Lockheed Wins Two Training Contracts

With Sequestration affecting the U.S. defense budget that still does not mean contracts for new programs are not being awarded. In fact with the extension of the Continuing Resolution and the passing of a full year’s funding — not budget — the Services may now award some work that was on hold pending a decision in that matter.

Lockheed Martin (LMT) in the last 30 days received contracts for 2 new training systems. One from the U.S. Army and the other from an international customer, the Royal Saudi Air Force. Foreign Military Sales (FMS) and Direct Commercial Sales (DCS) are not affected by sequestration.

The first, Saudi, contract is worth up to $253 million and is for systems to support the Kingdom’s Boeing (BA) F-15SA fighters. The contract will provide maintenance and pilot training support by 2020. In the current day services are investing millions in computer and simulation based training devices to aid in operating and maintaining complex weapon systems.

The second one for the U.S. Army is for a command and control simulator to aid in training U.S. and allied country leadership in the conduct of military operations. That could be worth up to $146 million. The Joint Land Component Constructive Training Capability (JLCCTC) system builds off of an earlier simulator, WARSIM, that has been successfully used since 2012 for group leader training.

The advantages of computer based training is that it reduces overall costs and personnel required. They also collect data that may be reviewed and analyzed to support teaching and further training. Lockheed’s Orlando unit does a great deal of work in this area as do several other contractors like Cubic and L-3 Communications.

C-130J Production Continues

Even though as part of the FY13 budget the Defense Department is proposing to restructure the existing C-130 fleet and cancelling the Aviation Modernization Program (AMP) production of the C-130J continues. With this the Air Force place a contract with Lockheed Martin (LMT) for 7 more of the capable transport for use by itself and the Marine Corps.

The $70 million option will procure 4 MC-130J tankers, 2 AC-130J gunships and a HC-130J for the Coast Guard. This is under the current production contract.

The next five year budget, though, due to the desire to cut several hundred billion in spending over the next five years is not so kind to the program. It sees a forty-one percent cut to the planned spending for production while also ending the AMP.

The AMP had been developed by Boeing (BA) but the plan was to have another contest to award the production and retrofit contract. Boeing under the development contract would have done some of the upgrades but the bulk would have been done by the winner of the new effort.

The budget also ends the C-27J Joint Cargo Aircraft (JCA) program which was buying twin engined transports from L-3 Communications (LLL) for use by the USAF Guard. This capability will be replaced by C-130 performing that mission. With the ending of fighting in Iraq and Afghanistan the planned use of the C-27J would have been much less then intended.

There is no guarantee that any of these budget proposals are final until Congress votes on the 2013 defense budget this year. They are the final say on what is cut and what is kept but generally they follow the Pentagon’s proposals.

Photo from kingair42′s flickr photostream.

Seeking Alpha: FLIR’s Future

This is an exclusive post I wrote for Seeking Alpha about FLIR and its near term future. It may be found here.

L-3 Expands Electro Optical Business with Acquisition of Kollmorgen

L-3 Communications (LLL) expanded its electro optical business by completing the acquisition of Kollmorgen from Danaher Corporation. The transaction closed for a price of about $210 million. Kollmorgan primarily makes optical systems for U.S. and other nation’s submarines.

L-3 already has a growing electro-optical sensor business and the addition of Kollmorgen will only add to that growth. In their most recent quarterly report the company reported earnings of $2.72 a share on net sales of $4 billion. This was an increase of earnings of twenty-eight cents over the previous year. Interestingly the Electronics Systems division of the company where Kollmorgen will fall had a decline in net sales of $110 million in 2011 primarily due to less demand for night vision products, power devices and the lack of revenue from technology licenses. The division did, though, sell $43 million more in Electro-Optical / Infra-Red (EO/IR) products.

Kollmorgen is estimated to add sales of $160 to $170 million and earnings of up to $30 million for L-3. This additional revenue will help offset any further drops in sales by the Electronics Systems part of the company.

