With a bipartisan vote of 30-1, the Senate Appropriations Committee released its FY17 defense spending bill report and it is very good news for defense prime contractors.
Like the House, the Senate bill "finds" $15B to fund most of the services' unfunded priority lists for more fighters, more ships and higher readiness levels that were not requested by the President. Unlike the House, the Senate "finds" the money from within the President's request itself rather than by underfunding the OCO budget.
Technically, both the House and Senate versions conform to the President's baseline request for ~$524B and OCO of ~$59B. The difference is that the House appropriators use $16B of OCO funding for additional baseline items, funding overseas operations only until 30 April 2017 with the intent of adding supplemental funds in the spring. In contrast, the Senate version funds the entire year's worth of OCO costs and then "finds" $15B within the baseline by taking $3.8B in recissions from prior year funds, assuming higher fuel costs savings of $1.6B, and then making relatively small changes to over 450 line items. The Senate version funds many of the same unrequested items that the House would fund by underfunding the OCO account.
When it is time to conference the House and Senate versions (probably not until the fall), the Senate version will come in as the lower in terms of defense spending. Given standard Congressional rules that confine conference topics to the differences in the bills, this means that FY 2017 defense spending will be at least what the Senate Appropriations Committee has recommended. Changes in the House-Senate conference are therefore likely to be further increases to the Senate version.
Of primary interest to investors is the clear consensus that Congress is going to increase the procurement portion of the defense budget by at least $5B:
By analyzing the Senate Appropriations Committee changes we can derive by company the minimum amount of increase each of the major defense primes should see in the FY 2017 Pentagon budget. Although we are three to six months from a final bill, we can anticipate the following changes to the President's request as a worst case with a look to further increases in any compromise.
Boeing (BA) +$750M. Like the House, the Senate keeps Boeing's St Louis line going for yet another year by adding +$979M that was not requested for 12 F/A-18E/F. The Senate adds two V-22s worth +$135M to the PresBud request for $1.2B. On the negative side, the Senate gives the P-8 Poseidon anti-sub aircraft program a haircut of -$120M from the PresBud request of $1.9B. The Evolved Expendable Launch Vehicle (EELV) space launch program, which at one time was the exclusive turf of United Launch Alliance (ULA), BA's joint venture with LMT, will see a substantial reduction of -$495M from the PresBud request for $1.5B as the Senate pushes for a change to DoD's acquisition strategy.
Lockheed Martin (LMT) +$800M. The Senate adds +$355M for UH-60 for the National Guard to the PresBud request for $755M. The President's request for $7.7B for F-35s will include four additional jets for the Marines (House added a total of 11 acft) but the program will see a net reduction of -$148M after all haircuts have taken place. There are +$263M in additions to the $146M requested for C130J and Compass Call. As above, LMT's share in ULA will suffer a shared $495M hit to EELV program. Missile defense continues to shine with $50M added to the $370M Aegis Ballistic Missile Defense budget and +$50M to the $464M THAAD program. By adding +$475M to build an unrequested third ship in FY17, the Senate joins the House in resisting the Navy's plan to early downselect and truncate the Littoral Combat Ship.
Raytheon (RTN) +$290M. Missile defense is the coin of the realm and especially Israeli missile defense. Congress has forced Israel to take Raytheon on as a co-producer of its US-subsidized hardware and to that end has added +$20M for the low altitude Iron Dome system, +$120M for the medium altitude David's Sling, and +$150M for the high altitude Arrow system. The Senate adds +$49M for additional Tomahawks while RTN weapon programs like AMRAAM and Standard Missile take small hits as contributions to the kitty.
Shipbuilding: +$2.1B Apart from the $475M for the LCS, the duopoly of HII and GD will split +$85M added to the $1.8B Va class submarine program, +$403M for the remaining payment on an additional DDG-51. Congress added $1B to build the first polar icebreaker since 1976 with the builder as yet unclear. HII is the likely beneficiary of +$200M towards LX(R), a new class of amphibious ships.
