Army Continues to Invest in M2 Bradley Fighting Vehicles

The U.S. Army has not developed a new heavy armored vehicle since the 1980′s. They have continued to rely on the M1 Abrams tank and M2 Bradley Fighting Vehicle family for that mission. They did start a new system, Future Combat System (FCS), that would have used speedy, wheeled vehicles to ultimately replace the two venerable tracked systems but that was cancelled due to cost and schedule issues. The current systems have had to “make do” throughout the fighting in Iraq and Afghanistan.

That does not mean they haven’t spent billions on upgrading and refurbishing the systems. The current versions have received significant changes in armor, mobility and electronics. These has kept them capable of carrying out modern missions.

The Army just announced yet another contract to upgrade M2 Bradley’s assigned to the U.S. National Guard. BAE Systems (BAE:LSE), which through a series of mergers and acquisitions, now owns the rights to the Bradley originally designed and manufactured by FMC. That British company received a contract worth over $300 million to provide “enhanced survivability and interoperability” for vehicles belonging to a variety of states.

The company will see more contracts like this as the fighting winds down in Afghanistan and the Army resets their fleet of Bradleys to a common standard.

There is a new Ground Combat Vehicle (GCV) in development that will ultimately supplement or replace the M2. The Army is waiting to received prototype vehicles from different bidders to begin testing. BAE is one of several companies participating in that contest.

BAE like all of the other large defense contractors is facing challenging times as the U.S. and its Western European allies move to reduce their defense spending. Recent earnings were down compared to last year with a 10 percent drop in sales. Keeping existing programs like the Bradley active will only help it in the near future. If the U.S. does go ahead with the GCV and slowly replace the M2 BAE could lose several hundred million in revenue a year.

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Thales and French Government to Share in Fine for Taiwanese Bribes

A French court ruled this week that the French defense contractor, Thales (HO:PA), along with the French government must pay a fine in relation to charges that bribes had been paid to the Taiwanese government to secure a large naval ship order. The deal was originally signed with Thomson-CSF and the government owned shipyard DCN. Thomson-CSF is now part of Thales.

The fine of 630 million euros, which is almost a billion dollars, will be split roughly 70/30 between the government and Thales. As part of the agreement with the court the government will not appeal the decision allowing Thales to get on with business without facing any more potential penalties or bad publicity. Thales says that the money has already been accounted for in preparation for paying the fine. The money will be returned to Taiwan.

Thales stock price has been little affected by the news.

This is the largest corruption case in French history and rivals the payouts that BAE Systems (BAE:LSE) has had to give to the U.K. and U.S. governments over its deals with Saudi Arabia. These totaled almost $500 million to the U.S. and $450 million in the U.K. The U.S. has especially been harsh on companies that used bribes and corrupt acts to win contracts overseas.

Historically bribes and payments have been a part of the international arms trade. Many countries required these kind of payments or the use of middle men to facilitate deals. This practice has been accepted by governments more interested in winning the contract for their own domestic companies like this deal then in ethical practices. These kind of actions cheat the customer because they may not get the best system or deal for their money as well as the other potential bidders as they do not get a fair selection process.

Thales also illustrates the situation where mergers and acquisitions lead to a company inheriting the problems of another. Even though potentially no Thales employees were involved the company is responsible due to acquiring Thomson-CSF. Hopefully more decisions and cases like this will help eradicate this problem from the defense trade.

Photo from Lordcolus’ Flickr photostream.

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Diversification is Key to Defense Contractors Maintaining Revenue as Raytheon Illustrates

The U.S. defense market has been dominated by five major companies since the late Nineties. Boeing (BA), Lockheed Martin (LMT), Raytheon (RTN), General Dynamics (GD), and Northrop Grumman (NOC) emerged from the large scale mergers and acquisitions as the “Peace Dividend” caused contraction in the defense budget and the U.S. industrial base at the same time. In 2009 these five companies had total revenue of almost $40 billion to the U.S. defense establishment.

One of the advantages that these companies have over other defense contractors is that they offered diversified products. These include non-military aerospace systems such as Boeing’s civil airliners or GD’s Gulfstream Aerospace as well as other government customers such as the Department of Homeland Security or Health and Human Services or in Northrop’s case the Commonwealth of Virginia.