The addition of the company to L-3 allows them to expand their overall market share of the EO/IR business. With the expected reductions in U.S. defense spending the more diverse product line and markets should help L-3 maintain its sales and earnings. For 2012 the company is predicting $14.4 to $14.6 billion in sales and earnings per share (EPS) of between $8.35 and $8.55. This compares to sales of $15.17 billion in 2011 and EPS of $8.77. Clearly L-3 is expecting some contraction in the defense business in the coming year. This estimate does not include Kollmorgen.

As will all of the defense industry L-3 will have to adjust to the changing market in 2012 and one way of doing this is through M&A. The addition of Kollmorgen not only adds revenue and earnings but also increases their exposure in the EO/IR market while reducing potential competitors. There should be more moves of this type by defense contractors as they make moves to cushion the changes in spending.

Photo from Daniel Garcia Neto’s flickr photostream

Joint Cargo Aircraft (JCA) Facing Uncertain Future

The C-27J Spartan is a twin engined light transport aircraft purchased for the U.S. Air Force from a team made up of L-3 Communications (LLL) and Alenia North America, part of the Italian defence and industrial group Finmeccanica. The C-27 is not only used by the U.S. but other countries across the world.

The C-27 was the result of a program originally called the Joint Cargo Aircraft (JCA) which was conceived by the Army as part of their plans caused by the decision to cancel the RH-66 Comanche helicopter in 2004. The Comanche was going to be a new attack and reconnaissance helicopter utilizing many new technologies to maximize its stealth and performance. In development for almost twenty years it finally had begun serious testing when it was cancelled. The money freed up was used to by systems like the UH-60M, the AH-64D Block III, CH-47F and UH-72A helicopters.

The Army suffered from a lack of internal heavy lift for intra-theater missions unlike the Marine Corps who possessed their own C-130 transports. The JCA was meant to add this capability and relieve the pressure on the rotary wing fleet primarily being used to carry cargo in Afghanistan and Iraq. Fixed wing assets would be more efficient and economical.

In 2007 the Army and Air Force selected the C-27 from L-3 and Alenia over bids by Raytheon (RTN), who had teamed with EADS North America, offering a Spanish made C-295 and Lockheed Martin (LMT) who proposed a C-130 version. An initial contract worth about $2 billion for 78 aircraft was awarded to the winners.

The JCA was made a joint program and it was originally planned to issue it to Army and Air Force National Guard units to operate. In 2010 the Obama administration decided to transfer the program wholly to the Air Force to manage and operate. The number of aircraft was potentially reduced and only the Air Force Guard would receive it.

The first unit stood up in 2011 in Ohio where four aircraft will be based at Mansfield. In 2013 the Connecticut and the North Dakota Guard are supposed to received the aircraft.

There are now concerns that the C-27 program may be on the chopping block due to budgetary pressures. The Connecticut unit may be the first to feel this pain although the 2012 budget as submitted does contain the funding for the aircraft it may not make it into the final budget.

The C-27 is not a priority for the Air Force and new equipment for the Guard also sometimes takes hits. If the Air Force leadership is forced to sacrifice some of their funding it may be the C-27 is what is given up. It is also a small program and is primarily oriented towards non-combat missions at this time further making it easier to give up.

As the budget goes through these machinations over the next few years other programs similar to the C-27 may be on the chopping block. That does not mean they will be eliminated but they could see cuts, delays and changes to their size, missions and deployment plans. These programs will have to rely on the Congressmen and Senators who represent the states where they are made or based to protect them through trading of priorities and support.

The size of the cuts the Defense Department must make dictate that whole programs whether in development of production will have to be cut. The C-27 might just be one of them.

Photo from Blyzz’s Flickr photostream.

Defense Industry Projects a Good 2011 but 2012 and Out Look Worse

Most of the large and mid-sized defense contractors reported their most recent quarterly results in the last few weeks. While for the quarter the results were mixed with some seeing decent increases in earnings and revenue while others saw a drop overall they all felt that they would meet or exceed their estimates for the full year. The 2011 defense budget still remained high due to the extra spending for Afghanistan and Iraq as well as investment in some major weapon systems. The 2012 budget is working its way through Congress and will see some reductions based on proposals by the Services as well as Congress’ directed cuts but overall will be about the same as 2011. Spending beyond that could be considerably reduced based on the new debt reduction “super committee” as well as the pressure to decrease overall Federal deficits.

