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LOCKHEED MARTIN-LED TEAM TO BEGIN WORK ON $4.6 BILLION DEFENSE INFORMATION SYSTEMS AGENCY CONTRACT — Press Release

Lockheed Martin to Manage DISA Network Transformation

ALEXANDRIA, Va., October 3, 2012 – Lockheed Martin [NYSE: LMT] will begin managing the transformation of the Department of Defense’s global data network, known as the Global Information Grid. The determination on this Defense Information Systems Agency (DISA) contract was made by the Government Accountability Office after a protest by a competing bidder.

With a total program value of $4.6 billion over a seven-year period, this Global Systems Management Operations (GSM-O) contract includes a three-year base contract period and includes two 2-year options to extend it to a total of seven years.

“We are gratified that the U.S. Government has made its determination, and we are ready to begin work with DISA to improve the speed and efficiency of information exchange between our joint warfighters around the world as well as their commanders and allies,” said Gerry Fasano, president of Lockheed Martin Information Systems & Global Solutions-Defense. “Our team has maintained a high state of readiness to effect a smooth transition and an efficient, progressive path forward for the DISA.”

GSM-O is the largest of three DISA Global Systems Management contracts. It provides programmatic, operations, and engineering services; material; equipment; and facilities to support the lifecycle management of the network. GSM-O is headquartered at Fort Meade, Md., with multiple support locations worldwide.

The Lockheed Martin team will manage a smooth transition of GSM-O responsibilities and evolve the network into one that supports new communications capabilities and technologies that directly affect warfighters’ ability to achieve mission success. Lockheed Martin teammates include AT&T, ACS, Serco, BAE Systems, ManTech, and other specialized and small businesses.

Headquartered in Bethesda, Md., Lockheed Martin is a global security and aerospace company that employs about 120,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The Corporation’s net sales for 2011 were $46.5 billion.

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Army’s M4 Follies Continue

The United States military has over the last decade become to rely on the M4 carbine model of the standard M16 rifle. This is basically a M16 with a shorter barrel that was found more useful in the close combat fighting in Iraq and Afghanistan. The M4 originally was intended to supplement the M16 as a vehicle crew weapon. Since 2001 the U.S. Army has bought thousands of M4 from privately owned Colt.

The M4 has had a mixed combat record with complaints about range, jamming and stopping power. The Army has since 1990 tried multiple times to build a new replacement rifle for the M16 most recently with the cancelled XM-8 system. This does live on in the form of the XM-25 Punisher version which is a squad level weapon that fires 25mm airburst rounds. This is manufactured by Alliant Techsystems (ATK) and is seeing trials in Afghanistan.

Like a great deal of weapons the Army has relied on a sole source for the M4. They do own the technical data and in April awarded a production contract to rival Remington. Colt protested that decision.

Now the Government Accountability Office (GAO) has ruled on the protest upholding Colt’s claim. The GAO based their decision on a review of how the Army applied their source selection criteria and found it wanting. This means that in their view Colt’s proposal was not evaluated fairly against Remington’s. The GAO denied all other claims by COlt.

After the protest is upheld the selecting Agency will go back and review the decision. They may decide that it was done properly and maintain the contract with Remington, agree to a new contest, or in very rare cases throw out the original award and give it to the challenger. There is now no timeline when this decision will be made and Remington will have to stop work on their M4 contract.

At the same time the Army continues another attempt to get a new combat rifle. Various bidders have prototypes in test that could then lead to a formal solicitation. That program though is in its early days and it will be a few more years before a decision is made on production of a new system. The winner of that will see a huge amount of work as often the standard U.S. weapon is adopted by many different countries across the globe.

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TRICARE West Contract Finally Settled in UnitedHealth’s Favor

In 2009 the Department of Defense attempted to award new contracts to administer their primary healthcare program, TRICARE. These are regional contracts with the country divided up in groups of states as well as a contract to provide overseas services. The Western and Southern regions due to the density of military bases were the two largest and amount to several billion a year. As to be expected competition was fierce for these by different health insurance companies. It is just now, over three years later, that the government is finally resolving these contracts due to the amount of protests and reviews required.

The Western Region contract is worth about $21 billion over its predicted five year life. After a final round of awards and protests the Government Accountability Office (GAO) has upheld the award earlier this year to UnitedHealth (UNH). The GAO ruled in a protest by the incumbent, TriWest to the award in 2012.

TriWest has had the contract since 2003 and won the original re-compete in 2009. This decision was protested by UnitedHealth. In the last three years there have been new competitions, awards and protests. This final decision should stand and UnitedHealth will become the provider.

This is unfortunate for TriWest as their primary business is the TRICARE contract and the company may have to fold without it. There is a good chance that many of their employees could be absorbed by UnitedHealth as is often the case when a new company takes over an existing contract but that is not guaranteed.

The Defense Department faces growing pressure on their health spending which has increased dramatically over the last ten years due to the fighting in Iraq and Afghanistan. Not only has the size of the military grown with more dependents there are also more retirees and severely injured that require health care. TRICARE is the primary mechanism for this.

