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House Begins Markup of 2014 Budget with Add of Submarine

The House and Senate are in the process of considering the President’s 2014 budget request. As often different committees will review it and make changes sometimes based on their own priorities which means adding things or removing items from the original request. The budget has to go through two committees in each the House and Senate. Then it is voted on and a Conference Committee held. This means that often the final budget is not necessarily similar to what was submitted in February.

Not only do different companies lobby Congress for inclusion of their products and projects but sometimes the Services will indirectly. There exist lists of “unfunded priorities” and needs that Congress may address even though they are not part of the budget request.

The House Armed Services Committee as part of its review has reportedly increased the Navy’s buy of U.S.S. Virginia class attack submarines by 1 more then requested. The Navy had originally planned to buy two a year but in order to meet budget cut goals and reduce spending only 1 was asked for in 2014. The HASC has bumped that back up to 2.

Congress also wants the Navy to consider signing a multi-year contract for 10 submarines. Multi-year contracts are normally for five years and done for systems, especially aircraft, in steady state production. This allows efficiencies and better pricing due to stable quantities and funding. Virginia submarines are currently built by two companies – Huntington Ingalls Industries (HII) in Virgina and General Dynamics (GD) Electric Boat in Connecticut and Rhode Island.

One of the problems that the Pentagon will face as it tries to cut money required to meet budget goals is that Congress is loathe to reduce programs. There are 435 House members and 100 Senators who see defense spending as a way to bring money and jobs into their districts. The idea of keeping one more submarine in the current budget will do so. It will also require the Navy to cut less money or take it from other budget priorities.

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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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Good and Bad News for Huntington Ingalls Industries (HII)

An F-35B Lightning II makes the first vertical landing on a flight deck at sea aboard the amphibious assault ship USS Wasp (LHD 1).

Late last year after Northrop Grumman (NOC) separated their ship building components from the main corporation. Rather then selling these to another defense contractor they decided to set up a new company with its own stock. This was Huntington Ingalls Shipyard(HII). HII owns yards in Louisiana, Mississippi, and the Hampton Roads area of Virginia. It builds carriers, destroyers, and amphibious warships.

Northrop Grumman along with General Dynamics (GD) were the two major naval ship builders in the United States. They were concerned that the long term ship construction plans for the Navy were so limited in the future due to budgetary pressures and requirements that they decided it was better to get out of the business. The U.S. Navy currently really doesn’t have enough funds to build the number of ships in their plans. They also restructured their plans by limiting the new destroyer, DDG-1000, to only three and continuing production of the previous Arliegh Burke class.

HII has continued to received contracts from the Navy and deliver ships although it is planning a restructuring of its capabilities and workforce most importantly by closing their yard at Avondale, LA. In its last quarter the company reported a loss of $248 million but adjusting for a charge it actually had a profit of over $1 a share. This was better then analysts expectations and the stock went up quite a bit last week. The company increased its backlog and is predicting by 2013 that the financial should show much improvement as it works off contracts from the Northrop era.

At the same time though word came the Navy penalized the company several million dollars on a recent destroyer contract due to failures in its accounting and management system. The Department of Defense utilizes Earned Value Management System (EVMS) to help understand the cost and schedule of contracts. In this case the audit found deficiencies in 19 of 32 guidelines. The DoD qualifies company’s EVMS and if it fails then they can withhold funds or limit future contract awards until the system passes.

HII is in a situation where things like this are not helpful in the long run. It is not uncommon for EVMS to fail at times and the DoD and Lockheed Martin (LMT) had a long running argument over that company’s system a few years ago. Eventually they get resolved and work continues. It can just effect earnings and revenue in the short run.

The U.S. shipbuilding industry is in for a rough time in the next decade or so as the U.S. works out its budget issues. If the mandatory cuts do come into force there would be significant reduction in new ships which would affect GD and HII very negatively. While ships take several years to complete they need a steady stream of orders to maintain their entire workforce and to use them effectively. If there is a time when no new ship is on the horizon then there will be layoffs and contractions.

HII latest results were a positive but it may be hard in the future to continue to maintain the level of orders and revenue.

Photo from Official U.S. Navy Imagery’s Flickr photostream.

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U.S. Army Explosives Production Contract Protested by Alliant Techsystems

Since the Nineties and the downsizing of the U.S. defense establishment due to the end of the Cold War the Department of Defense has leased its ammo production facilities to a variety of defense companies. Then they have awarded contracts for the delivery of small arms, artillery and other ammunition. With the fighting since 9/11 in Iraq and Afghanistan there has been substantial investment in these types of products as the U.S. military has consumed large amounts of small arm ammo and those for supporting weapons such as the 30mm cannon on the AH-64 Apache attack helicopter.

