LCS Spin Off Contracts Begin to be Awarded

At the end of last year the U.S. Navy announced that it would go ahead and use two sources for the new Littoral Combat Ship (LCS). This was a reversion to the original plan for the small warship designed to fight inshore. Contracts were quickly awarded to Lockheed Martin (LMT) and Austal America (ASB:AUS) for ten ships each.

Now a variety of support and sub-contracts are beginning to be announced by suppliers for components to help assemble the new ships. While the two designs have very different hull forms the basic combat systems and weapons will be the same.

BAE Systems (BAE:LSE) has announced that they will fabricate 57-millimeter cannons for the Lockheed ships. These guns will be made at their plant in Minnesota. This is part of Lockheed’s almost $4 billion order for ships.

General Dynamics (GD) received a contract from Austal to build their ship’s combat and seaframe control systems. This is an open architecture system that supports the Navy’s plan to have different combat modules that are interchangeable on the ships.

One of the companies that may stand to gain the most from the contracts is Alcoa (AA). They not only provide engineering support to the Navy for the use of aluminum and other metals in ship construction including the LCS but also make the metal that Austal will use to assemble their LCS in Mobile, AL. If the Navy builds upwards of thirty or forty ships the amount of aluminum required will be quite substantial.

Lockheed also has awarded Rolls-Royce (RR:LSE) a contract for the power plants and propulsion systems. The Lockheed ships will be built at Marinette Marine’s yard in Wisconsin. Rolls-Royce makes the MT30 gas turbine which then uses water jets to propel the LCS.

As the two LCS programs continue more-and-more of these large sub-contracts will be announced as the money and work flows to different parts of the United States and many different companies. This continues to illustrate the economic effects of large defense procurement programs.

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Elbit Wins Brazilian Armored Vehicle Contract

The near term plans of many defense contractors is to expand their overseas sales as a potential way to offset declines in domestic business. They will do this with the support of their governments who want to maintain an industrial base, decrease their defense costs and keep their economy going. In the past countries would either turn to the United States or Soviet Russia for the bulk of their buys as these countries offered equipment and support on good terms as part of their foriegn policy.

Now though the world’s defense industry has expanded greatly and there are now many available sources of weapons and equipment. This is of benefit to customers as it offers greater competition which should keep prices down as well as a greater variety of choice in what they may buy.

Israel for example has greatly expanded their presence on the world’s defense market with sales to countries such as India, Turkey and in Africa. One company that has taken advantage of Israel’s push for this market is Elbit Systems (ESLT) which has expanded in the U.S., European and South American markets through the sale of electronics and Unmanned Aerial Vehicles (UAV).

In a recent win announced by the company Brazil ordered armored vehicle turrets from the company armed with thirty millimeter cannons. This follow on contract is worth about $260 million. These turrets will be installed on existing Iveco manufactured armored vehicles.

One of Elbit’s core businesses is electronics such as data links and displays. To further their penetration of Brazil and the South American market it acquired companies in Brazil that develop and make electronics. Elbit has also done the same in the United States allowing it greater access to the U.S. Defense Department.

As the world’s defense spending shifts to markets outside the U.S. and Europe Elbit may find itself well positioned to win more contracts like this. It also is in good shape to grow its business in Brazil who are planning a major update to their armed forces over the next several years.

Photo from Ingy The Wingy’s Flickr Photostream.

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