The Obama Administration has proposed raising the co-pays and annual payments that the military and retirees make but that was struck out of the 2013 defense budget by Congress loathe to pass those costs onto the military. Obama has threatened to veto the bill as it stands due to that provision but many times once the bill is complete it will be signed.

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GAO Expresses Concerns with KC-46A Development

The Government Accountability Office (GAO) released a report on the KC-46A new aerial tanker program and expressed some concerns with the schedule. Boeing (BA) won the contract to develop a version of their 767 airliner and deliver 17 aircraft after a long struggle with EADS (EADS:P).

GAO is worried that some of the software that is being developed to control the mission planning, defense and routing of the aircraft is being done at the same time as production and testing. GAO also considers the new fuel boom operating station and control higher risk as it has yet to be demonstrated in normal operating environment and at a high maturity. Similar systems are in use on only 3 tankers operated by non-U.S. military.

The KC-46A contract as expected has had some cost increases and earlier this year the Director, Operational Test & Evaluation (D,OT&E) also expressed that the test schedule was not adequate and the program did not allow enough time for the necessary testing.

The Air Force and Boeing dispute the reports claiming the program is on track and risks manageable.

GAO Expresses Concerns with KC-46A Development

The Government Accountability Office (GAO) released a report on the KC-46A new aerial tanker program and expressed some concerns with the schedule. Boeing (BA) won the contract to develop a version of their 767 airliner and deliver 17 aircraft after a long struggle with EADS (EADS:P).

GAO is worried that some of the software that is being developed to control the mission planning, defense and routing of the aircraft is being done at the same time as production and testing. GAO also considers the new fuel boom operating station and control higher risk as it has yet to be demonstrated in normal operating environment and at a high maturity. Similar systems are in use on only 3 tankers operated by non-U.S. military.

The KC-46A contract as expected has had some cost increases and earlier this year the Director, Operational Test & Evaluation (D,OT&E) also expressed that the test schedule was not adequate and the program did not allow enough time for the necessary testing.

The Air Force and Boeing dispute the reports claiming the program is on track and risks manageable.

GAO Finds Billion Dollar Overrun on Initial F-35 Production

Testifying to Congress yesterday the Government Accountability Office (GAO) reported on cost growth and overruns of the F-35 Joint Strike Fighter (JSF). The JSF program headed by Lockheed Martin (LMT) suffered cost increases of a billion dollars on the first four production orders for the aircraft.

These buys are for 63 aircraft which means about an average of almost $16 million each. The F-35 is the largest acquisition program in the world and ultimately over 2,000 will be built for the U.S. and allies to replace the F-16, F/A-18 and A/V-8A aircraft.

The cost overruns will be shared by the government and Lockheed in about a 65-35 ratio.

The GAO stressed there have been some improvements in the program and its stability but expressed concerns that there is still too much concurrency in it with simultaneous production, development and testing. This could lead to changes to the aircraft as they are being built adding time and cost.

The F-35 has suffered from schedule delays as it works through the testing and development program. One of the reasons for this added time and cost is that there are three different versions of the aircraft. One has vertical takeoff ability, another short and the the third conventional. This is for use not only on aircraft carriers but also to replace the unique capabilities of the A/V-8 Harrier which can land and take off vertically.

With the expected decline in the defense budget further increases like this will not only stretch out the production timeline but also reduce available funds for other programs. The Air Force has to invest in new tankers and bomber aircraft as well as the JSF. The Navy could see it needing more funds for ship building and the Marines ground vehicle programs could suffer.

As with all defense programs as time goes by it will solve its issues but the Pentagon has to face the question as to at what cost.

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Lockheed Martin (LMT) Protests Award of Navy Contract to Northrop Grumman (NOC)

At the beginning of the month the U.S. Navy awarded the first in a series of contracts to begin installing consistent networks on ships. The initial value of this contract is for $36 million and would be for installations on 3 ships.

The Consolidated Afloat Networks Enterprise Services (CANES) program is to undergo testing this year and have a Milestone C Low Rate Initial Production Decision to support completion of the first install by the end of the year.

Northrop Grumman (NOC) beat out Lockheed Martin (LMT) for the production contract. Both had been awarded development contracts a few years ago. If all options on the contract are exercised it could be worth over $600 million and be installed on 54 ships. Next year after more testing there will be a Full Rate Production Decision leading to the award of a much larger contract.

Yesterday though Lockheed formally protested the award citing a belief in flaws with the Navy’s evaluation of the two proposals. The protest will be reviewed by the Government Accountability Office (GAO) who have one hundred days to come to a decision. Normally the protested contract is placed on hold while the GAO conducts its review. If Lockheed disagrees with the result then they may appeal to the Federal courts.

Protests have been rising consistently over the last two decades as the Pentagon issues fewer contracts and company’s fight harder for market share. They are disruptive but Federal law allows almost any decision to be protested although the GAO often denies them. The biggest factor for now is that it delays the start of work by Northrop and disrupts the program’s schedule.