As the focus of the defense budget changes from paying for the troops in Afghanistan and Iraq and the equipment and supplies they need to invest in new systems to replace older one or achieve new technologies some defense contractors will prosper over others. If the discussed defense cuts are followed through and amounts vary from $35 billion to $70 billion a year from a $700 billion budget then some major programs will be canceled, the size of the military will decrease greatly and parts of the defense industry in the U.S. will disappear. This will either be through M&A activity or just loss of contracts causing companies to fold up.

There have already been moves by the larger defense contractors to adjust to the potential changes in how the U.S. Defense Department spends its money. ITT Corporation (ITT) has decided to split yet again into three different companies basically separating their flat performing defense business from more successful water and chip manufacturing areas. L-3 Communications Holding (L3) while it had a good quarter announced that it too was spinning off part of itself to adjust to what it sees as the future in the U.S. It is setting up its Scientific, Engineering, Technical and Analytical (SETA) business as a new company. SETA contractors support government offices most often in acquisition and research and development. Many of these positions were converted to government positions and new Organizational Conflict of Interest (OCI) rules prevent companies that provide SETA services to also bid on large hardware programs. L-3 is adjusting by getting out of the business.

Perhaps the biggest adjustment was by Northrop Grumman (NOC) who moved to separate their entire shipbuilding segment earlier this year. Rather then sell it to one of their competitors they set up a new company entirely, Huntington Ingalls Industries (HII). This was in realization that future U.S. Navy shipbuilding plans were so limited it could not necessarily support the current number of shipyards in the U.S. HII has already moved to close its yard in Louisiana with significant effect on the local economy.

Other companies have moved out to use M&A to position themselves. Many of the larger companies such as Boeing (BA) and Lockheed Martin (LMT) have been buying intelligence and cyber security companies to expand their opportunities. General Dynamics (GD) earlier this week made a big move by spending almost $1 billion on a health IT company. With the focus on health care reform including improvements in record keeping and storage IT may become a big source of business for government contractors. The company, Vangent, which was privately held also just completed a large contract with the Census Bureau that should be offered again in a few years.

The U.S. military is pursuing some large programs over the next decade. These if they are canceled or cut back will have the largest effect on revenues and earnings. For Lockheed Martin it is the F-35 Joint Strike Fighter that is finally moving towards large scale production. A reduction in planned quantities will severely affect that company. For Boeing it is the KC-46A new aerial tanker as the Air Force plans to buy at least 179 initially at a cost of over $30 billion. General Dynamics has major ship and submarine construction programs and the Navy if it cuts these will limit GD’s future performance.

Right now the next several months should see major defense contractors maintain their revenues and earnings except in odd cases where contracts are restructured or ending. Once the 2012 budget is decided upon that will give an indication of how next year will be. Then 2013 and out should start to see some cuts in defense spending with similar effect on the companies. It can be expected that there will be a decrease in performance accelerating if severe cuts are made by the United States. The ability of the contractors to move to different business areas in response to these cuts will dictate how badly they are affected. All indications are right now that this sector will struggle in the next few years to maintain what they have let alone growing it even more. There may be more moves coming similar to those by Northrop, ITT and L-3.

Photo from Images_of_Money’s Flickr photostream.

Article first published as Defense Industry Projects a Good 2011 but 2012 and Out Look Worse on Technorati.

L-3 Restructures in the Face of Budget Realities and Policy Changes

As part of their earnings announcement of the second quarter L-3 Communications Holdings (L3) announced that it would separate most of its government service unit into a stand alone company called Engility. L-3 is a diverse provider of services and hardware to the U.S. Defense Department. Management stated concerns with new rules on Organizational Conflicts of Interest (OCI) led them to this decision.

