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Submarine Contract Lifts Pentagon Awards in April

Photographer: Fernando Allen/U.S. Navy via Getty Images

In this handout image provided by the U.S. Navy, the Virginia-class attack submarine USS New Hampshire is commissioned at Portsmouth Naval Shipyard October 25, 2008 in Kittery, Maine. The five-year agreement for 10 Virginia-class submarines, announced April 28, is the Navy’s biggest-ever shipbuilding contract, according to Rear Admiral David Johnson, program executive officer for submarines. Close

In this handout image provided by the U.S. Navy, the Virginia-class attack submarine... Read More

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Photographer: Fernando Allen/U.S. Navy via Getty Images

In this handout image provided by the U.S. Navy, the Virginia-class attack submarine USS New Hampshire is commissioned at Portsmouth Naval Shipyard October 25, 2008 in Kittery, Maine. The five-year agreement for 10 Virginia-class submarines, announced April 28, is the Navy’s biggest-ever shipbuilding contract, according to Rear Admiral David Johnson, program executive officer for submarines.

A $17.8 billion submarine contract, the biggest weapons deal announced by the U.S. military in more than a dozen years, kept Pentagon awards from sinking last month.

The contract to General Dynamics Corp. (GD) and partner Huntington Ingalls Industries Inc. (HII) had been stuck in limbo during Congress’s budget squabbles last year. It was freed up when the president signed a $1.1 trillion spending bill in January, letting the Defense Department begin funding new projects again.

April’s awards rose 84 percent to $35 billion from $19 billion a year earlier, according to data compiled by Bloomberg. Contracting specialists said the boost was an anomaly rather than an indication that military spending is rebounding.

“This is more of a one-shot deal,” said Mark Amtower, a partner at Amtower & Co., a Clarksville, Maryland-based consulting firm specializing in government contracting.

The five-year agreement for 10 Virginia-class submarines, announced April 28, is the Navy’s biggest-ever shipbuilding contract, according to Rear Admiral David Johnson, program executive officer for submarines.

It’s also the biggest weapons contract announced by the military since the Navy in October 2001 awarded a $19 billion, 11-year contract to Bethesda, Maryland-based Lockheed Martin Corp. (LMT) for F-35 jets, according to data compiled by Bloomberg Industries analyst Brian Friel. The aircraft is the Pentagon’s most expensive weapons system.

Budget Cuts

Last month’s contracts dropped less than 1 percent from $35.1 billion announced in March, according to Defense Department data. The Pentagon is required to announce contracts of at least $6.5 million.

Without the submarine agreement, the value of April’s Pentagon contracts would have trailed the $19 billion announced in the same month last year and would have been less than half the amount awarded in March. On a year-to-year basis, the value of announced contracts has fallen in each of the four months before April.

Awards in April 2013 were affected by the start of automatic federal spending cuts under the process known as sequestration. Some of those planned reductions were eased for fiscal 2014 and 2015.

“We don’t know what the sequestration outlook is after 2015, and big contracts like the shipbuilding contract give a false impression of stability,” said Loren Thompson, a defense industry consultant and an analyst with the Lexington Institute, an Arlington, Virginia-based research organization.

Political Environment

The submarine agreement was among several big contracts put on hold while the U.S. government operated under a temporary spending bill from October 2013 to January 2014. The stopgap measure funding the government prevented federal agencies from beginning new projects.

General Dynamics and subcontractor Newport News Shipbuilding, now part of Newport News, Virginia-based Huntington Ingalls, already have built 10 Virginia-class subs together. Work on the new subs will be done in Newport News; Groton, Connecticut; Quonset Point, Rhode Island; Sunnyvale, California; and other locations.

Matt Mulherin, president of Newport News Shipbuilding, called the submarine contract “great news,” particularly in light of “today’s challenging economic and political environments.”

The second-largest defense contract last month went to Express Scripts Holding Co. (ESRX) The pharmacy-services agreement is valued at as much as $5.36 billion, with seven one-year options after the initial 12-month base period. The Tricare health-care deal was announced April 18.

Mailed Prescriptions

Express Scripts will operate military drug stores, fill prescriptions by mail and manage benefits, among other duties, for 10 million Tricare beneficiaries. The St. Louis-based company has provided pharmacy services for the military since 2003.

“This award reaffirms the Express Scripts business model that aligns client and beneficiary interests with our commitment to control costs, drive out pharmacy waste and improve health outcomes,” George Paz, chairman and chief executive officer of Express Scripts, said in a press release.

Four companies, including Falls Church, Virginia-based General Dynamics and McLean, Virginia-based Exelis Inc. (XLS), shared the April’s third-biggest contract. The 10-year deal for Army radios was announced April 9 and has a maximum potential value of $988 million.

The fourth-biggest agreement in April was a $950 million contract for military housing and other construction. This contract sets a total spending limit with no guarantees that the companies involved will win any orders.

Leidos Holdings Inc., (LDOS) based in McLean, and closely held Parsons Government Services Inc., based in Washington, were among the six companies sharing the Air Force contract announced April 15. The work is scheduled to end by mid-2021.

A group of 12 companies, including Leidos and Booz Allen Hamilton Holding Corp., (BAH) also based in McLean, shared a $900 million contract for research and development tied to weapons of mass destruction. The month’s fifth-biggest contract, which also provide no guarantees that companies will receive orders, was announced April 15 and was for one year with four one-year options.

To contact the reporter on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net

To contact the editors responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net Larry Liebert

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