Oshkosh Learns Some Hard Truths About Defense Contracting

Oshkosh (OSK) is the Wisconsin based manufacturer of heavy equipment such as concrete truck, fire engines, ambulances and selected military vehicles. Over the last few years they have been able to aggressively expand their military line including winning two major manufacturing contracts for support vehicles for the U.S. military.

Due to the downturn in the world’s economy since 2007 the company’s earnings and profits have been affected by declining demand for construction equipment and the decision by many governments not to invest in new vehicles. Starting in 2009 the winning of two major contracts for the U.S. Defense Department began to offset the losses from the commercial side of the company.

The MRAP-AT design submitted by Oshkosh won the contest for a new more maneuverable Mine Resistant Ambush Protected (MRAP) vehicle for use in Afghanistan. This program earned the company over $4 billion in contracts and counting to build the base system and variants.

Oshkosh was also able to move production of the Family of Medium Tactical Vehicles (FMTV) from BAE Systems (BAE:LSE) plant in Sealy, TX. The FMTV trucks and trailers have been made for over a decade and are the standard transport vehicle for the U.S. Army and Marines. Thousands of new systems need to be purchased to replace those damaged or destroyed in Iraq and Afghanistan as the U.S. recapitalizes its equipment. The transfer of production was a serious blow to the town and BAE’s earnings in the U.S.

In 2009 the combination of these two contracts helped reduce the company’s losses. It was hoped that the improvement in the economy overall would help buoy commercial sales and soften the impact of any reduction in military business.

Most military hardware contracts have definitive quantities or length. The U.S. buys only a certain amount of items driven by requirements. Unlike commercial lines which can go on for decades if the product is good and continuously upgraded the total number of units purchased may be limited. Oshkosh is starting to face that with the MRAP-ATV. In the last quarter profit decreased over forty percent as that vehicle began its production decline.

The company still has thousands of FMTV systems to build but that program is very price conscious which is why Oshkosh was able to win it away from BAE. They were able to underbid the original manufacturer which is good for the Government but may not be that great for the company at least in the short term. Even though to meet the needs of the customer Oshkosh is ramping up hiring and expanding facilities. This too will put pressure on their earnings and profits.

Most large military contractors rely on supporting equipment once it is in service as well as winning the contracts to develop their replacements. With some types of systems like trucks it may be years before a follow-on program enters development. As the fighting in Iraq and Afghanistan ends the demand for MRAP systems will decline. The U.S. is already struggling to fit them into their tactical organizations as they were a reaction to a certain threat and mission in operations since 2001.

Overall Oshkosh has done well with their defense business but they must find ways to continue their success. If not eventually they could be facing the same situation as BAE and Sealy.

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Oshkosh Victim of its Own Success in Labor Relations?

Oshkosh (OSK) the Wisconsin based manufacturer of heavy vehicles including firetrucks, ambulances and trucks for the military has had a rough time of it with the worldwide global economic problems. Demand for their civil products has fallen considerably causing the company in 2009 to lose over a billion dollars. Since then two major military contracts have helped the company turn a profit so far this year.

Oskosh won a contract to provide new, lighter Mine Resistant Ambush Protected (MRAP) for use in Afghanistan. The MRAP proved critical in Iraq as well for defending troops as the moved around the country. The MRAP vehicles purchased by the U.S. military and its Allies tended to be very large and heavy and tended to stay on roads. In Afghanistan the rougher, less developed country side led to the demand for the MRAP-ATV designed to be more maneuverable. Oshkosh won a competitive contest held by the Defense Department and so far has booked over four billion dollars of work related to their M-ATV product line.

Oshkosh was also able to win the Army’s contract to build their standard truck and trailer from BAE Systems (BAE:LSE). The Family of Medium Tactical Vehicles (FMTV) has been in production for almost twenty years for the U.S. military. The Army awarded a contract in 2008 to Oshkosh to keep building the same design at their factories. The Army will be buying thousands of the vehicles to rebuild stocks and replace those lost in Iraq and Afghanistan and Oshkosh will profit from that.

The fact that the company has got back on its feet is not lost on its workforce. Yesterday they through their union, United Auto Workers Local 578, rejected the company’s offer to extend an existing contract another year. The dispute was not about pay and benefits but concerns among the workers as how the company treats issues with “seniority, layoff and recall rights, family and medical leave rights, and overtime”.

Unlike many employers during economic downturns who can demand concessions from their workforce to help keep up the number employed Oshkosh is facing the opposite situation. Due mainly to the two military orders the company is reopening plants and hiring workers many of whom are former employees. Once the economy does start to get back on its feet there may be even more demand from the company to hire.

Of course many defense contracts have a definitive end or as Oshkosh demonstrates may be moved to another supplier. Oshkosh’s workforce may be recognizing that in five or ten years they could be in the same situation as BAE’s workers in Sealy, TX. A contract that contains protections for seniority, layoffs and other work rules will certainly be more protective of their long term employment then one that gives them a decent rise in wages or benefits. A good paying job is only as good as long as you have it.