Interestingly the company has decided to keep the intelligence and cyber support parts of this business with L-3 while letting the more traditional Scientific, Engineering, Technical and Analytical (SETA) support go with the new company. The first two are potential high growth areas as illustrated by the moves of the larger defense contractors such as Boeing (BA) and General Dynamics (GD) buying up of smaller companies in that field. The use of SETA contractors who often work directly supporting new system development and acquisition is under pressure first through insourcing and now just through cuts to the size of the work force as the Pentagon moves to reduce its overhead and budget.

Overall the company reported a drop in sales due to the loss of one major contract but overall a rise in profits of about 32 cents a share. Revenue compared to the similar quarter last year fell to $3.77 billion or about fiver percent. The company followed other defense contractors reporting this week by increasing their guidance for the year raising it 15 cents a share from last quarter’s prediction.

The future defense budget remains in flux but different companies are positioning themselves for what is expected to be declines in business, more strict regulations and policies and pressure on pricing. This has been reflected in moves like ITT Corporation (ITT) which is spinning off its entire defense business into a separate company, to be called ITT Exelis or Lockheed Martin’s (LMT) plans to eliminate thousands of jobs to cut overhead and prices. L-3 is holding onto its business lines with the most potential while putting its services unit in a place where they will either sink, swim or end up being part of another company.

Defense Department Awards Massive Translation Contract

The U.S. military and other government agencies are now involved in fighting and support actions across Africa, the Middle East and Asia. Large number of troops remain in Afghanistan and while forces are winding down in Iraq there are still several thousand engaged there. They are also interacting in places like Somalia and Yemen. Much of there work is day-to-day work with the people of these countries as they try to counter terrorism with public works and provide other services. All of this requires that they be able to communicate with them.

Since the actions began in Afghanistan and Iraq the U.S. has relied on interpreters provided mostly by contractors. Some of these have been local companies but also U.S. defense contractors have provided these services. To aid this work DoD just awarded a task order contract to six different companies. The total value of this contract if all options are exercised is almost $10 billion over five years.

Mission Essential, Northrop Grumman, Linc Government Services, L-3 Services, Global Linguist Solutions and CACI all qualified to compete for tasks under the omnibus contract. This means as work is needed by a service or agency they will generate a task order and the six companies may bid on them.

The way this contract is structured is that while it looks very large there is no obligation by the government to offer any task orders unless they need to. It also means that no company is guaranteed to win any although with the size of the requirement it is probable that all of the qualifiers get work.

L-3 to Operate Air Force C-17 Training System

The U.S. Air Force has developed various simulators to aid in the training for the operations and maintenance of its aircraft. The C-17 strategic transport which has been in service now for almost twenty years has two different ones in use. These are the Aircrew Training System (ATS) and the Maintenance Training System (MTS).

The use of these types of training aids greatly reduces the total cost of training aircrew and support staff. While it is not 100% realistic they allow skills to be learned and developed without relying on flying the aircraft which is not only expensive but frees them up to fly combat and support missions maximizing the use of the available aircraft. The training systems were developed separately and have been provided to ten sites in the U.S. and Australia.

Now the Air Force has awarded L-3 Link, part of L3 Communications (LLL), a contract to manage both parts of the training system under one contract. The base contract is for one year and has up to six option years. The total value if all options are awarded is almost $1 billion.

This contract illustrates that the training simulator market is quite large. Not only to develop and produce the simulators required by today’s modern military but also to operate and keep the simulators operating. Training programs now rely heavily on the simulators so having them available and operational also requires investment and effort.

Photo from Bytemark’s flickr photostream.

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.

L-3 Continues Enhancements of F-16 Mission Training Centers

The use of simulators in training has moved well beyond just having a pilot sit in a seat in front of a large display screen. Now there are larger, more sophisticated systems that allows multiple aircraft to participate together and cover all aspects of mission planning to flying the actual mission. The U.S. Air Force has had developed and built the F-16 Mission Training Center (F-16 MTC) which allows up to four crew to utilize it simultaneously and provides “a complete training program from individual Initial Qualification Training through multi-combatant Campaign Level Expeditionary Forces”.

