space optical terminals that they can be combined to create ultra-secure Gigabit-per-second air-to-ground optical links,” says Professor Prem Kumar, Founder and CEO of NuCrypt.

The US administration’s Quadrennial Defense Review, the main statement of U.S. military doctrine, is to be released on Feb. 1. The Review projects that overall defense spending would be as shown in the diagram.

The UAVs used for combat, reconnaissance and surveillance missions in Afghanistan, Iraq and Pakistan are a marked as top priority in the Review, with the objective to boost procurement of new Reaper UAVs and increasing flight hours for Predator and Reaper.

For the 2010 fiscal year, the president’s base budget of the Department of Defense rose to $533.8 billion. Adding spending on “overseas contingency operations” brings the sum to $663.8 billion. When the budget was signed into law on October 28, 2009 the final size of the Department of Defense’s budget was $680 billion, $16 billion more than Obama had requested. Adm. Mike Mullen, the chairman of the Joint Chiefs of Staff expected an additional supplemental spending bill, possibly in the range of $40-50 billion, by the Spring of 2010 in order to support the wars in Iraq and Afghanistan. Defense-related expenditures outside of the Department of Defense constitute between $216 billion and $361 billion in additional spending, bringing the total for defense spending to between $880 billion and $1.03 trillion in fiscal year 2010.

Key investments FY2010
The bill includes $104.4 billion for procurement, $3.46 billion above 2009 and $816 million below the request, and $80.5 billion for research and development, $17 million above 2009 and $1.9 billion above the request, to develop and field the weapons and equipment.

• Bradley Fighting Vehicles: $526 million as requested for Situational Awareness upgrades to 353 vehicles.
• Stryker Combat Vehicles: $364 million in the base bill, $25 million below the request due to excessive program management costs.
• E-2D Hawkeye: $649 million, $142 million above the request, for 3 E-2D Hawkeye aircraft, one above the request; and $362.5 million for the continued development of the E-2D Advanced Hawkeye aircraft.
• F-18 Super Hornet: $1.5 billion for 18 F/A-18E/F Super Hornet Tactical aircraft, nine above the request; and $1.6 billion for 22 EA-18G Growler electronic attack aircraft.
• F-35 Lightning: $6.8 billion, matching the requested, for the procurement of 30 F-35 Lightning Aircraft, including 16 Short Take-off and Vertical Landing (STOVL) variants for the Marine Corps, 4 Carrier variants for the Navy, and 10 conventional variants for the Air Force. The bill also includes $465 million, not requested, to continue development and initial procurement of the Alternative Engine for the Joint Strike Fighter.
• V-22 Osprey: $2.7 billion for the procurement of 30 MV-22 and five CV-22 Osprey aircraft, equal to the President’s request.
• E-8 JSTARS: $62 million, $46 million above the request, for JSTARS re-engining research and development and $54 million for continued procurement.
• Air Force Cargo Aircraft: $2.5 billion for 10 additional C-17s above the budget request; $905 million for five C/HC/MC-130Js and advance procurement for 20 C/HC/MC-130s; $319 million, matching the request, for eight C-27J Joint Cargo Aircraft; and $202 million, $49 million above the request, for Infrared Missile Countermeasures for the C-17 and C-130 aircraft.
• Multi-mission Maritime Aircraft: $1.2 billion for the continued development of the Multi-mission Maritime Aircraft.
• Next Generation Aerial Refueling Aircraft: $306 million for the development of the Next Generation Aerial Refueling Aircraft.
• Unmanned Aerial Vehicles (UAVs): $554 million, matching the request, to procure RQ-4 Global Hawk UAVs; and $489 million for 24 MQ-9 Reapers.
• Military Helicopters: $3.34 billion to increase and improve the military’s fleet of helicopters, including $326 million, as requested, for 54 Light Utility Helicopters; $1.26 billion as requested for 79 UH-60 Blackhawk Helicopters; $882 million for 27 CH-47 Chinook Helicopters; $584.8 million for 24 UH-1Y Huey/AH-1Z Cobra Helicopters; and $145 million above the request for five HH-60M helicopters and modifications to the existing HH-60G fleet.
• Presidential Helicopter: $130 million, of which $100 million is for technology capture to recoup investments in research and development of the VH-71, an increase of $44.8 million above the request.
• Tactical Wheeled Vehicles: $498 million for the procurement of Medium Tactical Vehicles, and $613 million for the procurement of Heavy Tactical Vehicles. The Overseas Contingency Operations portion of the bill includes additional funding for tactical vehicles.
• Targeting pods: $68 million, $18.5 million above the request, for targeting pods to increase the combat effectiveness and precision strike ability of U.S. military aircraft.
• Guided MLRS Rockets: $293.6 million, as requested, for 2,628 Guided Multiple Launch Rocket System Rockets, to enhance the precision strike ability for U.S. artillery.
• Shipbuilding: $15 billion, $120 million above the request, for the procurement of 7 Navy ships, including: one DDG-51 Guided Missile Destroyer; one SSN-774 Attack Submarine; two Littoral Combat Ships; one Intra-theater Connector Ship; and two T-AKE Auxiliary Dry Cargo/Ammunition Ships.
• Enhanced Radar Technology: $32 million, $30 million above the request, for advanced radar technology.
• Electronic Warfare: $248.5 million, as requested, for continued development of electronic warfare devices to protect our troops.
• Advanced Communications: $880 million, as requested, for continued development of the Joint Tactical Radio System; and $50 million for Digital Communications, $50 million above the request. The recommendation provides $1.8 billion, matching the request, for a fourth Advanced Extremely High Frequency communications satellites.
• Missile Defense: $589 million, matching the request, for the Theater High Altitude Area Defense (THAAD) system and the Standard Missile 3 (SM-3); $569 million, matching the request, for the continued development of the Patriot/MEADS Combined Aggregate Program; $638.8 million, matching the request, for Ballistic Missile Defense Sensors Capability; $50.5 million, matching the request, for Ballistic Missile Defense European Capability; $202 million, $82.8 million above the request, for the Israeli Cooperative Program; and $80 million, not requested, for the Early Interceptor Program.
• Future Combat Systems: $2.29 billion for continued development of the restructured Future Combat Systems Program. The recommendation is $330 million below the request due to excessive termination liability and $1.1 billion below 2009.
• SPACE: $292 million, $97.4 million below the request, for the Global Positioning System III, operational control segment (OCX), plus $50 million for next generation military satellite communications system.
• Defense Advanced Research Projects Agency (DARPA): $3 billion, $246 million below the request for research and development programs because of chronic under-execution.