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Loss of FMTV Contract Hangs Over BAE Systems and Sealy, Texas

Over a year ago the U.S. Army awarded the latest contract to manufacture their standard truck and trailer combination, the Family of Medium Tactical Vehicles (FMTV), to Oshkosh Corporation (OSK). The Wisconsin based manufacturer of fire engines, construction vehicles and heavy transport vehicles for the U.S. military won a contract valued over $3 billion as the U.S. moves to replenish its truck fleet from the long years of fighting in Iraq and Afghanistan.

Previous to this contract award the FMTV line had been made in Sealy, Texas by BAE Systems (BAE:LSE), who had acquired the company making them in a deal in 2007. That company, Armor Holdings, was doing well with the current combat operations providing armor and other support to the U.S. forces but one of their key product lines was the FMTV production. The original FMTV contract was awarded to Stewart and Stevenson Services, Inc. in 1991. Over the years that company and factory produced thousands of the ubiquitous trucks.

BAE protested the award to Oshkosh when it was announced in 2009, and the Government Accountability Office (GAO) did uphold their protest in December directing the Army to review how the contract was awarded. It did not overturn the award to Oshkosh. While all this was going on the Texas and Wisconsin Congressional delegations were fighting in support of the contract and their state’s companies as the number of jobs related to this contract were in the thousands. With the loss of the contract Sealy would be devastated as Oshkosh intended to use their existing plants to handle the work.

In February the Army reaffirmed the award to Oshkosh and the process of winding down the production line in Texas began.

Now BAE Systems has announced that the first 1,300 jobs will be eliminated with almost all of them at the Sealy plant. The town of just over 5,000 people is about to see its primary employer and economic engine disappear. With the U.S. remaining in an economic downturn the chances of a major contract or work being started at the plant is minimal in the short term. Without the contract BAE does not have any funds to keep the work going and the workforce will have to be reduced.

Because of the loss of this contract as well as paying a fine over charges relating to accurate records regarding a contract with Tanzania the BAE suffered a loss for 2009. The charge related to the Armor Holdings contract was over $1 billion. Oshkosh on the other hand due to this win as well as getting the contract to build the new, lighter MRAP-AT for use in Afghanistan was able to offset the performance of its commercial lines in 2009 and while it saw a decline in earnings of over twenty-five percent without these two contracts it would have been much worse.

The U.S. Defense Department usually buys equipment in discrete amounts. This is especially true in times of peace. While building the required quantity of the system the services develop its replacements. Then these go into production. This means that a company with a contract knows at some time it will end. Plants built just for that production will find themselves without work and must be shuttered or converted to a new product. The situation with the FMTV was different in that the military chose a new supplier for an existing item, but it amounts to the same. BAE Systems without a new product to make at the Sealy plant will have to close it or find a buyer who has something to make there. The U.S. has many plants like this where the military moved to a new company or source.

That Oshkosh is employing thousands in Wisconsin many who are newly hired to build the FMTV is little comfort to those in Texas losing their jobs, but often the defense budget is boom-or-bust for companies, towns and states. The defense budget only goes so far and the military only needs so much of a given system.

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BRAC Work At Fort Sam Houston Leads To Contract for World Wide Technology

The recent round of BRAC moved most of the U.S. military’s medical training to Fort Sam Houston in San Antonio, Texas. This has required significant investment in contracts to help with the new construction, movement of organizations there and the other myriad work involved with the consolidation. Now the Department of Defense has awarded a $27 million contract to World Wide Technology to provide the necessary IT support.

World Wide will provide network services and storage as well as help desk support. They will also be responsible for supporting the A/V assets needed to conduct the training. The school when fully completed and implemented will have an average of 9,000 students at a time. The necessary teaching load will require substantial IT and A/V support from World Wide Technologies.

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BRAC Work Continues At Fort Sam Houston For Eaton

The last round of the Base Realignment and Closure (BRAC) act in the United States moved to consolidate development and training centers. One base that is gaining from this policy is Fort Sam Houston in San Antonio, TX. Because it was decided to move most of the military’s medical training to this location much work is being done to expand the facilities there. Eaton Corporation received a further contract addition worth $8 million.

The contract is for electrical services and parts to support the construction of the required facilities. One key component of this is a 425 bed hospital that Eaton Corp. has been working on.

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Army Awards DCGS Support Contract

Overwatch an operating unit of Textron Inc. (TXT) was awarded a contract by the U.S. Army to support the Distributed Common Ground System (DCGS)-Army system. DCGS is a product of Raytheon (RTN) that allows the distribution of a variety of intelligence material. The DCGS-Army as it sounds is the system in use by the Army at their ground facilities to support their operations.