In 2008 L-3′s (LLL) Link Simulation & Training (L-3 Link) was awarded a contract to continue development of the F-16 MTC which included options for buying up to twenty of systems to be installed at U.S. Air Force bases across the globe. This contract had a value of about $68 million.

The F-16 remains the Air Force’s most numerous tactical aircraft and is also heavily used by NATO and other Allied countries. It will ultimately be replaced by the F-35 Joint Strike Fighter as that system enters full production.

One thing that is required if the simulator is to remain comprehensive and useful is that it must be updated to match the current aircraft systems and software. As part of the base contract L-3 Link had options to conduct that kind of work.

In the last month the company received a contract option execution of about $12 million to install the M6 Operational Flight Program (OFP M6+) software. This is a further update to the F-16 to allow integration of other weapons, data links and systems.

The goal of these sophisticated simulators is to provide realistic training at lower cost and with less footprint as they don’t require the use of actual aircraft over a large area. This saves fuel, time on the aircraft and maximizes the location of where the training may take place. As computer hardware and software along with video technology improves simulators will become more sophisticated and complex allowing better and more sophisticated training.

Photo from matthewpiatt’s flickr photostream.

Looking for a Mission and a Buyer: The A400M in America

The European defense conglomerate EADS (EADS:P) has been working for several years to develop the A400M “Grizzly” transport aircraft. This advanced turboprop transport falls in between the two Western standard aerial transports Lockheed Martin’s (LMT) C-130J and Boeing’s (BA) C-17 in terms of size and capacity. EADS is also advertising its ability to fly from short, unimproved airfields when compared to the two U.S. Air Force basic aircraft. In this way the A400M is more like traditional Soviet transports where this capability was emphasized over other characteristics. EADS would like to sell the A400M to the U.S. military as well as other foriegn customers to help with the total cost of the program and perhaps even make a profit.

The problem they face is that the United States has invested over the last twenty years in a fleet of C-17 and C-130 to augment their heavy lift C-5 which is about to be upgraded. There is little requirement for a new transport even if it is offers advantages over the current aircraft. In fact the U.S. believes it has too many C-17 due to Congress’ adding buys over the Air Force’s acquisition objective for the last several years. It looks like the 2011 budget will not contain any more C-17 aircraft when it is finally completed. This means that EADS is looking for an uphill climb to sell the aircraft in the U.S. just from a requirement stand point.

The A400M has had a troubled development history ending up being two years late and much more expensive then planned. EADS has renegotiated the contract it had with its European customers to try and adjust for these issues. The problem they face is that to try and make the money up they will need to sell much more then originally planned. This means they must look for overseas customers in a crowded market. Only two countries had planned to place Foreign Military Sales (FMS) orders for the aircraft: Malaysia and South Africa. South Africa canceled theirs due to the cost increases. While the domestic customers state commitment to the program they also could readjust their quantities putting even more cost pressure on the aircraft program.

Unfortunately the delays in the A400M means it missed some potential orders that it might have been able to bid on if the original schedule had been met. The demands of fighting in Afghanistan have increased the need for tactical transports like the A400M but the C-130J has been able to win a great deal of contracts that the A400M might have. Lockheed has a hot production line in steady state that provides availability and cost stability. The A400M was several years in the future with some unknowns when it came to cost.

Another problem that EADS must face is the U.S. political opposition to buying non-domestic aircraft. While they are bidding on the KC-X against Boeing there is a lot of criticism of the Air Force for even allowing their bid. Partly this is due to concerns about “U.S. jobs” and just the normal chauvinism present in any large arms deal. Due to declining industrial base issues the U.S. has to consider an EADS bid if they want any competition on the KC-X. The transport market is a little more diverse and EADS could face competition from more then one U.S. manufacturer making it hard to make the KC-X argument for any new airlift mission.

Another cautionary tale for the A400M is the U.S Army’s planned Joint Cargo Aircraft (JCA) program. The Army originally wanted to purchase an aircraft smaller then a C-130 to provide lift in Iraq and Afghanistan between bases. As the name implies it became a shared program with the Air Force partly because they buy fixed wing aircraft and the Army has a very limited fleet of tactical transports and ISR assets. The program ended up purchasing the C-27 Spartan an Italian made aircraft through a contract with L-3 Communications (LLL). In the 2010 budget reforms the program was transferred to Air Force management and the plans to buy aircraft significantly scaled back. The JCA faced issues as it didn’t fit with the Air Force plans even if the Army wanted it. The A400M will face the same issues.