Unfortunately for the Services and the Defense Department many cases are decided in favor of the company protesting which continues to highlight the need for the process as some selection decisions have proved flawed for many reasons. The KC-X tanker contract originally awarded to Northrop was successfully protested by Boeing (BA) who won the contract upon a new competition was ordered.

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Alliant Techsystems Faces Double Dose of Bad News

24 January – Updated to reflect the loss of the Lake City contract would be a blow to the company instead of “will be”.

Over the last ten years the U.S. military has consumed large amounts of ammunition. This includes not only small arms and support weapons like machine guns and mortars but also larger and more sophisticated weapons such as tank rounds, artillery shells, aerial bombs and guided missiles. Alliant Techsystems (ATK) has become one of the largest suppliers of ammunition and other pyrotechnics to the U.S. military during this time.

Up to last year they had contracts to run two of the largest government owned plants involved in this process — the one in Radford, VA that manufactures nitrocellulose used as the basis for ammunition as well as the one in Lake City, MO which makes small arms ammunition.

Last year the Army awarded the contract for Radford to BAE Systems (BAE:LSE) in the spring. Alliant protested that decision and the Army agreed to revise the competition and conduct another source selection. In October the new contract bids were received and again BAE won. Alliant protested that decision too.

Unfortunately the Government Accountability Office (GAO) announced today that it had denied that protest upholding the award to BAE. Alliant will lose a key contract that it had had since 1995. BAE’s 10 year initial contract also has multiple five year options that could make the contract last until 2036. The value could be well over a billion dollars if all options are exercised and production at Radford remains fairly steady.

Alliant will also face a challenge this year for the Lake City contract as BAE announced it will team with ammunition manufacturer Olin (OLN) to form a team to bid on that one. The Lake City contract could be worth up to $200 million a year to the winner. With the knowledge used for their successful Radford contract proposal BAE and Olin should have a good chance of winning the Lake City one as well.

The loss of these two contracts would be a hard blow to Alliant as they form a decent portion of their revenue each year. They have already seen declines in revenues the last few quarters and this would continue that negative trend. In 2011 their total sales to the U.S. Government, primarily ammunition and explosives, was about $3.3 billion. In their annual report the company stated that they “derived approximately 15% of our total fiscal
sales from the military small-caliber ammunition contract at Lake City”. The loss could be made up if their were other contracts to win or demand for their other products would increase. Unfortunately with the fighting winding down in Afghanistan and budget cuts predicted this might be hard.

Alliant may have recognized that the future might get tough as they moved their headquarters from Minnesota to the Washington D.C. area. In this they followed Northrop Grumman (NOC) which left California. It places them nearer Congress and the Pentagon and will facilitate engagement. This should aid them in keeping work and perhaps gaining new efforts.

All defense contractors no matter what the size are facing the same problems that Alliant is. Cost pressure on the Defense Department will make them look at new providers who may offer the best price meaning contracts will be harder to keep. There will also be less contracts due to the retrenchment from the recent fighting and budget cuts. If the 1990’s when a similar decline in defense spending is a guide then some contractors will have to adjust or face converting to new markets or just merging with other companies.

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Lockheed Wins Contract for More GPS Satellites

Even though the U.S. defense budget and spending overall will decline in the next few years there is no doubt certain critical modernization and support programs that need to be funded. One of these is the U.S. investment in the Global Positioning Satellite (GPS) system. The United States military developed the system and has launched several satellites over the last thirty years and is now in the process of carrying out a program to build and place into orbit the GPS III Constellation.

GPS is now used not only for navigation of ships and aircraft as originally intended but also to support ground movement and provide guidance and targeting data for a host of weapons and unmanned vehicles. This is not even considering the capability it provides to the civilian world as well. In the near future GPS will become critical to international and national air traffic control and guidance as while the U.S. upgrades its system the European Union and Russia are deploying their own advanced constellation of updated satellites to provide similar capability.

The Block IIIA satellites have been under development and production by Lockheed Martin (LMT) and other contractors since 2008 when the program passed its Defense Acquisition Board (DAB) review. In early FY11 the Government Accountability Office (GAO) released a report stating that the program was facing development and deployment delays due to not awarding the contract for the new satellites in a timely manner. This could lead to the GPS constellation being smaller then necessary to support all applications. The Air Force and Lockheed were working mitigation plans.

As the program has progressed the Air Force awarded Lockheed the contract to build the third and fourth satellites in this configuration. The initial value for the contract is almost $240 million. The initial contract awarded in 2008 covered the first two satellites in the program.

Ultimately up to 32 GPS III satellites will be manufactured and deployed over the enxt several years. The first is expected to be launched in 2014.

GPS is critical to support U.S. combat operations and new satellites need to be launched to replace the older, less capable systems from earlier constellations. Lockheed as long as it continues to meet the Air Force’s schedule and requirements should have the bulk of this work which should be due to its importance fairly well funded until its completion.

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Air Force Places Light Air Support Program On Hold Due to Protests

The U.S. Air Force had recently awarded their Light Air Support (LAS) contract to a team of Sierra Nevada and Brazil’s Embraer. This over $300 million contract was to buy turboprop aircraft initially for Afghanistan but potentially for use by the U.S. and other countries in a counter insurgency role.

