Reuters | Defense not the cause of budget deficit: Gates

June 30, 2011 § Leave a comment

By David Alexander, Phil Stewart and Missy Ryan
WASHINGTON | Thu Jun 30, 2011 1:40am EDT
(Reuters) – Military spending is not the cause of the $1.4 trillion U.S. budget deficit, and even a “disastrous” 10 percent cut would only reduce the budget shortfall by some $50 billion — about 4 percent, Defense Secretary Robert Gates says.

Gates, in his final interview as Pentagon chief before stepping down on Friday, offered a robust defense of his effort to trim military spending since 2009 and said his successor was “on board” with his measured approach for finding new cuts.

President Barack Obama has called on the Defense Department to come up with $400 billion in reductions over 12 years as he struggles to reduce the country’s $1.4 trillion deficit and $14 trillion debt.

Gates saw the writing on the wall two years ago and began an efficiency drive — an effort that resulted in cuts expected to produce $154 billion in savings over five years due to reduced overhead and better business practices.

“I saw this train coming and knew we were going to have to get better and more disciplined if we were going to … defend ourselves at all,” he said. “We had to be seen as out in front in trying to do smart things to make this place more efficient and more cost-effective.”

Gates said critics who accuse him of cutting too many programs or not defending Pentagon budgets are “completely oblivious to the political reality in this city and particularly on Capitol Hill among both Republicans and Democrats.”

Members of both parties — even Republicans traditionally strong on defense — have demonstrated an increased willingness to draw the line on military spending after a decade of war and rising costs that have nearly doubled the Pentagon’s base budget.

But Gates said he did not believe the Pentagon had lost the budget debate in Congress, where lawmakers are working to trim Obama’s request for nearly $690 billion in military spending for the 2012 fiscal year beginning October 1.

NEXT ROUND OF CUTS

The administration’s budget request includes a $553 billion Pentagon base budget, $118 billion for the wars in Afghanistan and Iraq and $18 billion for maintenance of the nuclear stockpile by the Department of Energy.

If the base Pentagon budget were cut by 10 percent — “which would be disastrous” for the military — that would only be $50 billion of a $1.4 trillion deficit, Gates said. “We are not the problem.”

Lawmakers in the House of Representatives are close to cutting the president’s request by some $9 billion, while the Senate is considering at least $6 billion in reductions. But the sides are still far from a final defense spending bill that Obama can sign into law.

Fulfilling the president’s request for an additional $400 billion in cuts will fall to Gates’ successor — outgoing CIA director Leon Panetta.

The defense secretary, who departs for his home in Washington after farewell ceremonies on Thursday, has rejected the idea of across-the-board cuts to the military, saying it would leave the United States with a “hollow” force structure with too few people to perform all the required tasks.

Instead he has said defense cuts of the magnitude sought by Obama will require a slimming of the force, strategic tradeoffs and a willingness to accept greater risk to national security.

Gates said one strategic assumption on the line is that the United States must have a military capable of fighting two major regional wars simultaneously — a core principle since the Second World War.

“That is clearly one of the issues that we’re looking at,” he said, “and what difference it makes in terms of force structure if you assume that you’re not going to fight those wars simultaneously but sequentially.”

To decide how to proceed, Gates has announced a review that will present the president and other policy-makers with options for cutting the military and its missions along with an analysis of the risks they entail.

Gates said Panetta, who would be the first Democrat to serve as defense secretary in about 15 years, had indicated in conversations that he was “on board with the approach.”

But at the end of the day, he added, defense secretaries serve the president.

“If the president says go do this, you have two choices,” Gates said. “It’s a binary decision.”

Reuters | Defense not the cause of budget deficit: Gates

United Press International | Northrop, Australia in supply chain deal

June 29, 2011 § Leave a comment

Published: 29 June 2011

CANBERRA, Australia, June 29 (UPI) — Northrop Grumman has signed a deal with Australia to identify opportunities for Australian industry to compete within the company’s global supply chain.

The Global Supply Chain deed is part of the GSC program designed to assist entry by the Australian defense industry into global supply chains of multinational primes and will provide the mechanism that will enable the Australian government to fund Northrop Grumman to assist smaller Australian companies to compete for work within the corporation.

