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Navy Awards Contracts for New Ship Components

The building of a modern warship requires not only the initial large contract with the builder but numerous other ones to buy components and support for the actual ships. Other systems are purchased with separate contracts and then items are provided to the builder for installation on the ships as they are assembled. The U.S. Navy is currently building new aircraft carriers, missile destroyers, Littoral Combats Ships (LCS), amphibious warfare ships as well as support vessels.

The LCS is being built by 2 different yards under 2 separate contracts. The LCS-1 design are made in Wisconsin by Marinette Marine and Lockheed Martin (LMT). The LCS-2 in Mobile, AL by Austal America and General Dynamics (GD). While they have dissimilar hull designs the basic weapon fit remains the same and both will carry mission modules. Up to 20 LCS are on contract to be built with the Navy periodically issuing contracts for 2 from each builder.

2 related contracts were recently awarded to support U.S. Navy ship construction. First General Dynamics (GD) received one for 8 MK 46 Naval Weapon Systems. The MK 46 is a 30mm cannon mounted in a stabilized turret. These will be installed on LPD-12 amphibious assault ships and the LCS. The contract is worth $26 million and is a follow on to previous contracts under which 30 systems have been delivered.

Then ATK (ATK), the ammunition and explosive manufacturer, received a contract for 30mm ammo. This $12 million contract is for incendiary rounds for the MK 46. It is a 5 year Indefinite Delivery / Indefinite Quantity (ID/IQ) contract with 1 base and 4 option years. As an ID/IQ the Navy will order off of the contract what is required to outfit ships with the Mk 46 weapon.

With Sequestration and the budget reductions recently passed by Congress and agreed to by the Obama Administration FY13 will probably not see many more major contracts awarded. There may be many though like these to support bigger programs already underway.

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Two More Littoral Combat Ships for Lockheed and Marinette Marine

The U.S. Navy in late 2010 awarded contracts to the two teams building the new Littoral Combat Ships (LCS) for ten platforms each. These were Lockheed Martin (LMT) whose mono-hull design will be built at the Marinette Marine yard in Wisconsin and Austal America in Mobile, AL. Austal America is the U.S. subsidy of Austal (ASB) the Australian manufacturer of fast ferries. The Austal design utilizes a catamaran hull.

Prior to these contracts each team was building two of the small warships. They have received orders under the new contract for two more and last week the Navy issued Lockheed a contract worth about $700 million for two more. This brings the total of LCS under order from Lockheed to six.

The Navy ultimately plans to operate 30 or more of the ships. They are designed to be equipped with different mission packages depending on the requirements. This includes anti-air, anti-ship and mind warfare among others. Like their name implies they are optimized for in-shore activities such as anti-piracy operations in the Indian Ocean and special warfare.

Even though the defense budget is being cut the Navy remains committed to building substantial numbers of the ship. The fact that it is built in smaller yards allows such construction.

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GD to Begin Design of Mine Warfare System for Littoral Combat Ships (LCS)

The Navy’s new Littoral Combat Ships (LCS) are small combatants that are optimized for missions in-shore. They are being designed to operate different modules depending on the missions that will add to and expand the capabilities of their standard gun and helicopter armament. One primary mission for them will be reconnaissance and clearing of minefields.

Currently there are over 20 LCS on order from two different builders who are offering two different designs. Lockheed Martin (LMT) and Willamette Marine are building a more traditional hull design while Austal USA, part of the Australian shipbuilder Austal, is offering a trimaran hull based on fast ferries they have previously built. Lockheed’s ships are being built in Wisconsin and Austal in Alabama. The decision to use two suppliers means that the LCS will be built and in service rather quickly.

Even though the two designs are very dissimilar they will operate the same weapons and combat modules. These will include ones that provide capabilities for the anti-air mission, to attack ships and mine warfare. The modules will be designed to plug into the ships.

Now General Dynamics (GD) has been awarded a contract to begin developing one of the mine warfare systems for the LCS. This is the Surface Mine Countermeasure Unmanned Underwater Vehicle (SMCUUV) which is an autonomous system that will be used to search and classify mines. It will also collect environmental data to support operations. The contract has an initial value of $87 million.

More details about the SMCUUV may be found at the U.S. Navy’s website here.

The key to the LCS will be the ability to develop these modules and make sure that they work efficiently with the two different designs of ships.

Photo of the Austal design from Surfaces Forces’ Flickr Photostream.

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Labor Woes Add to Oshkosh’s Struggles

Further Update – It has been announced the Union has accepted the latest offer from the company and a new five year contract has been signed.