Hawker Beechcraft who had also bid but were eliminated from consideration have sued the Air Force to have the decision reviewed and to get a full explanation as to why they were eliminated. As part of this yesterday the Air Force placed a stop work order on the current contract. Sierra Nevada released a press release about this decision yesterday that is as follows:

“Sierra Nevada Corporation Statement: U.S. Air Force Stop Work Order on Light Air Support Award

SPARKS, Nev., Jan. 4, 2012 /PRNewswire/ — Sierra Nevada Corporation issued the following statement in response to a stop work order received today from the U.S. Air Force on the recently issued Light Air Support (LAS) contract:

Our team is excited to have been awarded the LAS contract by the U.S. Air Force as a result of a fair and open competition and after a favorable review by the Government Accountability Office.

We remain confident that the issue will resolved expeditiously. These critical LAS capabilities need to be made available soon in order to support our men and women in uniform and our partners in Afghanistan. The A-29 Super Tucano, built in America, is the right solution for the LAS mission.

Sierra Nevada Corporation, a woman owned company, and all our numerous partners across the U.S. who will contribute to this contract stand ready to continue work and to serve our nation by providing the most proven capable light air support aircraft that meets the U.S Air Force’s requirements.”

During a normal protest period the contract is usually placed on hold and the Air Force most likely did this as they expected the Judge in the case to issue such an order momentarily.

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Air Force Light Attack Contract Gets More Curious

Update – Last night Embraer confirmed receipt of the $355 million contract for twenty aircraft and their support.

It came out today as part of Hawker Beechcraft’s suit against the U.S. Air Force over their denied protest about their exclusion from the Light Attack aircraft competition that the contract has been awarded to the team of Sierra Nevada and Brazil’s Embraer. Hawker had submitted a version of their T-6 trainer for an aircraft initially to potentially be used by Afghanistan and the U.S.

The Air Force eliminated the proposal from consideration as not being technically responsive. Hawker protested to the Government Accountability Office ( GAO) but was denied by that agency. Hawker then sued as the next step in the protest process. That case is being expedited by the Federal Court responsible for these cases.

The notice of the award tothe only remaining bidder came without seemingly either public notice by the Defense Department or Congressional notification. This latest move will only further raise questions especially of those in Congress who support Hawker.

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Navy Orders Two More (And Last Two) Zumwalt Class Destroyers from General Dynamics

Last month it was reported that the U.S. Navy and General Dynamics (GD), owner of the Bath Iron Works (BIW) in Maine, were still negotiating the cost of the next two DDG-1000 Zumwalt class destroyers. In August a price had been worked out and this week the contract for the two ships was executed at an agreed on price of about $1.8 billion.

The Zumwalt was supposed to go into series production and become the standard destroyer for the Navy but due to escalating costs with the development and production the Navy decided to only build two and re-start the production line for the previous DDG-51 Arleigh Burke class destroyers. The Arleigh Burkes are built both at BIW and at Huntington Ingalls Industries (HII) yard in Mississippi.

The first DDG-1000 ship, the Admiral Zumwalt, is expected to be delivered in 2014. These two ships will be completed after 2015.

The Navy had decided to hold the class at two but Congress authorized the third one after the plans to end the program were announced.

The Zumwalt will integrate several pieces of new technology which is one of the reasons that the development costs grew from initial plans. This includes the new Air and Missile Defense Radar (AMDR) that will replace the current AN/SPY-1 that is part of the AEGIS Weapon System on current U.S. Navy cruisers and destroyers as well as a hybrid-drive and stealth qualities. The plan is to add these systems to the DDG-51 new construction.

There are now reports that the Government Accountability Office (GAO) is reviewing how the Navy did their cost analysis and the assumptions to come up with the new plan. There are also concerns that adding the AMDR and other systems to the Burkes may not be as easy as hoped. There are concerns that costs of doing all this may actually make the decision to not build more Zumwalts not necessarily as cost effective as thought.

There was a need to get this contract awarded as any delays would make it hard for BIW to have space available for the next production order of DDG-51 class ships making it hard for them to win that work. Without it the yard would have little construction available after completion of the three Zumwalts.

The award of this contract means that the timing should work out for BIW. There have been many concerns raised that the Navy is not ordering enough ships over the next few decades to support the current naval construction capability. This is one of the reasons that Northrop Grumman (NOC) spun off HII as a separate company. As the work on reducing the U.S. budget deficit continues this too may affect planned ship building programs.

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Army Decides to Recompete Radford Contract

In June the U.S. Army announced that it had awarded a contract with BAE Systems (BAE:LSE) to run the U.S. explosives production facility at the Radford, VA Army Ammunition Plant. The losing company, ATK (ATK), who had had contracts to run the facility for several years protested the award. Under normal processes the Government Accountability Office (GAO) which is responsible for deciding these matters would have made a decision no later then September.

The protest though is now not necessary as the Army has decided to recompete the contract which led to the GAO dismissing the protest. After a review by the GAO the Army will change some parts of the Request for Proposals (RFP) and allow bidders to submit new ones. This is good news for ATK as the Radford contract had a value of over $800 million over its ten year duration.

