?>

Good and Bad News for Huntington Ingalls Industries (HII)

An F-35B Lightning II makes the first vertical landing on a flight deck at sea aboard the amphibious assault ship USS Wasp (LHD 1).

Late last year after Northrop Grumman (NOC) separated their ship building components from the main corporation. Rather then selling these to another defense contractor they decided to set up a new company with its own stock. This was Huntington Ingalls Shipyard(HII). HII owns yards in Louisiana, Mississippi, and the Hampton Roads area of Virginia. It builds carriers, destroyers, and amphibious warships.

Northrop Grumman along with General Dynamics (GD) were the two major naval ship builders in the United States. They were concerned that the long term ship construction plans for the Navy were so limited in the future due to budgetary pressures and requirements that they decided it was better to get out of the business. The U.S. Navy currently really doesn’t have enough funds to build the number of ships in their plans. They also restructured their plans by limiting the new destroyer, DDG-1000, to only three and continuing production of the previous Arliegh Burke class.

HII has continued to received contracts from the Navy and deliver ships although it is planning a restructuring of its capabilities and workforce most importantly by closing their yard at Avondale, LA. In its last quarter the company reported a loss of $248 million but adjusting for a charge it actually had a profit of over $1 a share. This was better then analysts expectations and the stock went up quite a bit last week. The company increased its backlog and is predicting by 2013 that the financial should show much improvement as it works off contracts from the Northrop era.

At the same time though word came the Navy penalized the company several million dollars on a recent destroyer contract due to failures in its accounting and management system. The Department of Defense utilizes Earned Value Management System (EVMS) to help understand the cost and schedule of contracts. In this case the audit found deficiencies in 19 of 32 guidelines. The DoD qualifies company’s EVMS and if it fails then they can withhold funds or limit future contract awards until the system passes.

HII is in a situation where things like this are not helpful in the long run. It is not uncommon for EVMS to fail at times and the DoD and Lockheed Martin (LMT) had a long running argument over that company’s system a few years ago. Eventually they get resolved and work continues. It can just effect earnings and revenue in the short run.

The U.S. shipbuilding industry is in for a rough time in the next decade or so as the U.S. works out its budget issues. If the mandatory cuts do come into force there would be significant reduction in new ships which would affect GD and HII very negatively. While ships take several years to complete they need a steady stream of orders to maintain their entire workforce and to use them effectively. If there is a time when no new ship is on the horizon then there will be layoffs and contractions.

HII latest results were a positive but it may be hard in the future to continue to maintain the level of orders and revenue.

Photo from Official U.S. Navy Imagery’s Flickr photostream.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter

Rolls-Royce to Support Navy Trainer Aircraft

The U.S. Navy executed the third year of a contract with Rolls-Royce (RR:LSE) to provide support for the engines used in their primary trainer, the T-45 Goshawk. The T-45 is a version of the British Hawk trainer originally manufactured by McDonnell Douglas but now by Boeing (BA). The T-45 utilizes two F405 (Adour) engines from Rolls-Royce.

The contract for one years support has a value of almost $100 million.

The T-45 is a primary conversion trainer that supports transition to the F/A-18 and AV-8A jet aircraft. The Navy has received over 200 of the aircraft and it is part of an integrated Training System that utilizes simulators and instruction programs.

The U.S. Air Force is considering starting a new competition for a training aircraft to replace their elderly T-38 aircraft. This is used by that service to support transition to their advanced jet fighters and bombers. The T-38 has been in service since the Sixties and has been upgraded multiple times. The current T-38C Avionics Upgrade Program is expected to extend their life until 2020.

BAE Systems (BAE:LSE) the manufacturer of the Hawk aircraft has already indicated that they will bid a version of that aircraft called the Hawk Advanced Jet Trainer. They will do this as partners of Northrop Grumman (NOC).

The trainer and a new helicopter are the only two really new aircraft programs on the horizon for the U.S. Air Force and there are concerns that budgetary pressures may cause their delay or a decision to not go forward with them. The majority of the Air Force aircraft procurement budget is oriented towards the F-35 Joint Strike Fighter (JSF) and the KC-46A tanker.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter

Better Price Does Not Lead to More Profit

The Department of Defense uses different source selection criteria for different programs depending on what phase they are at in the acquisition cycle or how stable a product they are. One factor that is constant though is they are looking for the best price and value for their dollar. This doesn’t mean that they will always accept the lowest bid but they will accept the most technical constant at the lowest bid.