“Northrop Grumman recognizes that small and medium enterprises, or SMEs, face challenges in gaining access to the global supply chains of multinational corporations,” said Wes Bush, chief executive officer and president. “The Australian government’s innovative approach ensures opportunities for SMEs to compete globally while giving prime manufacturers greater visibility into the talents and capabilities of innovative Australian companies.”

The global supply chain deed concept was outlined in the Australian Government’s 2010 Defense Industry Policy Statement and is, in part, in response to the continued globalization of the defense industry.

“International collaboration is very important and we are looking forward to assisting with this important initiative,” Bush said. “We plan to work closely with the Australian Department of Defense to identify opportunities for Australian companies.”

United Press International | Northrop, Australia in supply chain deal

DoD Buzz | F-35C begins initial CVN ‘suitability’ tests

June 29, 2011 § Leave a comment

//DoD Buzz

By Philip Ewing
Published: 28 June 2011

For the Navy’s F-35C Lightning II, this is where the rubber hits the road — in this case, the deck: The jet has begun the first stages of “carrier suitability testing,” the Navy announced on Tuesday, at the base formerly known as Naval Air Station Lakehurst, now known by the poetic name “Joint Base McGuire-Dix-Lakehurst, N.J.”

Navy engineers want to begin to get a clearer understanding of how the C interacts with the flight decks and equipment aboard the aircraft carriers that will be its home, according to an announcement:

“CF-2 and the F-35 integrated test team from Naval Air Station Patuxent River, Md. are at the NAVAIR facility in Lakehurst for the first jet blast deflector (JBD) testing, in preparation for carrier shipboard testing in 2013. The team is at the JBD test facility to evaluate deck heating, JBD panel cooling, and vibro-acoustic, thermal, and hot-gas ingestion environments.”

The jet blast deflector is the big metal wall that rises up out of a carrier’s flight deck behind a jet on the catapult for launch — how, the Navy wonders, will the existing ones in the fleet stand up to the F-35’s powerful engine exhaust? Could carriers that take aboard future squadrons of F-35s need special modifications or procedures to accommodate the new aircraft? The Navy wants to answer these and many other questions as possible before the Lightning II actually makes its first cats and traps at sea.

DoD Buzz | F-35C begins initial CVN ‘suitability’ tests

Reuters | DealTalk: After L-3, activists drool over Textron

June 29, 2011 § Leave a comment

By Soyoung Kim and Nadia Damouni
Published: 28 June 2011

(Reuters) – Cessna aircraft maker Textron Inc (TXT.N) could be a prime target for activist investors scouring the aerospace and defense industry for breakup targets as activists move up the food chain.

Until a few months ago, shareholder activism in defense was largely focused on smaller targets, as investors took positions in companies with niche security technologies that larger military contractors might want to buy.

But emboldened by some success, activist investors are increasingly trying to shake up larger contractors, whose shares have languished on fears of softening military spending as the U.S. wars in Iraq and Afghanistan wind down.

Textron, a $6.2 billion diversified conglomerate, makes products ranging from Bell helicopters and Cessna aircraft to automotive parts and golf carts, while a subsidiary finances sales of them.

Over the last several years, each one of Textron’s major business lines has been a drag on the overall company at some point, making it vulnerable to breakup pressure, several activist investors, bankers and industry experts said.

“There is no one in the activist space who hasn’t looked at it and licked their lips,” one activist investor said. “It falls under the rubric of what the activists do a lot — which is the diversified conglomerate doesn’t get a fair multiple unless it is a mega cap.”

“The only people that make it work is United Technologies (UTX.N) or Honeywell (HON.N),” the investor said, referring to the other conglomerates with big presence in defense.

Cessna continues to suffer from weak business jet demand as well as increased competition from new and existing rivals, while the financing division has been burning cash several quarters. Although defense-related contracts have supported Textron’s earnings lately, that division is also facing headwinds from military spending pressures.

Textron did not respond to requests for a comment.

Other defense names that could face activist pressure for a sale or breakup include Motorola Solutions Inc (MSI.N) and Harris Corp (HRS.N), people familiar with the industry said. Activists could still also look at smaller targets like Comtech Telecommunications Corp (CMTL.O) or Kratos Defense and Security Solutions (KTOS.O), they added.