Once the A400M enters service it may prove to be a very capable, effective aircraft. Unfortunately to break into the U.S. market it may be too late as the defense budget declines and the C-5, C-17 and C-130 fleet soldiers on.

Photo from Ronnie Macdonald’s Flickr photostream.

Navy Moving Forward with New Landing Craft

In the 1980′s as part of the Reagan build up and modernization of the U.S. military the Navy developed and placed into service amphibious assault landing craft based on hovercraft. These Landing Craft Air Cushion (LCAC) have been in service now for almost thirty years and provide the ability to move vehicles and troops at high speed from Naval ships to the shoreline. The Soviets also had introduced hovercraft landing craft but the U.S. with their large amphibious Navy and the Marine Corps operated the most of these systems.

Now the Navy is moving to begin the process of replacing the LCAC. Textron Marine and Land Systems, part of Textron Inc (TXT), announced that they are forming a team including U.S. defense contractor L-3 Communications (LLL) as well as Alcoa Defense, part of Alcoa (AA). The system when it is finally developed and placed into production will be mainly made out of aluminum so the inclusion of Alcoa helps lay the foundation for that process.

The new SSC program is being managed by the NAVSEA command. A presentation about the program from a workshop may be found here.

Another team vying for the contract will be made up of Boeing (BA) and Marinette Marine Corporation (MMC). More information about their team and proposal is here at their website.

The SSC is one of two major programs that are being developed to aid the insertion of Marine and other forces onto a hostile shore. The Marine Corps has been working on the Expeditionary Fighting Vehicle (EFV) for several years. That program is being led by General Dynamics (GD). The program has suffered delays and cost increases and has been criticized but so far has been spared cancellation with the new Obama Administration when they canceled programs like the VH-71 Presidential Helicopter.

These two programs when complete will represent a significant modernization of the Navy and Marine Corps’ ability to project power ashore at high speed. The SSC will be able to move heavy equipment such as tanks ashore while the EFV will carry the infantry needed to conduct battles. The EFV is also designed to fight ashore and act as an armored carrier.

Both of these efforts represent significant work for GD and the winners of the SSC competition.

Photo from UNC-CFC-USFK flickr photostream.

M&A Activity to Pick Up?

A recent blog post at The Conglomerate: Business, Law, Economics and Society discussed a potential boom in the requirement for Merger & Acquisition (M&A) lawyers. This would be due to the current world economic condition which caused Gordon Smith to opine “Nevertheless, the stars seem to be aligning. Banks are strengthening their balance sheets and becoming profitable. The weak economy has exposed vulnerable companies, but it has helped many other companies to become leaner.”

This situation will help those corporations with good balance sheets and productivity to utilize their available cash to buy up weaker, more poorly performing competitors. They will do this to gain market share and improve their product line. Often in the defense industry contractors buy smaller ones to allow penetration into a market or area that they had not been in before.

In the Nineties there was a significant contraction in the U.S. defense industrial base through M&A. Partly this was due to Pentagon encouragement and partly as a way to adjust to the severe decline in the U.S. defense budget due to the “Peace Dividend” which resulted in the lack of big production programs. The budget just did not support several major companies providing such capability.

Defense M&A has been expected to grow in the near future. This will be because the U.S. defense spending is expected to fall as Iraq and Afghanistan wind down. The U.S. federal budget deficit will also put downward pressure on all spending including defense and this will cause opportunities to also become more limited. Great Britain’s new coalition government has already announced major reductions to planned defense spending and this may come true in the U.S. as well.

If there is a general move in the U.S. and across Europe for M&A to pick up it certainly will also happen in the defense industry as contractors move to buy up their weaker brethren or find new markets.