The Federally Budgeted Military Expenditure of the United States DoD for FY 2010, including the wars in Iraq and Afghanistan:

By Appropriation Title

Components	Funding	Change, 2009 to 2010
Operations and maintenance	$283.3 billion	+4.2%
Military Personnel	$154.2 billion	+5.0%
Procurement	$140.1 billion	-1.8%
Research, Development, Testing & Evaluation	$79.1 billion	+1.3%
Military Construction	$23.9 billion	+19.0%
Family Housing	$3.1 billion	-20.2%
Total Spending	$685.1 billion	+3.0%

By Service

Service	2010 Budget request	Percentage of Total
Army	$225.2 billion	33.9%
Navy/Marine Corps	$171.7 billion	25.9%
Air Force	$160.5 billion	24.2%
Defense Wide	$106.4 billion	16.0%

OVERSEAS CONTINGENCY OPERATIONS
Equipment and Force Structure: $23.36 billion, $1.71 billion above the request, for equipment in Iraq and Afghanistan, including:

• $6.3 billion, $825 million above the request, for the Mine Resistant Ambush Protected (MRAP) Vehicle Fund to procure over 6,600 new MRAP all-terrain vehicles to protect our troops.
• $80 million for the procurement of MQ-1 Predator Unmanned Aerial Vehicles, a reduction of $170 million due to request in excess of capacity.
• $1.1 billion, $187 above the request, for the procurement of High Mobility Multi-Purpose Wheeled Vehicles (HMMWVs).
• $863 million, $577 million above the request, for the procurement of Family of Medium Tactical Vehicles.
• $803 million, $180 million above the request, for the procurement of Family of Heavy Tactical Vehicles.