This means that in times of decreased government spending on defense or other items they can use their commercial product lines to balance out those declines in revenue in earnings. They also can by spreading their defense products into R&D, hardware and services also achieve the same effect. Raytheon is a recent example of this.

Their recent earnings report was down partly due to the cancellation of an IT contract by the United Kingdom’s government. This required the company to take a charge against the cancellation. One would think that this might make the British government take a harsher look at further dealings with Raytheon due to their failure on that contract. Raytheon though does have an advantage in that they have an installed base of equipment and systems throughout the British military that need support.

This meant that a few days ago the company received a contract worth almost $140 million to support self defense gun systems mounted on Royal Navy ships. ) The Close–In Weapon System (CIWS) used by the U.S. Navy and many allies features a 20mm Gatling gun with on-mount radar and tracking systems that allows it to detect, track and engage missiles and aircraft. Raytheon will upgrade the system for improved capability and also to make it similar to the ones being used now by the U.S.

So at the same time that the U.K. government is cancelling a contract and trying to resolve the financial impact of that with the Massachusetts’ based company they are also buying further services and hardware from it. This disconnect is caused by the fact that Raytheon makes the CIWS and the government must deal with them on maintenance, repair and other work. Raytheon by having a broad base of products and services is able to keep customers and continue to generate revenue and earnings.

This means that defense contractors are able to ride out periods of decline in spending or issues with one or another contract and while there may not be that growth that some analysts like there will be steady revenue and in some cases dividends as their stock prices hold their value.

Photo from surfaceforce’s flickr photostream.

Article first published as Raytheon Illustrates Diversification is Key in Defense Contracting Maintaining Revenue on Technorati.

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U.S. Department of Defense Concerned About Industry Consilidation

At a speech yesterday the Undersecretary of Defense for Acquisition Ashton Carter discussed the potential for shrinkage in the U.S. industrial base due to declines or flat spending by the Government on defense. He made it rather clear that while mergers and acquisitions would not be discouraged the Obama Administration is concerned about consolidation among the biggest defense contractors.

After the decline in spending in the Nineties caused by the collapse of the Soviet Union and the “Peace Dividend” the U.S. defense contracting world ended up with five big companies. These were Boeing (BA), which absorbed McDonnell Douglas; Lockheed Martin (LMT), which merged Lockheed and Martin Marietta; Northrop Grumman (NOC); which combined Northrop and Grumman; Raytheon (RTN) and General Dynamics (GD).

These companies became the major developers of systems and suppliers of large aircraft, ship, space and missile programs. The U.S. defense budget is very diverse and allows many other companies to participate including those that primarily provide services and consumable items such as fuel, ammunition and food to the military. The fighting in Iraq and Afghanistan has also allowed innovative systems like Unmanned Aerial Vehicles (UAV) to become important and a company like General Atomics can do very well through there product line.

The Nineties also led to penetration of the U.S. market by the large European defense contractors like BAE Systems (BAE:LSE) and EADS (EADS:P) necessitated by the need for competition and their acquisition of U.S. companies that provided or maintained systems like the M2 Bradley Infantry Fighting Vehicle (IFV).

Carter made it clear that the desire to maintain competition for future contracts and projects will outweigh thoughts on future efficiencies caused by the lack of work for many different contractors. He was asked point blank about Northrop’s plans to either sell or spin off their ship building division due to concerns about the amount of work available for it in the future. Carter expressed concerns that if Northrop did separate this part it had to be a viable stand alone company able to support the U.S. military.

As the fighting in Iraq and Afghanistan winds down and the continued pressure to reduce overall government spending rises the defense budget will see reductions. This will most likely affect new, future programs as the budget for their development and production will take the biggest hit. The Defense Department is committed to the Joint Strike Fighter as the biggest item in future spending. That program alone may eat up most of the available investment funds in the near term.

The government may be faced with problems as it tries to maintain a competitive industrial base while reducing the amount of spending to a point where they might not be enough work to go around.

Photo from Kevin Burkett’s flickr photostream.

