L-3 Communications Executive Sees Budget Higher Than the Proposed $30 Billion
By DOUG CAMERON
The Pentagon’s so-called war budget will likely come in higher than the $30 billion proposed by defense planners for fiscal 2016 even as the drawdown in Afghanistan continues, a senior executive at L-3 Communications Holdings Inc. LLL +0.54% said Thursday.
Continuing U.S. operations abroad—including the 9,800 troops due to remain in Afghanistan after the end of this year—and contracts related to special operations forces are expected to generate outlays from the Overseas Contingency Operations, or OCO, budget, a supplement to core Pentagon spending that peaked at $162 billion in 2010.
The OCO budget is closely watched by defense contractors, as it provides a cushion to cuts in core procurement spending. The Pentagon, in January, established a placeholder budget of $79 billion for the coming fiscal year, reflecting uncertainty over the elections in Afghanistan. That amount would drop to an annual $30 billion over the remainder of the Pentagon’s five-year plan.
“I don’t believe that it’s going to go down to $30 billion [in 2016],” said Ralph D’Ambrosio, L-3’s chief financial officer, at an investor conference in Chicago. He noted that, in fiscal 2013 and 2014, the OCO budget was doubled from its original projection.
“Even after the drawdown from Afghanistan, there are other OCO engagements that are under way, and there are likely to be others,” he said, without specifying where.
President Barack Obama last week called for the creation of a $5 billion counterterrorism fund that defense experts said would likely be drawn from the OCO budget.
The sharp fall in the value of OCO contracts has dented revenue across a swath of military contractors providing everything from food and transport for U.S. troops in Afghanistan to training for that country’s security forces.
Mr. D’Ambrosio said he expects L-3’s OCO-related annual revenue to bottom at between $300 million and $400 million in 2016. That compares with an estimated $650 million this year—5% of total sales—and $950 million in 2013.
New York-based L-3 is the seventh-largest U.S. defense contractor by sales, focused on intelligence, surveillance and reconnaissance, as well as the fast-growing cybersecurity segment. Some 65% of its sales are derived from the Pentagon, with overall revenue forecast to fall to around $12 billion this year from $12.6 billion in 2013.
While three congressional committees have, so far, broadly backed the $79 billion placeholder for the coming contingency fund, some analysts do expect it to come in between $50 billion and $70 billion when appropriators complete the formal budget process, a step that could come before or after November’s midterm elections.
Pentagon planners have estimated that supporting the remaining troops in Afghanistan would cost around $20 billion a year.
The administration hasn’t announced when it would seek to terminate OCO funding, and some resources are expected to be directed toward refurbishing equipment such as trucks and helicopters worn by heavy use in Iraq and Afghanistan.
A number of government budget watchdogs have been sharply critical of the OCO fund, which they maintain has been used to circumvent broader Pentagon cuts. The contingency fund increased to $85 billion in 2014 from $82 billion the prior year, even though troop numbers in Afghanistan fell by more than a third over the same period.