Last year, hedge fund MMI Investments LP urged longtime takeover target Applied Signal Technology to solicit buyout offers, resulting in a $490 million sale to Raytheon Co (RTN.N). MMI was also behind the $506 million sale of satellite firm EMS Technologies (ELMG.O) to Honeywell this month.

But Ralph Whitworth of Relational Investors LLC set his sights higher earlier this year, when he pressured the large industrial conglomerate ITT Corp (ITT.N) to split up.

Relational returned last week with yet another high-profile push in the sector, reporting a nearly 6 percent stake in L-3 Communications (LLL.N) and urging the defense contractor to divest assets to unlock value.

Activists are also circling Motorola Solutions, which has a market value of $15.4 billion and makes safety communication products and services for government and enterprise customers.

Hedge fund ValueAct Capital recently reported a 5.9 percent stake in the company, which was split off from handset maker Motorola and already counts billionaire investor Carl Icahn as its top shareholder.

BIG BET ON CESSNA?

The argument for breakup is not that clear for some other companies, however, as any upside from a split would have to be big enough to offset a tax hit.

ITT was a textbook case since it had three very different segments — water purification, industrial components and defense electronics. While defense generated only half of total revenue, uncertainly about U.S. budget cuts held back the entire company’s share performance.

In contrast, L-3’s businesses are all defense-related and depend heavily on the U.S. government. The company was already planning to divest some lower-margin services assets to focus on electronics and intelligence.

Moreover, with an enterprise value of around $12.7 billion, L-3 trades at 6.7 times estimated 2011 earnings before interest, taxes, depreciation and amortization. That’s more expensive than giant defense conglomerates like Lockheed Martin Corp (LMT.N), Raytheon or Northrop Grumman Corp (NOC.N), which trade at multiples of 5 to 6.

Some activist investors and bankers questioned whether Relational’s involvement would make a marked difference to what L-3 was already planning on doing.

“I’m not sure if there’s going to be a significant value creator,” said an industry banker who requested anonymity because he was not authorized to speak with the media. “It’s already trading at a decent premium to peers.”

Like ITT, Textron has diverse businesses that do not necessarily fit with one another. But at around 7.4 times estimated 2012 EBITDA, Textron is trading like an aerospace company, rather than a defense company. United Technologies and Honeywell trade at about 8.5 times 2012 EBITDA, above the sector average of about 8.

Textron would look cheap, activist investors and experts said, if one believes that the Cessna aircraft unit is in for a big turnaround as commercial aviation picks up.

“The difference between Textron and ITT is that Textron is expensive and for you to believe it you are betting on a recovery in commercial aviation. Whereas in ITT, you didn’t have to bet on anything,” said a second activist investor who declined to be identified.

“Textron could make sense if the Citation business comes back. It has fallen off the cliff,” the activist said, referring to the Cessna business jet unit.

Reuters | DealTalk: After L-3, activists drool over Textron

New York Times | President Announces an Initiative in Technology

June 29, 2011 § Leave a comment

President Obama spoke Friday at the National Robotics Engineering Center at Carnegie Mellon. //Doug Mills/New York Times

By Jackie Calmes
Published: 24 June 2011

LAWRENCEVILLE, Pa. — President Obama visited a university research center in Pittsburgh on Friday to announce a new partnership between the government, industries and leading universities to speed the movement of technological advances to commercial users. The trip was the latest of his increasingly frequent travels to battleground states to showcase administration efforts to create manufacturing jobs.

After touring the National Robotics Engineering Center at Carnegie Mellon University, a high-technology facility adjacent to a rusted factory symbolic of the area’s industrial past, Mr. Obama said federal agencies would invest more than $500 million to seed the initiative. Of that, $70 million is to go to robotics projects like one he viewed at the center: a boom-box-size robot that inspects sewer pipelines, made by a company started by a Carnegie Mellon professor.

“We’ve launched an all-hands-on-deck effort between our brightest academic minds, some of our boldest business leaders and our most dedicated public servants from science and technology agencies, all with one big goal, and that is a renaissance of American manufacturing,” Mr. Obama said in remarks to about 150 people, including the partnership’s co-chairmen, Andrew N. Liveris, the chief executive of the Dow Chemical Company, and Susan Hockfield, president of the Massachusetts Institute of Technology.