Because of this decision ATK, the incumbent, will continue to operate the plant and be paid by the Army until a new contract is awarded. Both BAE and ATK have indicated they will submit new proposals and there is always a potential for other companies to also try to win the work.

If the U.S. defense budget does decline for any company the key will be keeping their existing contracts and then attempting to win new ones. Having a core of existing work will cushion any lack of new work caused by the reduced opportunities available in the next decade or so as the U.S. reduces its investment in Iraq and Afghanistan as well as new development programs or building up stockpiles of weapons and munitions.

ATK recently had a rough quarter with sales down which led to a drop of about 4% in profits when compared to the similar quarter last year. One areas where revenue was down was sales of ammunition to U.S. allies like Afghanistan. The loss of the Radford contract would have reduced annual revenue $80 million or so or about 2%. A chance to win the work back will only help the company in the future.

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General Dynamics Wins DHS IT Contract

After a lengthy protest and a new contest General Dynamics (GD) was able to win an IT support contract with the Department of Homeland Security (DHS). The company will support the building of the agency’s new headquarters and the move and integration of its employees into the facility.

Total value of the award could be up to $876 million as it also covers some time of dedicated support to the DHS. The original contract, though, won by Northrop Grumman (NOC) was much larger, lasting ten years and potentially worth over $2 billion.

After the award to Northrop late last year several of the losing bidders protested. The Government Accountability Office (GAO) upheld the protests and decided that a new contract should be awarded. This led to a new source selection process this spring with Northrop being the winner.

The new contract is much smaller as it was decided to de-scope the work and also eliminate many of the years of support after completion of the move. This means that in a few years there will be another contest to do that work and offers hope to Northrop that they can win that to counter the loss of the original contract.

The Federal Government stills has a hard time doing major IT work in-house and relies on large contracts such as this to carry out that work. There has been much discussion of the best way to move this work within the civil service but it has often foundered on how to integrate IT pay scales into the more rigid GS pay system. IT as illustrated does remain a significant contract cost for all parts of the Federal government as no matter what work they do from buying weapons to processing taxes they need IT support.

This area will remain a major market for the near future.

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UnitedHealthCare Takes Next Step in TRICARE Protest

As we had written last week the Government Accountability Office (GAO) had ruled against UnitedHealthcare’s protest of the award of the Southern Region TRICARE contract. This meant that the contract would go to Humana (HUM) who had actually been the incumbent back in 2009 when the government tried to award the latest group of TRICARE medical management contracts.

TRICARE is the medical insurance program offered by the Pentagon to its active duty members, their dependents, retirees and selected Reservists and National Guardsmen. The country is divided into regions and one insurance company is awarded a contract to manage it. These contracts are quite large in the region of $4-5 billion a year.

In 2009 the government attempted to award new five year contracts for the different regions. Three of the contracts were protested for various reasons but normally because the source selection criteria were not followed correctly. Two of the three have been resolved but the Southern one still remains in a legal battle. Originally Humana lost the contract to UnitedHealthcare but protested. That led to a decision to have a new contest which Humana then one. UnitedHealthcare then protested that decision. The GAO denied the protest and let the award to Humana stand.

Now Unitedhealthcare has decided to sue in the U.S. District Court of Federal Claims which is the next step in the protest process. In their press release from Tuesday the company states: “The Pentagon disregarded its own stated goals for this contract, and military families’ access to quality health care in the South will be put at risk as a result.” The company continues to believe that the decision by the government to choose companies for the TRICARE offering low reimbursement rates limits care and choice for the military.

The lawsuit should take a few months to decide and the current TRICARE contract should continue with Humana

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TRICARE Protests Continue

TRICARE is the primary medical insurance program for the United States’ military. It covers those personnel, their dependents and retirees along with selected Reservists and National Guardsmen. It functions like a HMO for its members. The Defense Department divides up the country into regions and awards large contracts to individual health insurers to manage these. In 2009 new contracts were awarded but three of them were protested with one, the Southern Region, still not resolved.

The Southern contract was originally awarded to UnitedHealthCare but the incumbent Humana (HUM) protested the decision. The Government Accountability Office (GAO) which reviews protests agreed that the Defense Department had failed to carry out a proper source selection and it was decided to have another competition for the potential $23.5 billion of work.

That contract source selection occurred this spring and it was decided that Humana was the winner. UnitedHealthCare promptly protested that decision basing their claims on a belief that Humana offered too low a payments to providers to lower their costs and that may end up forcing providers from TRICARE limiting the members options.

That protest has now been resolved with the GAO ruling in Humana’s favor. UnitedHealthCare is still reserving the right to appeal that decision which it can to the Federal Courts. Normally in these situations the incumbent stays in while the protest goes on which means Humana will be the provider and collect revenue and earnings from this contract.

There is no doubt the Defense Department made serious errors in this cycle of contracts. Three of the four were protested and in all three cases the original winner has not kept the contract. UnitedHealthCare looks like they will continue their protest of the second attempt to award the South Region contract so a final decision may not be made until the Fall. It will have taken the Defense Department almost two-and-a-half years to resolve all of this.