Alliant Techsystems (ATK) has been one of the major suppliers of ammunition and pyrotechnics for the U.S. military over the last decade. The company is a leading manufacturer of small arms rounds as well as larger artillery rounds, missiles and rocket engines. They have been able to operate two of the major production plants owned by the Government for several years. These are the ones in Radford, VA and Independence, MO.

Now the Army has awarded the contract to run the Radford plant to BAE Systems (BAE:LSE). It is estimated the contract will have a value of over $800 million during its ten year duration. Alliant has filed a protest with the Government over the award. Normally the Government Accountability Office (GAO) will resolve the protest within 100 days. The contract does not start until September so Alliant will continue running the plant until then pending the review of the protest.

If the GAO finds that there were irregularities in the award to BAE they may order a new competition, ask the Army to review how their source selection was conducted or even give the contract to Alliant. Most protests are denied and Alliant will have to hope that the Army did not carry out their source selection properly in order to get a ruling in their favor.

As the U.S. defense budget begins to decline and troops return from Iraq and Afghanistan demands for certain products like ammo and explosives will also be reduced. This means that locking in contracts now at the beginning of this process is very important. Alliant relies on this work for a large portion of their revenue and earnings. Losing the contracts will have an impact on their long term prospects and force them to try to expand their other product lines or look for new markets.

Photo from Yarden Sach’s flickr photostream.

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Gates Announces Cuts and Reinvestments

The Secretary of Defense Robert Gates in what some are considering an attempt to get ahead of Congress announced that the Pentagon will be voluntarily reducing spending. Some of the money is part of the efficiencies he ordered last year while some of it is new reductions to programs and other parts of the military budget.

The goal is not to only cut the total defense budget as part of an attempt to reduce the deficit but also to free up money for higher priorities.

Much of what Gates’ is claiming as savings are those items related to the reductions from last year. Cuts to the contractor workforce and elimination of some DoD offices and personnel are one part as well as the closing of the Joint Forces Command in southern Virginia.

Other new reductions were the elimination of the Marine’s new amphibious transport the Expeditionary Fighting Vehicle (EFV). This General Dynamics (GD) led program was to replace the LVTP-7 currently used to move Marines from ship-to-shore as well as support operations on land. The EFV would have been faster and more capable as well as having a higher protection level. The program suffered from cost and schedule growth making it an easy target.

The Army also saw the end of the SLAMRAAM air defense program which put a Raytheon (RTN) AMRAAM missile on a HUMVEE teamed with fire control and battle management systems. Lockheed Martin’s (LMT) Non Line of Site- Launch Systems was also canceled. This was a rather unique system of remote missile launchers used to provide fire support for ground troops.

One aspect of his announcement that is sure to cause concern is an increase in TRICARE co-pays for some military members and retirees. The idea is to begin trying to reduce total healthcare spending by the Defense Department. TRICARE is the HMO type program that covers most active duty members, their dependents and retirees. The co-pays have seen little increase since start of the program. At a time though when the Veterans Administration and Defense Department have been criticized for not adequately treating the current Iraq and Afghanistan military the increase may prove politically risky.

Another move to save money that also might raise hackles is a decision to begin reducing the size of the Active duty Army and Marine Corps. This comes after several years of growth due to the large commitment to Iraq and Afghanistan. Personnel costs make up a large portion of the budget and this is the most direct way to reduce them. Of course having less troops means that if there is a need for a major operation over the next several years there will be greater pressure on the smaller force as well as Reserves and National Guard. The reason they were growing the current force was to minimize deployments.

Gates is hoping that his ideas will be considered by the new Congress who are looking to reduce spending. That doesn’t mean all of his proposals will be accepted as Congress has the power to restructure defense spending to reflect their views. They might want to keep some of the programs that Gates doesn’t and cancel other ones.

This move is the start of the FY12 and out budget development and many changes and ideas will be presented over the next several months as the process goes on.

Photo from RDECOM’s flickr photostream.

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NASA Hires Hewlett Packard for IT Support

The U.S. Government has tried different ways to provide necessary IT support to its employees. One of its major goals has been the ability to keep up with technology with refreshing desk and lap top computers while also providing the necessary mobile technology. Attempts have been made to do it completely in-house. Other times the purchase of hardware and software has been separated from the actual management and support. A third way is to pay contractors over several years to manage everything with the idea that they will update technology routinely.

All of these different ways have their pros and cons as well as cost implications. Sometimes it means that too much of the wrong hardware and software is bought or not updated quickly enough. Some Federal agencies are looking at web based applications such as Google (GOOG) Apps or other equivalent packages with the idea it might save money. The National Aeronautics and Space Administration (NASA) has decided to hire Hewlett Packard (HP) to manage its IT needs for up to ten years.

