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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More Ammunition for the U.S. Armed Forces

As the U.S. military has remained engaged in Iraq and Afghanistan over the last decade one area where they have spent a lot of funding is on ammunition. The U.S. Army, Marine Corps and other services have utilized large amounts of small arm ammunition as well as fire support weapons such as Apache attack helicopters, mortars, artillery and aircraft weapons. These have ranged from the very mundane to the very sophisticated but the U.S. has utilized a large amount of rounds in the 5.56mm to 30mm variety.

Different companies have benefited from this market. One of the biggest has been ATK (ATK) which has had contracts since 2001 to operate U.S. ammo plants as well as provided larger ammunition and pyrotechnics. Other companies as well have been able to win contracts due to the large demand for this product.

Recent Federal Cartridge Co. was just awarded a contract for training ammunition. As the fighting has continued the U.S. has also increased training making it more realistic and demanding which has required more consumption of ammunition for this purpose. Federal will make a special training round in 5.56mm which is the primary small arms round for the U.S. military. This is made out of polymers and is designed to fragment upon impact minimizing penetration and ricochet. The use of plastic rather then lead means it is better for the environment. The value of this contract is about $46 million.

In another announced contract Olin Corp. (OLN) announced that their Winchester division had received a contract for small arms ammunition. This includes 5.56mm, 7.62mm and .50 caliber rounds primarily used by soldiers and in vehicle mounted support weapons. The value of that contract if all options are exercised is about $300 million. The contract will begin in 2012.

One of the downsides for defense contractors is that as the U.S. withdraws from Iraq and Afghanistan the requirement for large amounts of ammo like this will be reduced. If the military is not involved in active operations they will not require large replacement stocks of consumable items like this. They will rely on what they have on hand to support training and any small operations. The large capacity built up over the last ten years of activity will not be needed.

For companies that have provided this product they will see a reduced market and a fall in orders unless they can find new products or customers to make up for the loss. The U.S. contraction in the defense industry will not just be the end of large acquisition programs but also cuts in soldiers, their support and basic items like 5.56mm training bullets and other ammunition.

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DOD Awards Contract for Training Ammunition

December 26, 2007 by · Comment
Filed under: Olin Corp, U.S. Air Force, U.S. Navy 

As this contract award reported Monday on Defenselink.mil shows, even training in DOD costs a great deal.

“Olin Corp., Winchester Ammunition, East Alton, Ill. is being awarded a maximum $29,000,000 firm-fixed price, indefinite-delivery/indefinite-quantity contract for 5.56 mm ammunition used by the Navy and Air Force as training rounds. Work will be performed in East Alton, Ill. and work is expected to be completed by Dec. 2012. Contract funds will not expire at the end of the current fiscal year. This contract was conducted on a competitive basis with the solicitation being publicized on the World-Wide Web with three offers received. Naval Surface Warfare Center, Crane Division, Crane, Ind., is the contracting activity (N00164-08-D-JN10).”

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