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Budget Deal Brings Welcome Clarity to Defense Industry

Just in time for the holidays, the federal government gave Brad Antle and his defense contracting peers a gift they had hoped for: visibility to the road ahead.

The first 80 days of Fiscal 2015, which began Oct. 1, had been murky. The government had not offered any indication which programs would be in and which programs would be out, which program was funded and which had to wait.

Visibility is something the industry needs, said Antle, CEO of Salient Federal Solutions. Once executives know the government’s spending priorities, they can align their businesses with them.

Congress agreed to a $520.5 billion defense budget for fiscal 2015, with added funds of $63.7 billion. President Obama signed the bill Dec. 19.

The bipartisan spirit that made a budget agreement happen was most welcome, Antle said.

Since the federal fiscal year began on Oct. 1, the Pentagon had been operating under a temporary spending bill, which placed limits on defense contracting. Among other things, contractors were not allowed to begin new programs.

A federal budget in place makes things easier, said Antle, who is based at Salient’s corporate headquarters in Virginia, but comes to San Diego every six to eight weeks to review operations. Seventy-five of Salient’s 1,000 employees work in San Diego, mostly on U.S. Navy projects.

Salient specializes in information technology and engineering services. It had upward of $200 million in revenue last year.

A Year of Change

2015 promises to be a year of change. Ashton Carter is expected to succeed Chuck Hagel as defense secretary, assuming that the Senate confirms him. Congress will operate with a Republican majority. And what many see as the albatross around the Pentagon’s neck — sequestration — might return on Oct. 1, with the start of the 2016 fiscal year.

Sequestration refers to an approach to cutting the federal deficit. It eliminates a percentage of every line item in the budget. Congress made some exceptions to which accounts get cut. For example, they kept pay for sailors and Marines intact.

Dumping Sequestration?

The cuts were originally to be spread over 10 years, but the movement to sideline sequestration may have grown stronger. Marion Blakely, CEO of the Arlington, Va.-based Aerospace Industries Association, told an audience recently that the cuts belong in “the dumpster of bad ideas.”

“The decade-long defense modernization holiday based on the dangerous illusion that history’s zealots have gone on holiday simply must end,” Blakely said at his organization’s forecast luncheon on Dec. 17.

Congress, however, faces a dilemma. The alternative to sequestration is funding more defense programs, which means either cutting other popular federal programs or increasing an alarmingly high federal deficit.

The people who repair the U.S. Navy fleet along San Diego’s waterfront are “highly concerned” about the return of sequestration, said Derry Pence, president of the Port of San Diego Ship Repair Association, an industry group.

Congress OK’d a two-year lull in sequestration, in fiscal 2014 and 2015. The outlook for the coming year is “very good,” Pence said. Between the base Pentagon budget and its overseas contingency funds, ship repair is fully funded.

The newly signed 2015 National Defense Authorization Act calls for $520.5 billion for the departments of Defense and Energy. An additional $63.7 billion in the budget covers overseas wars, including a late request for $5.1 billion to counter ISIL, the Islamic State of Iraq and the Levant. Both figures are down from 2014.

Since he works within the Washington Beltway, Antle has had a front-row seat to the politicking.

Sitting in his San Diego office, he said he was happy to see lawmakers make compromises.

Go Navy

The new budget favors the Navy — which is good for San Diego — as well as shipbuilding, Antle said. Things didn’t go so well for the U.S. Army, which lost money in the budget. The 2015 budget will also provide more R&D than what the Pentagon requested, which is good. Antle also said he was happy to see top officials working to improve the Pentagon’s procurement system.

For now, the 2016 Pentagon budget is under wraps. But not for long.

The budget process for 2016 gets underway in February, when the Pentagon unveils its ideal budget and sends it to Capitol Hill. As in past years, the Pentagon will likely ask for a base closure round (known as BRAC, for Base Realignment and Closure). Base closures, however, are bad for incumbent lawmakers. Some observers have said lawmakers won’t have an appetite for closing bases until after the 2016 or even 2018 elections.

Brad Feldmann, the new CEO of San Diego-based Cubic Corp., said he plans to deal with uncertain federal spending priorities by staying the course.

Cubic serves a unique set of markets. “We believe,” Feldmann said, “we’re in the right space.”

For one thing, Cubic offers a mix of services, systems and products.

In addition to the U.S. Defense Department, Cubic sells to the armies and air forces of U.S. allies. If that is not diverse enough, Cubic can fall back on its unusual business model of getting 44 percent of its revenue from mass-transit agencies in several parts of the globe. Cubic sells and services technology that collects fares from commuters.

The outlook seems good for transportation systems, Feldmann said, since the world will probably continue to urbanize. Meanwhile, he said, there will be demand on the other side of the house, since militaries will always need to be trained.

The publication Defense One said the 2016 Pentagon budget will likely focus on the Pacific region, which bodes well for the San Diego economy.

Antle’s personal plans for the new year include growing Salient.

Salient came to San Diego in 2010 when it bought locally based SGIS. Antle acknowledged that he still spends a fair amount of work time considering possible acquisitions.

Asked whether he is looking at prospects right now, Antle responded with a smile.

“There’s always something to buy,” the CEO said.

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