A good example is L-3 Communications (LLL) which earlier this year acquired Insight Technology. This company made electronics in support of night vision equipment. L-3 already had a business making electro-optical sensors and this provided some synergy. Now L-3 was just awarded a contract by the U.S. Army for night vision goggle test articles worth over $250 million.

If Mr. Smith’s prediction is right about M&A in general then the defense industry will see its fair share as the U.S. industrial base along with Europe’s sees further consolidation. Perhaps it is time to go to law school and get into the business.

U.S. Air Force Buys L-3 Communications Wescam Electro-optical (EO) Sensors

The U.S. Air Force awarded L-3 Communications (LLL) subsidiary, Wescam, a contract to purchase MXTM-15Di targeting systems. The contract is worth $200 million if all options are exercised.

The Air Force is using these advanced High Definition sensor and targeting systems in Afghanistan to support operations. They have already bought a substantial number of the Wescam MXTM-15D system and the Di is an upgrade to those. The systems provide EO as well as infra-red data that may be down linked to ground stations to provide Intelligence, Surveillance and Reconnaissance (ISR) data as well as targeting solutions.

The contract is structured as an Indefinite Delivery/Indefinite Quantity (ID/IQ) buy where the Air Force is able to order as many of the systems as they need, or none if they desire. There is no guarantee of any sales to L-3 but the use of the predecessor systems indicates the Air Force has found the system successful and capable. This means that some of the systems will be purchased for mounting on U.S. Air Force assets.

The use of EO/IR sensors has grown over the last forty years allowing data collection at night and in adverse weather. Combined with remote operated systems these advanced data collection sensors has increased ISR capability of the U.S. and other major nations exponentially.

Photo from Rob Shenk’s flickr photostream.

Lockheed Gains From L-3 Suspension as it Starts Supporting Air Force SOCOM

The U.S. Air Force recently suspended L-3 Communications Holdings (LLL) from work on various contracts because it faces criminal investigation over misusing government email and IT systems. Because of this suspension Lockheed Martin (LMT) was given the contract back to execute. The total value of the contract if all options are executed is about $5 billion.

L-3′s Special Support Programs Division is now banned at least temporarily from receiving new contracts or task orders. The group had a contract to manage the U.S. Air Force Special Operations Command’s IT network including email. The company used their access to the system to examine emails from government employees, their own workers as well as contractors to look at bidding on other contracts. They also attempted to discover if their employees were sharing information with other companies relative to competitions.

The news and suspension have had little effect on the company’s stock with it closing yesterday at 88.39, down a little over one-quarter-of-one-percent. If the case goes on to find criminal acts the company could see more suspensions, fines and limits on their ability to bid on new contracts as a whole rather then with just one unit.

Lockheed will transition to take over the contract over the next four months, slowly assuming the duties. Lockheed had won the work away from L-3 in 2009 but the two companies were waiting on a protest filed by the loser to be resolved. The decision to suspend the group means that Lockheed will get the contract which will last until late into the next decade. The wait to resolve the protest by the GAO may have delayed the start of this work by several more months.

More Fuzes For The Army From L-3

Since 9/11 the U.S. military has consumed a great deal of ammunition. This has been of all types — small arms, machine guns, 30 millimeter cannon rounds, Hellfire missiles, aerial bombs and even 155 millimeter artillery. Because of this demand the U.S. has actually invested in new and more production. In the last month the Army has awarded L-3 Communications (L3) two contracts to make ordnance and fuses. The most recent is one worth about $19 million to be carried out at the company’s Anderson Township plant.

Many of the companies involved in ammunition and high explosive production utilize the facilities of existing military arsenals as well as their own facilities.

Photo courtesy of the Soldiers Media Center.

U.S. Air Force Expands L-3 Communications IT Contract

L-3 Communications Holdings, Inc. (LLL) was awarded a contract by the U.S. Air Force to support the service’s Central Command IT and cyber operations. If all aspects of the contract are executed it could be worth up to $150 million over five years. This contract continues L-3′s support for the Air Force in these areas.