Administration officials said the initiative would be overseen by federal agencies already active in public-private partnerships, like the Department of Energy, and would rely on both existing federal financing and money that Mr. Obama has requested from Congress. The new sum, however, reflects a small fraction of what the government already spends on research and innovation, and that has led to some of the mass-market products Mr. Obama cited here, like the Internet, cellphones and GPS navigation devices.

“What we’re trying to do is provide more focus and direction to this spending,” Ron Bloom, Mr. Obama’s adviser on manufacturing policy, told reporters. He called the new Advanced Manufacturing Partnership an “umbrella” for government innovation programs.

Mr. Obama’s new packaging for the government’s existing public-private efforts also allowed him to underscore his commitment to manufacturing jobs as the economy continues to sputter, and in a swing state for presidential elections.

Mr. Obama was careful not to declare complete victory over the economic downturn he inherited. “We’ve made some tough decisions that have turned our economy in a positive direction over the past two years,” he said.

Other universities in the partnership include Georgia Tech, Stanford, the University of Michigan and the University of California, Berkeley. Other manufacturers include Allegheny Technologies, Caterpillar, Corning, Ford, Honeywell, Intel, Johnson & Johnson, Northrop Grumman and Procter & Gamble.

This article has been revised to reflect the following correction:

Correction: June 25, 2011
An earlier version of this article mistakenly placed the National Robotics Engineering Center at Carnegie Mellon University as outside Pittsburgh. The research center is in Lawrenceville, a neighborhood in Pittsburgh.

New York Times | President Announces an Initiative in Technology

Washington Post | Boeing begins final 787 testing and affirms plans to deliver in August or September

June 29, 2011 § Leave a comment

By The Associated Press
Published: 27 June 2011

CHICAGO — Boeing Co. says its new 787 is beginning the final phase of flight testing and repeated that it should be ready for delivery in August or September.

The final flight testing includes simulations of abnormal operations. It also tests long-range flying, including the 787’s ability to divert to a far-away airport on just one engine.

Federal authorities have special rules for two-engine planes that fly more than an hour away from a suitable landing field. Generally, such flights are over water. The idea is to make sure the plane can make it to an airport if one engine shuts down.

The testing will be done on a 787 with Rolls Royce engines. Separate tests will be done later on 787s with General Electric engines.

Washington Post | Boeing begins final 787 testing and affirms plans to deliver in August or September

Washington Post | Taiwan’s president says efforts to procure advanced F-16s from US ‘not going smoothly’

June 28, 2011 § Leave a comment

By The Associated Press
Published: 28 June 2011

TAIPEI, Taiwan — Taiwan’s president said Tuesday that the island’s long-running efforts to acquire relatively advanced F-16 jet fighters from the United States are “not going smoothly.”

The comments by Ma Ying-jeou follow a report Monday in the U.S. publication Defense News that the American Institute in Taiwan, the de facto U.S. embassy, told Ma’s government last week not to submit a formal request for the 66 F-16 C/Ds it covets.

There was no immediate comment from the American Institute. Taiwan’s Defense Ministry denied the report.

Speaking to military officers in Taipei, Ma acknowledged difficulties in securing the American warplanes, which Taiwan says it needs to help defend against a possible attack from China.

“Some of our defense procurement projects from the United States including the F-16s … are not going smoothly,” Ma said. “But the government will continue pushing for the systems.”

Taiwan has already been turned down three times since it first moved to acquire the F-16s in 2006, and Taiwanese officials have been informed by Washington that another formal denial would nix any chances it has to seal the deal.

While Taiwan’s allies in the U.S. Congress and Lockheed Martin, which manufactures the plane, have been pushing hard for the sale, the State Department and the National Security Council have resisted, fearing that it would infuriate China. Beijing condemns all foreign military transactions with Taipei as interference in its internal affairs. The two sides split amid civil war in 1949, but Beijing still claims Taiwan as its territory.

During Ma’s three years in office, tensions with China have fallen to their lowest level since the split more than six decades ago. Even so, Ma says, Taiwan still needs the planes. He says their acquisition would also give the democratic island the confidence it needs to improve its relationship with Beijing even further.

Aside from the F-16 C/Ds, Taiwan is also pressing Washington to provide upgrades for its rapidly aging fleet of 146 F-16 A/Bs. That request is also pending.

Washington Post | Taiwan’s president says efforts to procure advanced F-16s from US ‘not going smoothly’

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