Update – The Union voted on Saturday the 8th on an updated proposal from the company and again turned down the offer. The Union has offered to continue negotiations.

Oshkosh Corp. (OSK) is one of a few, recent stories of success where a company is able to expand its business into defense from its more traditional lines of work. Oshkosh is traditionally a manufacturer of construction and emergency vehicles but was able to win two major defense contracts for support vehicles in the last five years. These have generated a great deal of revenue and some profit for the Wisconsin company when its traditional work was declining due to the global economic downturn.

Oshkosh was able to win the production contract for the U.S. Army’s standard truck, the Family of Medium Tactical Vehicles (FMTV), as well as a new Mine Resistant Ambush Protected (MRAP) for Afghanistan called the MRAP-All Terrain Vehicle (ATV). This was designed to be lighter and more maneuverable for use in Afghanistan’s rougher terrain with its limited roads.

The MRAP contract, though, is winding down as the need for the vehicles declines. The U.S. is planning on leaving both Iraq and Afghanistan in the next few years and is struggling with fitting the MRAP, which is primarily a heavily armored bus, into its tactical Table of Organization and Equipment (TO&E). If the next war includes a different threat then the role of the MRAP will be limited. This means that Oshkosh needs to find new customers or new work for their rapidly built up production capability for the MRAP.

The winning of the FMTV contract from BAE Systems (BAE:LSE) who had purchased the company that had that work for over twenty years was driven by price. Oshkosh bid very aggressively and hoped to make money off of modifications and other work related to the vehicles. Even though the Army and Marine Corps are buying thousands of those vehicles the margin on them is very low.

These two issues have combined to limit Oshkosh’s profit. The company is bidding on Canada’s new contract for an armored vehicle to help its situation but budgetary pressures will probably reduce its options for new contracts and new systems.

Now Oshkosh faces labor issues. Unlike BAE’s Sealy, TX workforce its is unionized. There current contract expired last Friday and the new one was voted down by the United Autoworker’s Union (UAW). As with many current labor negotiations healthcare costs and other issues remain the primary areas of disagreement.

Right now the union workers are not on strike and Oshkosh has not locked them out and the two sides met this weekend for more discussion. If the problems are not resolved in the near term though either could happen disrupting production for the military and affecting Oshkosh’s revenue.

Strikes are uncommon in the defense world as few major contractors are unionized. Sikorsky, part of United Technologies (UTX), had an ugly strike about six years ago that caused issues with UH-60 Black Hawk and CH-53E Sea Stallion helicopter production and took several months to recover from. Oshkosh is not facing that situation but it does add pressure to the company as they are trying to negotiate limited cost growth to maximize the profit from their products.

The next few months could be critical to the company’s defense prospects as the opportunities for new contracts in the U.S. are limited and there may be cuts to existing ones if there is a big decline in defense spending. This means it would be best for the union and the company to resolve their issues quickly and avoid a long term conflict.

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Oshkosh Looks North for More Military Vehicle Work

The market for new military support vehicles has been doing well lately. Nations like the U.S., the United Kingdom and other Allies who have sent troops to Iraq and Afghanistan have needed to invest in improving their fleets as well as restoring and upgrading existing systems. There has also been the growth of the Mine Resistant Ambush Protected (MRAP) market to protect troops against IED and mines.

One company that has been able to take advantage of this market has been Oshkosh (OSK) of Wisconsin. They have made heavy transport trucks for the U.S. military for several years but since 2008 they have won two major new contracts. First they were the victors in the contest to build new, lighter MRAP for use in Afghanistan with their MRAP-AT vehicle. The U.S. has purchased several billion worth of the vehicles and support. They also won the right to make the U.S. Army’s Family of Medium Tactical Vehicles (FMTV) which had been produced by BAE Systems (BAE:LSE) in Texas. The U.S. needs to build thousands of those to replace ones lost in combat or through hard use.

Oshkosh has been able to offset declines in their commercial business due to the overall world economic picture with these military sales. Unfortunately the MRAP business is winding down and the FMTV is not as profitable for the company as the Army chose them due to their very competitive price. This has led to reduction in profit as the commercial business has not yet fully picked up. So like many defense contractors Oshkosh is looking at overseas customers for more business.

One contract they are aggressively going after is a requirement for Canada’s new light tactical vehicles and trucks. Oshkosh owns a production facility in Canada and this will aid them if they do win the almost two billion dollar contract. One end result is that factory will be expanded and upgraded so that at the end of the military contract it will be better prepared to support production of other commercial and military vehicles.