This means that in some cases companies can win work by aggressively offering a low price by minimizing their overhead costs and factoring in a small amount for profit. This pricing strategy does have as an issue that while it may lead to the contractor winning the work it may mean little or even no profit on the contract. With the new focus by DoD on price this means that margins are going to be squeezed even more while budgetary pressures may reduce the amount of large contracts available for any contractor to win.

Two recent contracts illustrate this issue for different companies.

The first is the Family of Medium Tactical Vehicle (FMTV) truck production for the U.S. Army and U.S. Marine Corps. Oshkosh (OSK) aggressively bid on this work to win it away from BAE Systems (BAE:LSE). Oshkosh’s win was protested by the losers, including BAE and Navistar (NAV), with one of the concerns being the low price offered. The GAO denied the protest and Oshkosh has now built hundreds of the trucks and trailers for the U.S. military.

Oshkosh hoped to offset declines in its commercial specialty truck business with military work and was able to win this contract and another for Mine Resistant Ambush Protected (MRAP) vehicles. The two led to large amounts of revenue for the company but unfortunately the MRAP work is winding down and it turns out that Oshkosh’s price is so low on the FMTV that they are struggling to make money off of it. Their revenues and profit saw steep declines in the last quarter partially due to this issue.

Boeing (BA) recently won the new aerial tanker contract with their 767 derivative KC-46A. They bid $3.6 billion for the development and early production contract that the Air Force estimated would cost $3.9 billion. It was hard for the other bidder, EADS (EADS:P), to match this price. There were concerns raised that Boeing had deliberately bid low to make sure that they won since the contest would ultimately come down to price.

The current estimate for this phase is now around $5.2 billion. It may end up being lower in the end but not by more then a few percent. This means that the Government and Boeing share the cost of the first billion increase and Boeing pays everything above $4.9 billion. If the current price is correct Boeing will lose $300 million. Boeing recently reported a good quarter with earnings up 20% and profits nineteen cents a share.

In Boeing’s case commercial sales as well as their diverse defense product line will offset the overruns in the KC-46A. Oshkosh does not necessarily have that luxury with the FMTV as their commercial vehicle sales are dependent on construction activity and government investment in equipment. Both have fallen off with the current economic situation in the U.S. and probably will be down for a few more years.

While the Government wants companies to make profits and stay in business they are not going to factor that in when they make awards. If a companies offer a low, best price they will take that. It is up to the bidder to calculate the price that offers the best chance of winning while generating revenue and profit. These examples show that is not always the easiest thing to do.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter

Foreign Fighter Contracts Not Materializing Soon

The Western defense contractors face a shrinking market right now domestically for advanced combat aircraft. The U.S. and many of its Allies are committed to Lockheed Martin’s (LMT) F-35 Joint Strike Fighter and that system will dominate their inventories for the next few decades. The U.S. ended production of the F-22 Raptor by Lockheed and Boeing (BA) and European nations have pretty much finished up ordering Eurofighter Typhoon’s with the United Kingdom even planning retiring some of their older aircraft due to budgetary pressures. France and Sweden have their own domestic aircraft in the Dassault Rafale and SAAB Gripen but have purchased as many of those as they really can.

All of these companies and countries have looked to overseas customers to sell these aircraft with the two biggest deals being for Brazil and India. Unfortunately these contract are not materializing in the near future and may now be pushed out a year or two.

India has planned major upgrades to its military through the purchase of advanced Western systems. This has included aircraft like C-130J transports from Lockheed and P-8I maritime patrol aircraft from Boeing (BA) but their cornerstone program was for over a hundred fighters. This contract has been going through the source selection with the competitors from the U.S., Europe and Russia demonstrating their aircraft and at one point was hoped to be awarded this summer. It is now being reported that this major contract won’t be decided until early in 2012.

Brazil has also been planning to expand and improve its military through some deals with overseas suppliers. They too would like to buy a new fighter and that contest has seemed to be between Boeing’s F/A-18 and the Rafale although SAAB bid as well. The original plan was to award this year but due to budget cuts the decision will now be postponed for at least twelve months. There are concerns that it may not happen at all as Brazil had to cut its defense spending significantly.

Finally Dassault had hoped that the U.A.E. might invest in the Rafale as well which so far has yet to find a foriegn buyer. The Emirates already operates French Mirage aircraft and the Rafale would be the logical extension of these. The big arms expo in the U.A.E., IDEX, came and went though without any announcement of a deal although a contract was awarded to upgrade Mirage aircraft worth about $30 million. Failure to win this contract would be a blow to France’s aggressive campaign to sell the fighter to new customers.