The contract awarded to HP’s Enterprise Services unit could be worth up to $2.5 billion if all options are exercised. Enterprise Services is what EDS became after HP acquired them in 2008. EDS has a history of providing this type of support contract to various government agencies over the last few decades.

The contract has a four year base and two three year options. One of the goals of this contract and a justification for its length is that it will allow HP to provide multiple updates to the NASA computing base. The longer contract will also allow HP to control costs by allowing better coordination and purchasing of new equipment to replace existing stocks.

While these types of contracts are not uncommon they do face the problem of schedule delays in implementing updates and controlling costs. Virginia issued a vast contract to Northrop Grumman (NOC) to take over management and integration of all of their state government systems that has seen cost growth and schedule issues as well as attempts at re-negotiations.

That contract was much more complicated then HP’s with NASA as the state was trying to unify its IT systems as well as update equipment. The more standard type such as this is much less complicated but it does illustrate the size of that market if Federal agencies want to use this approach.

Photo from njt1982′s flickr photostream.

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Potential Sale of Northrop’s Ship Yards Signal First Major Shakeup of U.S. Defense Contractors

On Friday Northrop Grumman (NOC) one of the biggest U.S. defense contractors filed paperwork with the Securities Exchange Commission (SEC) that lays the ground for selling their shipbuilding assets. As early as June the company had said that they were considering this move.

As we wrote several weeks ago the U.S. Navy is looking at a severe reduction in planned ships and ship construction:

“With the pressures on the defense budget caused by the fighting in Iraq and Afghanistan for the last nine years as well as the high cost of new ships the number of orders each year has been reduced. On top of that the Obama Administration canceled or restructured planned programs by ending the DDG-1000 and substituting current DDG-51 class ships as well as ending a plan to have two designs produced for the new Littoral Combat Ship (LCS) and have a competition.”

So far at least one company, Cleveland Ship, has said that they intend to purchase Northrop’s yards. There are also reports that several private equity companies are exploring the purchase. Many smaller defense contractors or parts of larger ones have recently been purchased by equity companies including the sale of Northrop’s SETA arm, TASC, to one in 2009.

There have been rumors that the then smaller Northrop would consider a merger with Boeing (BA) to maximize the similar product lines and capabilities.

In the Nineties as the defense budget declined due to the “Peace Dividend” there was major contractions in the number of defense contractors mainly through M&A activity. The expected decline in the next decade will have the same effect as the number of programs and contracts decline.

Northrop’s ship yards in Louisiana and Virginia make aircraft carriers, destroyers and amphibious war ships. The Newport News facility is the only place that aircraft carriers are made as well as doing major refit work on them. Its operation is critical to the support of the U.S. Navy which is built around these ships.

The yards are also major employers for these states and their closing or reduction would be severe blows to the local economy. Keeping them open and working is critical to not only the industrial base but also the economy during a recession.

Unfortunately the Department of Defense is looking at improving efficiencies in their defense contracting. Keeping sites open just to have jobs is inefficient and costly. This may mean money for other programs may have to be used to maintain this industrial base capability. The balancing act will only get harder as defense budgets decline.

The U.S. may be entering a time when it cannot afford or build enough ships to support its current industry and while ship construction is first it may spread to other sectors of the defense economy such as aerospace and vehicle development and production.

Any loss of industrial base this time around will be expensive and time consuming to recover when the U.S. is facing economic and budgetary difficulties.

Photo from cybaea’s flickr photostream.

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Virginia Begins to Fight for Joint Forces Command

In a recent series of cost saving proposals the Secretary of Defense Robert Gates recommended closing the Joint Forces Command (JFCOM) located in Norfolk, VA. In Gates’ eyes the JFCOM which develops doctrine and training for the U.S. military across services performed duplicative work and employed too many people, especially contractors.

The closing when it does happen will be a severe blow to Virginia’s economy. The JFCOM employs over 5,000 people with high paying jobs that spend money and buy houses in the local area. Now the Congressional delegation from the Commonwealth has begun to fight back.

In both the Senate and House legislators are planning on introducing legislation that will require the DoD to provide detailed reports and analysis as to how they came to the decision. In the House Representative Glenn Nye will introduce the bill and Senator Jim Webb in the Senate.

Even though the legislation will be looked at by Congress it is no guarantee to stop the closing in the near term. It has first to make it through both Houses and then be signed by the President. It also may be attached to another bill such as the defense appropriations or authorization bills which would make it easier to get passed.

Congress could also not fund the closure which would keep the command open. Either way there would be a fight with the Executive Branch over this decision and really the move could only be postponed so long as the Administration kept trying to include it in their plans. Congress can fight a delaying action but without some major change in policy the JFCOM would end up closing.