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U.S. Army Explosives Production Contract Protested by Alliant Techsystems

Since the Nineties and the downsizing of the U.S. defense establishment due to the end of the Cold War the Department of Defense has leased its ammo production facilities to a variety of defense companies. Then they have awarded contracts for the delivery of small arms, artillery and other ammunition. With the fighting since 9/11 in Iraq and Afghanistan there has been substantial investment in these types of products as the U.S. military has consumed large amounts of small arm ammo and those for supporting weapons such as the 30mm cannon on the AH-64 Apache attack helicopter.

Alliant Techsystems (ATK) has been one of the major suppliers of ammunition and pyrotechnics for the U.S. military over the last decade. The company is a leading manufacturer of small arms rounds as well as larger artillery rounds, missiles and rocket engines. They have been able to operate two of the major production plants owned by the Government for several years. These are the ones in Radford, VA and Independence, MO.

Now the Army has awarded the contract to run the Radford plant to BAE Systems (BAE:LSE). It is estimated the contract will have a value of over $800 million during its ten year duration. Alliant has filed a protest with the Government over the award. Normally the Government Accountability Office (GAO) will resolve the protest within 100 days. The contract does not start until September so Alliant will continue running the plant until then pending the review of the protest.

If the GAO finds that there were irregularities in the award to BAE they may order a new competition, ask the Army to review how their source selection was conducted or even give the contract to Alliant. Most protests are denied and Alliant will have to hope that the Army did not carry out their source selection properly in order to get a ruling in their favor.

As the U.S. defense budget begins to decline and troops return from Iraq and Afghanistan demands for certain products like ammo and explosives will also be reduced. This means that locking in contracts now at the beginning of this process is very important. Alliant relies on this work for a large portion of their revenue and earnings. Losing the contracts will have an impact on their long term prospects and force them to try to expand their other product lines or look for new markets.

Photo from Yarden Sach’s flickr photostream.

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BARDA Smallpox Contract Protested by Chimerix

BARDA is the Biomedical Advanced Research and Development Authority, which is part of the Department of Health and Human Services. Their goal is to provide an “integrated, systematic approach to the development and purchase of the necessary vaccines, drugs, therapies, and diagnostic tools for public health medical emergencies.”

As part of this they fund various research, development and production of medical countermeasures for potential attacks using Weapons of Mass Destruction (WMD) including chemical, biological, radiological and nuclear agents. One concern is diseases such as anthrax and smallpox which have the potential to infect and damage large populations. This Pandemic Medical Countermeasures program has acquired vaccines and therapeutic drugs and treatments.

Recently they made the decision to award a production contract to Siga Technologies for an antiviral smallpox medical countermeasures. This was a five year contract with the potential for being worth over $400 million. It was to continue development of the treatment and explore manufacturing and safety. If all went well Siga would make about 1.7 million treatment courses during the contract with an option for up to 12 million more. That size of production could be worth almost $3 billion.

The contract award was protested with days by rival biotech company Chimerix. Chimerix had also received a BARDA development contract for their own smallpox countermeasure. They feel that the follow on contract should have been awarded to them. The Government Accountability Office (GAO) will review the protest and decide it. This means that there will be a delay to the implementation of the contract by Siga as long as the protest is denied.

If the protest is upheld then it will require a reevaluation of the bids or work by BARDA to justify their award to Siga. It could even lead to a whole new competition if the GAO feels it is warranted.

Defenses against such attacks is a new area of investment by the U.S. and other governments. Concerns about a terrorist group using such weapons was driven by the post-9/11 anthrax attacks in the the United States and has caused billions of investment by different organizations in countermeasures and treatment. This like many other aspects of contracting has led to more interest by companies and more competition. The fact of the protest is not surprising considering this.

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Creative Protest of TRICARE Dental Contract by United Concordia Fails

TRICARE is the primary healthcare provider for the United States’ military, their dependents and retirees. It works similar to a HMO with a network of providers and prescription services to supplement the available military hospitals. TRICARE requires a small co-pay from members for themselves and their dependents. Due to the size of the U.S. military the TRICARE management contracts awarded to commercial providers are quite large. This includes the one to provide dental benefits.

Two years ago the Department awarded new contracts for the various TRICARE regions to manage the system. These contracts were all worth $2-3 billion a year and at least three were protested. Earlier this year the various protests were resolved but there is still an outstanding protest of one of the new contracts awarded due to the protests.

Late last year the TRICARE dental contract was awarded. Unlike the medical ones this pretty much covers everyone in TRICARE in only a single contract rather then having multiple regional ones. It was won by Met Life (MET) over the incumbent, United Concordia Companies Inc., which is part of Highmark Inc. Met Life was awarded the $3.09 billion contract and United Concordia promptly protested.

While Met Life was cheaper then United Concordia the incumbent based part of their protest on the fact that the change in contractors would cause hardship for TRICARE subscribers due to the need for them to potentially change providers. This meant being the incumbent should help the evaluation of their bid. They asked the Government to review how the Source Selection criteria were applied in the decision.