It had been hoped that these overseas sales would make up for the decline in U.S. and European defense spending and help keep production lines going and workers employed. Unfortunately they are not materializing as fast as hoped and this may affect different contractor’s plans. The Asian and South American markets were seen as key to keep the defense business going in the next several years. It may be that even these nations who were hoping to improve their military may not have the money necessarily to meet their original plans.

Photo from Jerry Gunner’s flickr photostream.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter

India to Consider AH-64 Apache Attack Helicopters from Boeing

The U.S. Government’s Defense Security Cooperation Agency (DSCA) has proposed to the nation of India that they consider purchasing Boeing (BA) AH-64D Apache attack helicopters for their upcoming requirement. The notification to Congress by the DSCA means that the contract is being pursued.

Often this notification is to support an actual deal but in this case the U.S. is hoping that India will choose the AH-64 over its foreign competitors. This is to allow the quickest possible implementation of the contract.

The total package proposed includes twenty-two of the advanced helicopters along with engines, targeting systems, HELLFIRE and STINGER missiles. It also includes support equipment, cannon ammunition as well as training. The estimated value of the contract if all aspects are exercised is about $1.4 billion.

The Indian government has reportedly requested bids from multiple foriegn suppliers for the attack helicopter mission. Potential suppliers other then Boeing would include Eurocopter, Bell and Russia’s MiL or Kamov aircraft.

India in recent years has attempted to broaden their military systems suppliers to include large Western contractors such as Boeing and Lockheed Martin (LMT). In order to do this they have had to make adjustments to their laws governing offsets and the participation of Indian companies in the actual work.

Boeing has sold several P-8I maritime patrol aircraft in the first major deal with a U.S. company in many years.

India is considering buying transports such as the C-17 or C-130 as well as a modern fighter aircraft that has attracted bids from American, European and Russian companies.

As the U.S. and European domestic defense markets decline due to budgetary pressures and the winding down of Afghanistan and Iraq companies will look to the Asian market especially to make up difference. India along with the Middle East are two areas especially coveted for big contracts.

Photo from jensen_chua’s flickr photostream

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter

Defense M&A Continues

The world wide defense industry continues to consolidate as contractors larger-and-small continue to acquire other companies to expand their roles in certain business lines or due to shrinking defense budgets causing a refocus. Several deals closed or where announced in the last few months.

Last month for example Cubic Corporation (CUB) announced that they would move to acquire Abraxas Corporation. Cubic provides test support and range services to a variety of defense customers worldwide. Abraxas supports cybercrime and defense and security customers. The deal was estimated to be worth around $124 million. Last week Cubic received regulatory approval for the acquisition to go forward.

CACI (CACI) the large intelligence and IT service support contractor as of 1 November completed its acquisition of privately held TechniGraphics. TechniGraphics provides geospatial services and this will expand CACI’s ability to gain market share. CACI has done very well over the last few years and some consider its business model as the way most defense contractors will go as the large hardware contracts become fewer due to budgetary pressures.

The Israeli defense contractor Elbit who manufacture aerospace systems including UAV as well as parts and support services for aircraft completed its acquisition of the U.S. company M7 Aerospace yesterday. The $85 million sale will allow Elbit more penetration of the U.S. market as M7 provides government and commercial customers aviation logistics, maintenance and supply chain management. Due to export control and security laws and regulations it is often easiest for overseas companies to establish U.S. subsidiaries or acquire U.S. companies to enter its defense market.

M&A has been picking up as the market adjusts to the expected flattening or decline of the U.S. and European defense budgets. As the funding shrinks it will cause companies to consider their products and market shares. Some will want to sell parts to get out of those business areas and some will want to acquire to get into them.

The biggest deal that is hanging out there is what Northrop Grumman (NOC) wants to do with its ship building group. Previously they have stated they would like to sell it as declining U.S. Navy ship building plans limit their opportunities. Depending how the U.S. defense budget ultimately resets these plans could be reconsidered.

These trends will continue and may accelerate over the next few years as the defense industry adjusts as it did in the Nineties to the changing market.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter

Indian Air Force Buys Bombs from the U.S.

One of the plans that U.S. and the European defense contractors are hoping will offset decline in business in their own countries due to budgetary pressures is to sell overseas. Asian, Middle Eastern and South American countries are expected to invest billions over the next few decades in their military. While the contracts won’t be as frequent or as large as the ones gained domestically they are still good business.