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Another Contract To Support BRAC Activity Awarded, This Time To STG, Inc.

The last round of Base Realignment and Closure (BRAC) moves required many different organizations and commands to consolidate. The Pentagon plans to move similar schools and test centers to joint locations as well as close some smaller bases and realign facilities. One such move is the plan to close Fort Monroe near Norfolk, VA and move commands and schools to nearby Fort Eustis. One such Army unit being affected is the Training and Doctrine Command (TRADOC) headquarters.

STG, Inc. (STG) was awarded a contract worth about $19 million to provide engineering services for this move. STG will be responsible for making sure that the TRADOC HQ’s IT and computer assets are moved, established and working when the move to the new base is complete. The contract will require that STG also ensure the existing systems are working so TRADOC can continue their mission while the move is going on.

STG has performed similar work for other government agencies and this give’s the Army confidence that they will complete this task on time and budget.

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Reflecting Change In Focus SAIC Moving Headquarters To Northern Virginia

One of the top ten defense contractors, SAIC, is moving its corporate headquarters from San Diego, CA to outside Washington, DC to Fairfax, VA. The company obviously has a large presence outside Washington, DC where many of its contracts are executed. The move to Fairfax, VA is not completely unexpected and the company is using the excuse of the better business climate in that state to support the move.

The company will still stay in California as it has many customers there not least the Navy’s SPAWAR in San Diego. The cost to California will be several hundred of the company’s highest paid employees who will now be moving to Virginia and spending their earnings and paying taxes there. The cost of living even in Northern Virginia will be much less for their employees just in housing and income taxes alone.

The move also comes at a time when the Washington, DC area is going to experience solid growth in the Federal Government work force due to some of the initiatives of the Obama Administration. Having their leadership in the DC area will facilitate business development and cultivating relationships with politicians and bureaucrats alike.

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Centreville, VA., June 1, 2009 – Adaptive Methods was awarded a three-year contract and was funded an initial $4.5 million. Adaptive Methods will provide services to the Surface Ship Undersea Warfare (USW) Combat Systems Program Office (IWS5B).

The Company’s goals for the contract are to foster innovative technical solutions to the myriad of USW challenges, to enable the insertion of promising technologies into both new and existing Surface Ship Undersea Warfare combat systems, and to mitigate COTS hardware end-of-life issues by using portable software implementation of improved processing algorithms. The range of work will include system engineering, architecture design, software engineering, algorithm and prototype development, and installation, integration, and test activities.

Work will be performed by personnel from all Adaptive Methods offices including the new Rhode Island office.

Adaptive Methods, headquartered in Virginia with offices in Maryland, Florida, Tennessee, and Rhode Island, is a developer of advanced sensor processing and computing architecture products for surveillance, security, and military combat systems.

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Telos Accepted Into (ISC)2 CPE Submission Program — Press Release

Telos Accepted Into (ISC)2 CPE Submission Program

Members Can Immediately Begin Earning CPEs for Security Solutions 2009 and Other Training Events

ASHBURN, Va. – May 12, 2009 –Telos® Corporation has been accepted to the International Information Systems Security Certification Consortium, Inc. (ISC)2 Continuing Professional Education (CPE) Submission Program.

(ISC)2 CPEs are awarded to members for activities that are directly related to the domains of the Certified Information Systems Security Professional (CISSP) certification. CPEs are awarded at the rate of one CPE per hour of activity for information security events. As an official (ISC)2 CPE submitter, Telos can now submit CPEs for those attending a Telos education event. CPEs will be posted by (ISC)2 usually within 2 to 3 weeks.

Security Solutions 2009 is eligible for (ISC)2 CPE award, as are Telos’ monthly National Institute of Standards and Technology 800 Series Certification and Accreditation (NIST) Process Training and all Xacta® IA Manager training classes. To register for a class, e-mail [email protected] or call 1-877-409-2282. Complete details about training classes are available at

About Telos Corporation

Telos Corporation has provided innovative IT solutions and services to the federal government for more than 30 years, focusing since 1989 on secure enterprise solutions. Telos solutions ensure that the government’s most security-conscious organizations comply with demanding federal and DoD information security mandates. Offerings include Xacta® IA Manager for enterprise IT security management, enterprise security consulting services, secure networks, secure enterprise messaging, and secure identity management solutions. Solutions are represented to the federal government on Telos’ GSA schedule. For more information, visit


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U.S Navy Buys Eight More Submarines

The U.S Navy awarded General Dynamics and Northrop Grumman a contract worth over $14 billion to buy 8 more Virginia class attack submarines. has the report. The Virginia class are the latest attack submarines in the U.S Navy fleet. This order will bring the total to 18 either already delivered or under construction. The companies will split the order and build them at their respective yards in Connecticut and Virginia.

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