The Government Accountability Office (GAO) denied the protest. They ruled that the contract was awarded properly.

When a contract is re-competed it is easy for the Government to be favorable to the incumbent. These are people they have worked with for several years and trust. The source selection must look past these types of personal relationships and evaluate the bids against the criteria. Often the winner hires most of the former workers and one of the concerns with this contract is that because Met Life’s bid is smaller it may not support the same size workforce as United Concordia did.

If there is really reductions in U.S. defense spending and it is very likely then the chances of protests will increase as there is less work for the same amount of bidders. Each contract becomes more valuable to companies and they will fight hard to get them and if they are the incumbent keep them.

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Boeing’s Contract for Army Intelligence Aircraft Thrown Back to Source Selection

Boeing’s Contract for Army Intelligence Aircraft Thrown Back to Source Selection

The Enhanced Medium Altitude Reconnaissance Surveillance System (EMARSS) is a progrm for the U.S. Army to purchase aircraft based intelligence collection, processing and targeting support capabilities. It is a program that was started after the failure of the Aerial Common Sensor (ACS) program a few years ago. ACS was an attempt to buy a suite of intelligence gathering and analysis equipment that would be used by both the Army and Navy.

The ACS contract had begun in 2000 with a goal of replacing the Army’s RC-12 and the Navy’s EP-3 aircraft. A contract was awarded to Lockheed Martin (LMT) to develop the system but it was canceled in 2006 due to concerns the aircraft platform chosen would not host the necessary equipment.

EMARSS was competed last year and bids were received from four different companies: Lockheed Martin, L-3 Communications (LLL), Boeing (BA) and Northrop Grumman (NOC). In November Boeing was announced the winner of the initial Engineering, Manufacturing and Development (EMD) contract worth about $90 million. A month later the losers filed protests of this award.

The Government Accountability Office (GAO) is responsible for evaluating the protests and they ruled last week that the contract with Boeing should be withdrawn on hold while the Army re-examines the award and the criteria used to choose the winner. Due to the protest Boeing’s had not been working on the contract as they waited for a decision.

The GAO ruling means that the Army will review the proposals submitted by all of the bidders. There are three outcomes of this. They may affirm the award to Boeing and that company may keep the contract. They could decide to award it to one of the other bidders because their proposal in the end was the better one, or they could decide to have another competition.

Since one of the goals of the program was the rapid acquisition and deployment of the new aircraft this decision may lead to further delays. The work has already been delayed almost four months due to the protest. The Army could take several more weeks to review their decision and make a new one. Finally the decision to have a whole new contest would add several months to the initiation of work and the ultimate fielding of the aircraft.

The Navy after the ACS program ended began the EPX development effort to replace their EP-3 abandoning the idea of working on a joint effort with the Army. That program has seen multiple companies awarded concept development efforts that will lead to a competition for the development and production of the new aircraft.

Photo from Freelancer1’s flickr photostream.

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JSF Continues to Make Progress While Troubles Swirl

The F-35 Joint Strike Fighter is a great many things. It is the largest defense acquisition program in U.S. history with total costs projected in the hundreds of billions. It is the future of military aviation for America and several of its Allies for the bulk of the next century. It is also moving slowly towards entering full production.

At a time when the power of modern combat aviation is being demonstrated over Libya through the use of some of the more advanced and newer systems in use by the U.S. and its European NATO allies in combat that is right now strictly using air assets the JSF continues its testing and development. Designed to replace the ubiquitous General Dynamics (GD) F-16 that forms the core of the United States Air Force as well as many NATO countries military it will also be used by Navy and Marine Corps off of aircraft carriers and as a new Vertical and Take Off/Landing (VTOL) aircraft. Because of this complexity the program headed up by Lockheed Martin (LMT) has suffered its share of delays and cost growth that have threatened its completion.

In its most recent report to Congress the Government Accountability Office (GAO) reports that software development especially is now seeing delays. Final completion of this key component is now expected to be at least three years late in 2015. Part of this is due to the slow build up of flight testing although the program has seen great strides in that effort in recent months. The concern of the GAO, Congress and the Pentagon is that delayed development and entry into production will require more money at a time when the defense budget and Federal spending as a whole is under pressure to be reduced due to the recent large deficits.

Even though the second Low Rate Initial Production (LRIP) aircraft has joined the test fleet it and the others had to be grounded due to a oil leak and generator failure. Work by the Joint Program Office (JPO) and contractors have led to seven of the fourteen existing aircraft being cleared to fly again but the two LRIP remain grounded as it is believed a newer generator design may have led to the problem. Again problems like this is why you do testing but it does add time to the schedule.

Northrop Grumman (NOC) who is one of the major sub-contractors on the program responsible for making large parts of the fuselage assembly continued their support by opening their integrated assembly line in California. This production facility utilizes technology developed for the auto industry and has automated tools for assembly and manufacture as well as moving sections around. It is hoped that the more efficient line will lower costs and increase production rates.