As the U.S. and its Allies reduce or cap their defense spending Oshkosh if it wants to remain a major defense contractor for these types of systems will have to find other customers. If not once production goals have been met for the FMTV and MRAP-AT then they will be reduced to just supporting the vehicles with parts and modifications which will require a much smaller work force and generate less revenue.

Photo from abdallahh’s flickr photostream.

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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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LCS Spin Off Contracts Begin to be Awarded

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

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

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

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

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

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

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

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Army’s Desire to Control Costs Reduces Competition with GCV

The U.S. Army‘s attempt to start the program to replace the M2 Bradley Infantry Fighting Vehicle (IFV) suffered a blow today when one of the four bidders on the original development effort withdrew from the new contest. The Army had canceled the original RFP and substituted a new one when the bids submitted exceeded cost and schedule goals. The Army also decided to re-think some of the requirements due to the large size and weight of the proposed solutions driven by the armored protection goals.

Advanced Defense Vehicle Systems (ADVS) announced yesterday that they would not participate in this latest attempt as the company expressed concerns with the lengthy development process. ADVS believes it is better suited for a more rapid development and production contract.

The Army released their new RFP in early December. In a bid to minimize cost and schedule growth the new plan is to use Firm Fixed Price (FFP) contracts for all parts of the program including the development of the new vehicle. In the past the use of FFP for development of new systems has proven difficult as the contractor must assume a great deal of risk especially if their are changes to requirements that might drive up development and test costs.

The decision to focus on containment of potential cost and schedule issues has reduced competition for this program. There are still three bidders left from the first round who so far seem willing to participate. While the Pentagon has focused on restructuring acquisition rules to try to minimize problems they also still want to maximize competition. The idea being that multiple companies participating would put downward price pressure on the other contractors. With all things related to defense acquisition there is no easy solution or way to reach a balance.

The plan for the new GCV is similar to what the Defense Department used for the Mine Resistant Ambush Protected – All Terrain Vehicle (MRAP-ATV) program two years ago. The MRAP-ATV was designed to be a lighter, more mobile MRAP for use in Afghanistan which has poorer terrain and roads then Iraq. Multiple teams submitted prototypes which were then down selected through testing and ultimately Oshkosh’s (OSK) design was chosen. Oshkosh so far has built several hundred of the vehicles and received billions in contracts from the Pentagon for the system.

The GCV is a more complicated system then the MRAP-ATV and while there are potential existing solutions to the requirements there would be significant development to meet the Army’s needs. ADVS felt that they were better suited to rapidly develop and procure a solution based on currently available vehicles rather then the Government’s desire for iterations of development and test.

The GCV itself arose out of the end of the Future Combat Systems (FCS) canceling by Secretary of Defense Robert Gates. The FCS would be a new family of wheeled vehicles to replace the heavy M1 Abrams tank and M2 force from the Eighties. It had suffered cost and schedule problems while not being optimized for the combat situation in Iraq and Afghanistan. Because there was still a need for a new vehicle the GCV was started.

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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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DoD Continues Investment In WMD Sensors

The 2010 defense budget just signed last month includes further funding for Platypus Technologies to continue their research and development of a sensor for chemical and biological weapons based on liquid crystals. The value of this contract which lasts one year is about $2 million. Platypus is one of the leading innovators in the use of this LCD technology for uses such as this. The goal is to have a hand held sensor that changes color or intensity based on what it detects.

Since Desert Storm in 1991 the U.S. military has been working hard to develop systems that detect chemical and other Weapons of Mass Destruction (WMD) from a distance and more safely then the traditional swipe systems used for most of the last century. They have built ones based on lasers that can be vehicle mounted. This idea would work in the open air. Platypus needs to build a system that controls for variables like temperature and humidity while being able to detect trace amounts of gases and biological matter. This is what this research is focusing on. The company had previously received funding through the Defense Department’s Small Innovative Business Research (SBIR) program.

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Navy Awards LCS Contract

The U.S. Navy awarded Marinette Marine a contract modification in order to “preserve production capability” for the Littoral Combat Ship (LCS) program. The Business Journal reports that Marinette Marine was part of a team with Lockheed Martin that built one of the first two LCS ships for the Navy. The Navy plans to award two more ships and it was believed that only one of the two teams that had built a ship each would qualify for this next order. This contract action prevented Marinette Marine from cutting back on its work force, hence the preserving part. There is still no guarantee that the company will get further LCS work but it keeps the option open.

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