India has taken great strides in the past two years to reform its defense acquisition to allow greater competition from Western defense contractors. In the past the offset and investment requirements as well as regulations to encourage domestic growth made it hard for their market to gain much interest. Now India is trying to take advantage of the Western market to upgrade the overall technology of their military systems. India has signed deals with Boeing (BA) for P-8I Maritime Patrol Aircraft as well as considering the C-17 transport.

The biggest ongoing contract is for new fighters that has attracted competition from across the Globe with Boeing, Lockheed Martin (LMT), MiG, SAAB and the Rafale from France.

While these bigger deals percolate India has been signing some smaller ones. It was announced yesterday that Textron (TXT) will sell over five hundred aerial cluster bombs to the Indian Air Force. The contract was done as a Foreign Military Sale (FMS) from the United States government and is worth over $250 million.

While this represents only one percent of the company’s most recent quarterly revenue it is still welcome work.

If the U.S. defense budget does see serious decline it will be contracts like this that will help preserve the U.S. industrial base and keep companies going.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter

Does Lockheed’s Results Portend the Defense Market?

Lockheed Martin (LMT) announced their most recent quarterly earnings and they didn’t paint a pretty picture. The concern is whether this was a one off bad report or does it portend the future for the large defense contractors now that Iraq and Afghanistan may wind down and budgetary pressures will reduce U.S. defense spending.

Compared to the same quarter in 2009 profits fell twenty-eight percent. Profits totaled $517 million compared to last year’s $797 million. Lockheed also reduced its estimates for the year by 40 cents and its projected sales by $600 million.

One of the effects dragging down the company’s results was a charge of almost thirty-two cents a share to cover the costs of buying out executives and other over head employees. This was done by the company in September as part of cost cutting moves to meet the Defense Department’s desires for lower overall costs by their contractors. 600 executives accepted the buy out. This is a one time charge but reflects the changing market Lockheed is facing.

Lockheed also is expecting short term reductions in revenue due to the decision to sell its consulting engineering division, Enterprise Integration Group (EIG). This was done in response to Pentagon concerns about Organizational Conflicts of Interest (OCI) between companies that support weapon testing and buying and also provide hardware to the military. Last year Northrop Grumman (NOC) did the same thing with its TASC group.

With Britain announcing major defense spending restructuring including retiring and delaying major programs the United State’s is expected to follow in the near term. These considerations led Lockheed to predict that their 2011 is looking fairly flat as well.

While cuts are expected the issue will be how fast they come. If there is a downturn hopefully it will be spread across several quarters allowing the defense industry to reduce steadily. If there are major cuts done rapidly the industry will be driven to reduce capabilities and jobs without allowing consolidation or M&A to happen.

There are already reports of contractors laying off workers due to decline in demands due to the withdrawal of U.S. troops from Iraq. In the Seventies and Nineties the U.S. military saw major reductions in money for not only new weapons but also that used to maintain and operate their existing equipment and train their personnel. The coming draw down must avoid similar situations.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter

Malaysia Signs Contract With BAE Systems And Nurol For Armored Vehicles

Malaysia has signed a contract worth up to $500 million with the U.K.’s BAE Systems (BAE:L) and Turkey’s Nurol Holding AS to establish an armored vehicle production line. The two companies are establishing a joint venture in the Asian country to design and produce 250 wheeled vehicles with a variety of capabilities. This contract is part of a major investment by Malaysia in its armed forces.

The end result of course will be an established production capability indigenous to Malaysia.. This could allow it to build more vehicles for itself and overseas sales. The contract is also valuable to BAE Systems as it may see declining markets in Britain and the U.S. due to budgetary pressures.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter

BAE Systems Working On Future Royal Navy Ships

The Royal Navy has one major program underway right now. This is the new aircraft carrier which hopefully will deliver the two largest carriers used by the service in its history. Now BAE Systems has announced that they are designing the new surface combatants that will support these ships as well as perform general duties. The company has just started on a preliminary design for the two destroyers. If all goes well a production contract will be awarded in about ten years. The RN hopefully will buy up to twenty of these ships.

The U.S. Navy’s DDG-1000 and Littoral Combat Ship (LCS) programs are their new warships but those programs have suffered from development and cost issues. Right now the DDG-1000 is on hold while the U.S. continues to build DDG-51 class ships. The LCS program was to have two different designs built by Northrop and General Dynamics but now a down select is planned for one ship only.

The British Government faces major budgetary pressures due to the world’s economic doldrums and social spending. This along with the cost of operations in Afghanistan may lead to limits on how many ships may be built in the future. The carrier program itself may be delayed if funding issues persist. Despite the need for new surface ships it is not necessarily the best time for programs like this.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter

>