The Insider

Just because President Obama signed the fiscal year 2013 defense authorization bill into law late last night doesn't mean he likes every bit of it -- not by a long shot. According to the signing statement released by the White House:

In a time when all public servants recognize the need to eliminate wasteful or duplicative spending, various sections in the Act limit the Defense Department's ability to direct scarce resources towards the highest priorities for our national security. For example, restrictions on the Defense Department's ability to retire unneeded ships and aircraft will divert scarce resources needed for readiness and result in future unfunded liabilities. Additionally, the Department has endeavored to constrain manpower costs by recommending prudent cost sharing reforms in its health care programs. By failing to allow some of these cost savings measures, the Congress may force reductions in the overall size of our military forces.

Vew the full signing statement which includes other areas of the bill where the president wishes he had line-item veto authority.

Standard & Poor's Ratings Services is still bearish on its credit outlook for U.S. defense contractors despite the passage of a bill last night that would delay sequestration by two months.

In a statement released today, S&P finds:

We believe that Congress will not implement the full amount of sequestration cuts, but it's possible an additional $100 billion to $200 billion of reductions will be part of any final agreement. We expect these cuts and the $487 billion of reductions already planned will result in flat to declining revenues and earnings for most U.S defense contractors for the next several years. However, defense contractors will likely only gradually feel the additional cuts over the next year as they are to "appropriations" (the amount the military is allowed to spend), not to "outlays" (what it actually spends in any period from funds already appropriated). In addition, funds already appropriated are often allowed to be spent over two to three years. The most immediate impact will likely be lower purchases of products and services funded through the operations and maintenance (O&M) portion of the budget. O&M funds tend to be more fungible than those for procurement and research and development, which are tied more directly to specific programs. O&M funds could also be used to fund the costs of the war in Afghanistan if a separate supplemental appropriation is not passed.

We do not expect to take industrywide rating actions, even if Congress implements the full amount of sequestration cuts. We expect that large defense contractors, which generally have diverse weapons programs, will continue to generate good cash flow. The bigger risk to credit quality would be if firms respond to poor earnings growth prospects by materially increasing share repurchases, dividends, or debt-financed acquisitions. For example, this was one of our concerns when we revised our rating outlook on Lockheed Martin Corp. (A-/Negative/A-2) to negative from stable in February 2012. Smaller contractors' operations are generally less diversified, and they have fewer financial resources, so we could lower ratings if the defense budget cuts cause material deterioration in credit quality. However, we would likely need further detail on what programs will be cut before taking any rating actions solely on that basis.

InsideDefense.com reports this morning that the Pentagon's fiscal year 2013 budget roll-out could be delayed by last night's fiscal cliff deal:

The Defense Department faces significant uncertainty in early 2013 given a two-month deferment of sequestration approved in this week's fiscal-cliff deal, as well as other factors that could delay the Pentagon's budget process, according to defense sources.

The release of the president's fiscal year 2014 budget request could be delayed beyond February, a senior defense official tells InsideDefense.com.

"It's entirely possible that the normal budget roll-out timing could be affected by ongoing discussions on sequester, the debt ceiling and continuing resolutions," the official said.

Sequestration is unlikely to be implemented as written in the current law, but the deferment sets up a new round of "gritty" debate on debt reduction in January and February that will certainly address defense spending, Wall Street analyst Byron Callan of Capital Alpha Partners writes today in a report.

View the full story.

View InsideDefense.com's full budget coverage.

The Defense Business Board plans to hold a meeting later this month to discuss commercial satellite communications services, applying best business practices within the Pentagon and veterans issues, according to a notice published in this morning's Federal Register.