Overwatch received a contract that will be worth over $48 million if all options are exercised to provide software development and training. The software is used to develop and support applications on the DCGS. Overwatch has been doing this kind of work for U.S. and other countries military since the early 1990. It was acquired by Textron in 2006.

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BRAC Contracts For Fort Sam Houston Keep Adding Up

As part of the last round of Base Realignment And Closure (BRAC) the U.S. Department of Defense decided to consolidate service wide training at various locations. One of these plans is to move all medical training to Fort Sam Houston in San Antonio, TX. Much of the Air Force and Army training was already located there so the move is primarily of the Navy centers. Part of the consolidation will require construction of new barracks and facilities.

It was announced yesterday that Lockheed Martin was awarded a $200 million contract to provide logistics support for the movement of the Air Force and Navy’s training centers. The contract calls for the company to do purchasing, warehousing and training on new and moved equipment. Lockheed Martin will also actively manage the movement and transfer of the schools.

The goal of this consolidation is to save money in the long run through economies of scale. This is being done for a variety of specialized training such as moving electronics and missile maintenance to FT Lee, Virginia. Many of the facilities losing the training commands are not closing but gaining other organizations and commands.

This round of BRAC began a whole sale shuffle of training and testing and development organizations that should allow some synergy across the three services.

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Army To Upgrade And Refurbish M2 Bradleys

In the 1980’s the U.S. Army upgraded their heavy units with the M1 Abrams tank and M2/M3 Bradley Infantry Fighting Vehicles (IFV). These vehicles have been upgraded over the last twenty-five years and saw service in Desert Storm as well as the invasion and stabilization operations in Iraq. There has been no new production of them for several years and since 2001 the Army has spent a great deal of money to keep the vehicles up and running.

BAE Systems was awarded a contract to repair and upgrade another 600 M2 vehicles. This contract is worth about $600 million over its full life. This is enough to equip about twelve battalions. Normally when the vehicles go through this process they are completely rebuilt and also receive any current upgrades available. At the end of the process basically a brand new vehicle is delivered back to the Army.

Work on this contract will be done in Texas and Pennsylvania. BAE Systems has been doing the bulk of this kind of work on the M2 for the last several years. The vehicles were originally made by FMC a company that has long since been merged and bought out of existence.

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Earmark Proposed For Elbit To Upgrade CH-53D Aircraft

ch-53The U.S. Marines like the Army have been heavily stressing their helicopter fleet in Iraq and Afghanistan. That service has begun to upgrade their lift capability with the procurement of CH-53K and V-22 aircraft. At the same time they have refurbished their older CH-53D aircraft to maximize their use.

Elbit makes a display that has been fitted into many Army and Marine helicopters already called the ANVIS-HUD. The Marine Corps did not have the money available in their budget to add this to the CH-53D as part of their refurbishment. Now the local Congressional Representative, Kay Granger (R-TX), has proposed a $22 million earmark to do this.

This illustrates one of the issues with earmarks. Sometimes they can be used for good things that the services may not have available funds for. Not all earmarks are for blatant waste or fraud like those that make the headlines. There are also cases where the company or the Service have lobbied Congress to include these kind of marks.

Ideally the budget would be planned by the Services, OSD and the President and Congress would do little to change it. That is not possible as the Constitution gives the House the authority to start all funding bills. What is in the bill is what is given to the Executive Branch at the end. Earmarks are a part of this process. As this example shows though not all earmarks are bad and they can buy useful capability for the military that might not be able to fit in the regular budget.

CH-53 photo by Flickr user Obskurantist.

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BRAC Moves Air Force Unit to Aberdeen Proving Ground

The U.S. Air Force under the last round of BRAC is moving its chemical, nuclear and biological defense development unit to the Aberdeen Proving Ground (APG) in Maryland. Battelle was given a $32 million contract to aid in moving the 649th Aeronautical Systems Squadron from Texas. This round focused on concentrating the various parts of the services that carry on like roles. The Army has used APG for most of their chemical and biological research and the Air Force unit will move there to gain benefits from co-location. The Air Force bases in Texas though are gaining Army and Navy units related to medical research and training so that state will not suffer with this move.

Unlike a lot of contracts related to BRAC this is not for construction of facilities. Battelle will provide analysis and support so that not only with the Squadron be able to continue their programs and research without interruption; but also so that the unit can receive improved equipment and processes as part of the move. This is also a benefit of the BRAC process. By moving an organization or unit it is possible to upgrade and modernize their capability through improving facilities. The combining of like abilities from various services and organizations will also aid in sharing and exchanging experience and knowledge.

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Killeen Texas tries to understand the effect of defense contracting

January 13, 2008 by · Comment
Filed under: logistics, Texas, U.S. Army 

Killeen, TX is the largest city near Fort Hood in Texas. Two local defense contractors attempted to gain a handle on how much work was being done at the Fort and its effect on the local economy. See the story here. It proved to be hard to learn who and what were getting contracts that supported the base and the units there.

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