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Northrop Gains by Subtraction

Northrop Grumman (NOC) announced that they are considering selling their shipbuilding unit or even setting it up as a separate company. This news drove their stock to a recent high yesterday. The company has already separated a major part of their company with last year’s sale of TASC, its SETA branch and now seems willing to give up another part.

As part of the announcement the company also said that it would close one major and two minor yards in Louisiana and transfer all of their work to the Pascagoula yard in Mississippi.

The trend over the last twenty years had been consolidation of the defense industry in the United States. Companies used mergers and acquisitions to build their business and expand their product lines. Part of this was driven by the decline of the U.S. defense budget in the Nineties that led to less major programs and contracts which then supported fewer suppliers. Since 9/11 the large growth in defense spending has seen non-U.S. companies enter the market in large numbers to provide the necessary competition and capability. These companies like BAE Systems (BAE:L) and EADS (EADS:P) often established U.S. subsidiaries or acquired U.S. companies to allow market penetration.

It has been expected that the defense M&A market would start picking up due to the expected decline in the U.S. defense budgets. While there have been some deals this activity has not been at a high level yet.

This move by Northrop to divest its ship building may be a sign that such activity might be picking up. It is clear by the effect on the share price that the market feels this is a good move for the company.

Northrop faces a reduced market as the U.S. Navy finishes some products such as the LPD 17 amphibious assault ships and has limited near term future. The Navy will build the Littoral Combat Ship (LCS) but will choose between Lockheed Martin (LMT) and General Dynamics (GD) for that product. The new destroyer and cruiser were canceled with the focus being on the DDG-51 continuation. Northrop builds that ship along with General Dynamics.

Because the U.S. ship building market looks bleak it might be hard for another defense contractor to acquire Northrop’s group and it might end up as a separate company.

The U.S. defense industry looks like it is entering a phase of re-structuring similar to what happened twenty years ago and which is not unexpected. The questions will be the long term effects on the U.S. economy and industrial base.

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Northrop Grumman Elects Sheila C. Cheston Corporate Vice President and General Counsel; Stephen D. Yslas to Retire

Northrop Grumman Elects Sheila C. Cheston Corporate Vice President and General Counsel; Stephen D. Yslas to Retire
June 8, 2010

LOS ANGELES – Northrop Grumman Corporation (NYSE:NOC) announced today that its board of directors has elected Sheila C. Cheston, corporate vice president and general counsel effective August 30, 2010. Cheston succeeds Stephen D. Yslas who is retiring Dec. 31, 2010. In her new role, Cheston will be responsible for oversight of all of the company's legal matters. She will report to Wes Bush, the company's chief executive officer and president, and become a member of the company's Corporate Policy Council.

To facilitate an orderly transition process, Yslas will step down as general counsel on August 29, 2010 and continue as a corporate vice president with the company until his retirement date.

"We are delighted to welcome Sheila Cheston, a seasoned and highly respected general counsel and industry leader, to our senior management team," Bush said. "She brings broad-based legal and strategic expertise to her new position, including many years as a senior executive in the aerospace industry and in government. She will play a significant role in our drive to improve performance and deliver value for our shareholders, customers and employees."

"Steve Yslas has provided outstanding leadership in the corporation's Law Department over the past 34 years," said Bush. "We thank him for his many contributions to our company's growth and success from a $1.5 billion aircraft manufacturer in the 1970s to a $34 billion global security leader today. We wish him well in retirement, and appreciate his continued support through this leadership transition."

Cheston joins Northrop Grumman from BAE Systems, Inc., where she is a member of its board of directors and serves as the executive vice president, responsible for strategy and planning, finance, mergers and acquisitions, and all legal matters associated with BAE Systems Inc. Prior to joining BAE Systems, Cheston was a partner at the law firm of Wilmer, Cutler & Pickering, where she was chair of the firm's International Aviation, Defense and Aerospace Group.

Cheston has held key leadership positions in the U.S. Government, including general counsel of the United States Air Force and special associate counsel to the President of the United States.