In a Sept. 3 memo, Deputy Defense Secretary Ashton Carter called on the DBB to conduct a review to determine how to better take advantage of commercial satellite communications services:

Members of the satellite commercial sector often approach the Department of Defense (DoD) with opportunities to provide highly desirable and time-sensitive commercial satellite communication capabilities. Some propositions require a DoD commitment to take service when available, sometimes on an annual basis, while others may require a commitment of up-front dollars covering services for a multi-year period. DoD has been unable to take advantage of these ideas due to either existing processes (i.e., the Federal Acquisition Regulations, Joint Capabilities Integration Development System, and Planning, Programming, Budgeting and Execution) or a DoD culture that appears to resist dependence on commercial providers for satellite services.

Some obstacles, like congressional funding and other statutory restrictions (such as the Competing in Contracting Act 10 U.S.C. 2304), are beyond our control; however, there may be some changes in existing regulations processes that could allow DoD to take advantage of these operationally useful, yet fleeting opportunities. Consistent with the National Security Space Strategy and National Space Policy, and to meet the capability need of the Combatant Commanders, we must take action to assess whether it is possible to realize the potential benefits offered by the commercial satellite communications sector.

View more of InsideDefense.com's space coverage.

Next Monday's Inside the Army -- available today -- is reporting that while the Army has concerns over how a commercial off-the-shelf analyst tool, made by the California software company Palantir, will work with its own Distributed Common Ground System-Army, the service is not attempting to block the use of Palantir's technology in theater and is working to address how it might be incorporated into the Army's intelligence analysis framework:

At issue is a debate that has erupted in the last year over the extent to which the Army should use Palantir, software designed to track positions of roadside improvised explosive devices, over DCGS-A. The Army last year was accused of preventing units that wanted Palantir from receiving the software in theater and manipulating an Army Test and Evaluation Command operational assessment report about Palantir to downplay the software's performance and criticisms of DCGS-A (Inside the Army, Sept. 3). The Army was cleared of wrongdoing on the ATEC report, according to the results of an investigation -- laid out in an Oct. 17 memo obtained by ITA -- that was ordered by Army Chief of Staff Gen. Raymond Odierno.

Service officials last week took pains to explain the Army's position. "We are not fighting Palantir," Maj. Gen. Harold Greene, deputy for acquisition and systems management, told reporters in a Dec. 20 roundtable. "The Army leadership is very clear on what the job of those of us in the acquisition community is and it's to get the best of the breed for our soldiers with the resources that the taxpayers give us."

In working with Palantir software, "we have a concern about the interoperability and we are working to do the best we can to mitigate that challenge," Greene said.

Through a cooperative research and development agreement with Palantir, the Army is exchanging information between Palantir and DCGS-A. "We've had some initial success in the laboratory and we are looking at how we would build upon that. We are looking at how we can make all this work together so we can leverage the goodness that people have seen in Palantir," Greene stated.

We now have the Oct. 17 ATEC assessment (marked "for committee use only//unclassified//FOUO//LIMDIS").

View the full Dec. 24 ITA story.

The Obama administration's export control reform initiative will gain a boost -- with respect to satellite controls and the notification requirements for the removal of items from the U.S. Munitions List (USML) -- from the final version of the fiscal year 2013 defense authorization bill that emerged from conference on Dec. 18, which Congress is expected to pass by the end of this week, Inside U.S. Trade reports this morning:

On satellites, the [National Defense Authorization Act] gives back to the president the authority to move all satellites and related items from the USML to the Commerce Control List (CCL), provided they are not exported, re-exported or transferred directly or indirectly to China, North Korea or any country listed as a state-sponsor of terrorism.

It also precludes any satellite or related item to be launched from any of these countries or as part of a launch vehicle owned by the governments of one of these countries. The president, however, can waive this prohibition on a case-by-case basis if he determines it is in the national interests of the U.S. to make the export and notifies the appropriate congressional committees about his determination.

Regarding the notification requirements, the final NDAA drops the language in the House version of the NDAA that would have required the administration to enumerate "to the extent practicable" the items it wants to move off the USML. The administration has long criticized this language as making it impossible to implement its overall export control reform initiative, and demanded that it be removed from the final NDAA bill.