The JSF program is ambitious, costly and now necessary. The U.S. and its Allies need a modern aircraft to replace systems originally developed in the Seventies and built in the Eighties for a general war in Europe. The JSF is suffering development problems like so many other programs have in the past. These are multiplied due to the size of the program and the amount of money committed to it. If the JSF was to be canceled or scaled back another aircraft would have to be developed and produced eventually at a potential greater cost. The requirement will be there no matter what.

Photo from Sh4rp_i’s flickr photostream.

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Humana TRICARE Contract Faces Protest from UnitedHealth Group

Just when it looked like the last round of TRICARE management contracts had been resolved with the award to Humana (HUM) of the Southern Region contract after a lengthy protest process and review the loser, UnitedHealth Group (UNH), has protested that award.

This is one of several contracts awarded by the Department of Defense to manage what is basically the HMO for military members, their dependents and retirees. The value of the contracts are quite large due to the size of the population being served and this contract is worth $2.5 billion initially and has a total value of over $23 billion if all options are exercised.

In 2009 United won the contract away from incumbent Humana but that company protested and it was upheld. It has taken DOD over a year to resolve the issue ending up with requiring the bidders to submit new proposals. A few weeks ago it was announced that Humana’s bid was chosen over its rival. United is now protesting that award.

The protest is based on the fact that the losing company believes Humana “offered steep discounts in its latest bid that will pay doctors and hospitals below rates paid in the Medicare system.” This could drive providers out of TRICARE and limit care options for the users.

The protest will mean that the new contract will be delayed and the incumbent, Humana, will get basically a bridge to maintain their current services while it is resolved. Depending how it goes the Government Accountability Office (GAO) has the first attempt to review and rule on the protest although it may go further into court. Most protests are resolved within 100 days so there may be a further three months delay before the new contract starts.

If there really is cuts to the U.S. defense budget including attempts to reduce the cost of medical care as proposed by Secretary Gates then protests might become more common. Less big contracts mean their value to an individual company is heightened which leads to a greater need to win them. The potential for changes to the whole health insurance business with the implementation of health care reform also may lead companies to value contracts like this one for their stability and size.

This is now approaching the two year mark for these contracts to be resolved and it could drag out for several more months.

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Will EADS Protest?

Now that the U.S. Air Force and Defense Department have awarded the KC-X new aerial tanker contract to Boeing (BA) for their KC-46A aircraft the major question is whether the losing EADS NA (EADS:P) bid will protest? In 2008 when the Air Force selected Northrop Grumman (NOC) and EADS Boeing did protest and the choice was overturned leading to this current iteration of the contest. Considering this is the only fixed wing aviation program in the near future or at least until the Next Generation Bomber program emerges it may be hard for EADS not to protest on the chance that they might win or at least there would be another competition.

In their public statement the company is non-committal about the chances of filing a protest with the Government Accountability Office (GAO). They say “EADS North America officials today expressed disappointment and concern over the announcement by the U.S. Air Force that it had selected a high-risk, concept aircraft over the proven, more capable KC-45 for the nation’s next aerial refueling tanker.” but they also say ““Though we had hoped for a different outcome, it’s important to remember that this is one business opportunity among many for EADS in the United States,”. So read into that what you may.

At a minimum the filing of an unsuccessful protest would delay the initiation of the contract for about 100 days making the delivery of any new tankers to the Air Force even later then they will be after an almost ten year process to build a new one.

Loren Thompson Predicts EADS Win

The well known aerospace analyst writes that based on discussions he has had it looks good for EADS North America to win the current KC-X new aerial tanker competition. He believes that the information accidentally shared by the U.S. Air Force with EADS and its U.S. competitor, Boeing (BA), indicate that the analysis by the source selection board favors EADS A330 MTT based bid.

EADS did win the contest two years ago teamed with Northrop Grumman (NOC) only to have it overturned on protest by Boeing. The Government Accountability Office (GAO) ruled that the Air Force had not applied its own criteria properly in evaluating those bids.

This time around EADS bid by itself and proposed basically the same aircraft. Boeing bid a modified version of their 767 tanker incorporating parts of the new 787 cockpit and other improvements.

Last month the Air Force had to admit it sent information to the two bidders about the others after mixing up the CD’s with data.

In Thompson’s analysis the data showed the Air Force favoring the EADS aircraft. Of course Boeing will have a chance to protest if they really do lose this contract.

In another piece of this very complicated puzzle this latest development may have serious affects on the latest attempt to replace the KC-135 Cold War era tankers.

U.S. Aerospace, Inc. Statement on KC-X Tanker Bid

October 20, 2010 by · Comment
Filed under: Syndicated Industry News 

LOS ANGELES–(BUSINESS WIRE)–U.S. Aerospace, Inc. (OTCBB: USAE), a U.S. aerospace and defense contractor, is pleased to issue the following statement concerning its joint bid for the U.S. Air Force KC-X Tanker Program. After comprehensive discussions of the Government Accountability Office’s decision, including the advise of counsel that there are substantial legal grounds to proceed in court, the Company has determined that it will not continue to pursue its bid to supply the U.S. Air Force wi



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