Cheston earned a Bachelor of Arts degree from Dartmouth College and a Juris Doctor degree from Columbia University School of Law. She is a fellow of the American Bar and a member of the Council on Foreign Relations. Cheston also serves on the Board of Advisors, National Military Family Association, and the Board of Directors, Organization for International Investment.

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Two M&A Actions Announced Involving DynCorp and Kratos Defense

Two defense related Merger & Acquisitions (M&A) were announced yesterday. One of these announcements involving DynCorp International (DCO) was the first blockbuster deal of the year. In the second Kratos Defense & Security Solutions, Inc. (KTOS) said they would be acquiring the maker of tactical shelters.

Cerebus Capital Management, most famous for their ill-fated purchase of Chrysler from Daimler Benz, has agreed to acquire DynCorp International in a deal worth about $1 billion. The proposed purchase of each share for $17.55 must still be approved by the shareholders.

DynCorp is best known for providing training and intelligence support to the U.S State Department and military in Iraq and Afghanistan. They are in hot competition with Xe Services for a large contract to provide training to the Afghan National Police (ANP).

Kratos will acquire Gichner Holdings, Inc. for roughly $133 million. Gichner makes tents, tactical shelters and other storage solutions mainly for military systems. They are used by UAV systems like the Predator and Reaper as well a the PATRIOT air defense system. This deal still needs regulatory approval.

While there were a substantial number of deals in the last twelve months a report by PriceWaterhouseCooper found that they were at a ten year low in total value. These figures were even more skewed by two large deals — the sale of TASC by Northrop Grumman (NOC) valued at over $1.6 billion and Boeing’s (BA) acquisition of Vought’s 787 production line.

If there is a contraction in defense spending by the U.S. and other countries as some have been expecting that might lead to more deals. In the Nineties when the Reagan build up ended with the “Peace Dividend” there was severe contraction in the U.S. defense industry with several major mergers and acquisitions.

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Northrop Grumman Appoints James Myers Vice President of Mission Assurance at Electronic Systems

March 1, 2010 by · Comment
Filed under: Syndicated Industry News 
Northrop Grumman Appoints James Myers Vice President of Mission Assurance at Electronic Systems
March 1, 2010

LINTHICUM, Md. -- Northrop Grumman Corporation (NYSE:NOC) has appointed James M. Myers sector vice president of
mission assurance for the company's Electronic Systems sector, effective today.


In his new position, Myers will have executive responsibility for the program management functional organization and development and
implementation of all mission assurance programs and processes across the sector, including quality assurance, design assurance, risk and
opportunity management, independent reviews and assessments, and such process-improvement initiatives as Six Sigma and Lean Manufacturing.

Myers joined the company in 1997 at the former TRW Space & Electronics where he served as vice president of business development
and, subsequently, vice president of strategic development with responsibility for strategic planning, mergers and acquisitions, and
portfolio and intellectual asset management. In 2003, he was named vice president of satellite communications and later served as vice
president of payloads and sensors at Northrop Grumman's Aerospace Systems sector. For the past three years, Myers served as sector vice
president and general manager of Northrop Grumman's Woodland Hills, Calif.-based Navigation Systems Division.

Myers earned a bachelor's degree in mechanical engineering from Stanford University, a master's degree in aeronautical and
astronautical engineering from Stanford University, and a master's degree in business administration from the Anderson School of
Management at University of California, Los Angeles.

He is a member of the board of the MATHCOUNTS Foundation, a nationwide enrichment, club and competition program that promotes
middle school mathematics achievement though grassroots involvement.


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Cobham Wins U.S. Army Intercom Contract

Cobham and its U.S. partner Northrop Grumman were awarded a contract to provide vehicle intercom systems for the U.S. Army. This ten year contract could be worth over $10 billion if all options are exercised. The English company will provide its newer Vis-X system for use in a variety of armored and other vehicles. The two companies are already providing an earlier version of the system under a previous contract.

Over the last ten years the U.S. military has relied on European companies to provide all types of material. These companies often either have formed partnerships with major American contractors or invested in mergers and acquisitions of companies originally former there. This has allowed them to work within the constructs of U.S. technology transfer laws and provide the necessary competition required by U.S. contract requirements.

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