The U.S. satellite industry supports the satellite language in the conference report, which was the result of negotiations that occurred among the administration and congressional staff in the House Foreign Affairs and Senate Foreign Relations Committees.

The legislation essentially repeals a provision in the NDAA for fiscal year 1999 that took the authority over satellite export control away from the president in the wake of a diversion scandal and returned all satellites and related items that had been transferred to the CCL back to the strict controls of the USML.

"Going back to the source and repealing [the 1999 NDAA] is a very clean way of doing it," said Patricia Cooper, president of the Satellite Industry Association.

Industry sources said this was a more desirable outcome than the House NDAA language, which tried to establish a new definition of which satellites and components the president could control. The House language referred to “commercial satellites and related components and technology” and defined them as communications satellites that do not contain classified components, including remote sensing satellites with performance parameters below thresholds identified on the USML. This language could have been interpreted to exclude authority over scientific, research and other types of satellites.

The language in the conference report gives the president nearly unrestricted authority over all satellites and related items, which are found in Category XV of the USML.

View the conference report.

Outgoing Arizona Republican Sen. Jon Kyl didn't mince any words during his farewell speech on the Senate floor today, particularly in his criticism of the Obama administration's missile-defense policies:

First, over the past four years, the Obama administration has consistently reduced funding for missile defense. Second, it has refocused funding on regional missile defenses at the expense of protecting the homeland and developing future technologies.

Third, the administration has scaled back the number of ground-based interceptors protecting the homeland from 54 to only 30 -- numbers that do not meet the standard established by the Missile Defense Act of 1999, which required a defense capable of addressing accidental and unauthorized attacks from any source. And, fourth, the administration has no plans to modernize interceptors that are more than 20 years old and therefore unlikely to keep pace with future threats.

And there is, as I said, very little funding devoted to new, breakthrough technologies that could provide even more effective defenses for the United States, such as lasers and space-based interceptors.

We must remember, as NORTHCOM commander General Jacoby has explained to Congress, that ‘no homeland task is more important than protecting the United States from a limited ICBM attack ...’

Finally, one of the greatest challenges we face today stems from Russian attempts to limit the development and deployment of U.S. and allied missile-defense systems. The United States cannot allow Russia to dictate to us limits on the capabilities of U.S. missile defenses. If they could be effective against a Russian launch, so be it. That’s what it means to protect Americans from potential threats. If the Russians argue that they pose no possible threat, then our missile defense should be irrelevant to them.

From negotiations on the New START treaty to threatening the United States and NATO in an attempt to limit our planned deployments in Europe, the Russians have never abandoned their goal of limiting the effectiveness of U.S missile defense. The answer is not ‘reset,’ but recommitment to the principle that the most moral way to protect the American people from missile attacks is by missile defense.

View the full national security-related excerpts from Kyl's farewell speech.

With Egypt in political turmoil, Sen. Jim Inhofe (R-OK) is calling on Secretary of State Hillary Clinton to halt the planned delivery of 20 F-16 fighter jets to that country beginning early next year.

In a statement released today, Inhofe said:

The Obama Administration should not be putting top-of-the-line aircraft in the hands of a government that is perpetuating instability in its region and showing aggression towards our ally, Israel. While this agreement for the F-16s was forged two years ago, Egypt's leadership has since changed hands, leaving open the question as to how this equipment might be used.

The first four jets are scheduled for delivery on Jan. 22, according to a Dec. 17 letter Inhofe sent to Clinton. He adds:

In light of the ongoing instability, aggression towards Israel, [Egyptian] President [Mohammed] Morsi's dictatorial decree, and absence of a constitution and parliament, this delivery should be stopped and subject to further review.

Until Egypt is able to establish [a] democratic parliament and ensure stability in the country, the delivery of F-16s to Egypt should be postponed for further review. I look forward to your response.