The Central Command (USAFCENT) is a component of the U.S. Central Command. This is the higher command that is responsible for Asia and Middle East and includes Afghanistan and Iraq in its area of operations. The USAFCENT provides control and management of Air Force assets assigned to CENTCOM.

L-3 will provide “cyber focused” support for network operations for USAFCENT and CENTCOM with this contract. This includes things like network and help desk support, information assurance and logistics support.

First Prophet Enhanced System Delivered By GD

The U.S. Army awarded General Dynamic’s C4 Systems a contract earlier this year to build Prophet Enhanced signal and tactical intelligence systems. This contract has a value of almost $900 million over six years if all options are executed. Two days ago the first of these new systems were delivered to the Army ready to be mounted on a vehicle.

The Prophet is a flexible system that can be installed either in a ground mount or on a variety of military vehicles. These first systems will be mounted in Mine Resistant Ambush Protected (MRAP) vehicles. The Prophet builds off of earlier systems and combines Electronic Warfare (EW) and Signals Intelligence (SIGINT) capabilities. L3 and Northrop Grumman aid GD in building the Prophet.

Joint Cargo Aircraft Loses Boeing

The U.S. Army and Air Force plan to purchase about seventy-eight Joint Cargo Aircraft (JCA). This is a light transport to supplement the C-130 primarily used for short haul missions in theater. The C-27J was selected to be the aircraft for the mission. This is a jet built by Finmeccanica in a joint venture with L-3 Communications. The team had been in discussions with Boeing to build an assembly plant for the originally European aircraft in the U.S. Now Bloomberg is reporting that Boeing is dropping out of the program due to the current world economic downturn. The plan is still to build a plant and assemble the aircraft in the U.S. but a new partner will have to be found or L-3 will have to spearhead the work. The JCA has had its issues mainly due to the Army and Air Force having different priorities for the aircraft but it had settled down with Low Rate Initial Production starting.

L-3 Wins Bradley Maintenance Contract

The U.S. Army awarded L-3 Communications Systems a follow-on contract to run the M2 Bradley transmission maintenance facility in Michigan. Mlive.com has the story. The contract is worth over $50 million and will last five years. L-3 also expects to receive further contract extensions on other work they are doing with military vehicles.

T-45 logistics contract awarded by the Navy

Vertex, a subsidiary of L-3 Company, was awarded a contract to provide logistics support to the Navy’s fleet of T-45 training aircraft. The contract, if all options are awarded, is worth over $500 M. The T-45 is used by both the Navy and Air Force to provide jet training for their flight personnel. Boeing teamed with L-3 to provide the parts management. The military has turned to Contractor Logistics Support (CLS) for a variety of systems – ground and air – in a bid to lower costs. One of the major areas is that the Department of Defense does not need to invest in a large pool of spare parts; relying on the contractor to do that.

See the press release at MarketWatch.com.

The UK buys refit on their C-130s

L3 was awarded a contract by the UK’s Ministry of Defence to perform replacement of the outer wings of three C-130 aircraft. The contract is worth over $18 M. The actual work will be done in Canada. Like many European companies expanding in the US market; it also behooves US ones to work there. Especially with so much originally American equipment being used by the UK, Germany and other NATO countries.

For the actual press release see MarketWatch at the Wall Street Journal Digital Network.

Research indicates that war in Iraq and Afghanistan good for the defense business

According to this article at Bloomberg.com the wars since 9/11 have been good to defense contractors. Two companies, L3 and Harris Corporation saw their stock price triple; or out perform the S&S six times. It can be expected that at least in the short term the wars and the defense budgets will continue to provide revenue for these companies. Unfortunately for them there will be that eventual time when there will be reductions in operations and in the budget as a whole as has happened so many times in the past in America.

DoD clears way ahead for $4.6 Billion translation contract

Dyncorp was cleared to go ahead and begin work on a $4.6 B contract it had won to provide translation services in Iraq to the US DoD. It had been protested by one of the losers. See the story here. L3 dropped the protest after it became part of the team that Dyncorp had set up to perform the services. That is one way around the protests process. Of course it helps that this is one large service contract with plenty of work to spread around. L3 was the incumbent who lost the contract.

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