General Dynamics wins contract to supply Army with bullets

The five-year agreement, worth as much as $1.2 billion, gives the military a second source of ammunition.


01:00 AM EDT on Thursday, August 25, 2005


BY EDMOND LOCOCO
Bloomberg News



General Dynamics Corp. has beat Alliant Techsystems Inc., the Pentagon's top bullet supplier, for a contract worth as much as $1.2 billion to make small-arms ammunition for the U.S. Army.

The five-year agreement covers production of as many as 500 million rounds of ammunition annually, the Army said in a statement Tuesday. The award makes Falls Church, Va.-based General Dynamics the second-largest supplier of cartridges for M-16 rifles after Alliant.

The Army wants production split between at least two plants so it doesn't risk a shutdown if anything happens to its Lake City ammunition factory in Independence, Mo., operated by Alliant. Demand for ammunition is at the highest level since the Vietnam War because troops are receiving more combat training as the United States fights wars in Iraq and Afghanistan.

"It's a nice new business for General Dynamics," said Paul Nisbet, president of JSA Research in Newport. He rates shares of General Dynamics "buy" and doesn't own any. "The war in Iraq drives the need for training and training rounds, and I'd be surprised if the volume dropped off significantly in the next year or two."

The order includes a one-year award worth $171 million, with four more one-year options, for the total value of $1.2 billion, General Dynamics said in a statement.

General Dynamics, which makes combat radios and armored vehicles, including Abrams tanks and Stryker troop transports, assembled a team of domestic and foreign companies in May 2004 for its ammunition bid. Its team includes Norwalk, Conn.-based Olin Corp.'s Winchester unit, Canada's SNC-Lavalin Group Inc. and Israel Military Industries Ltd.

Winchester and Israel Military Industries already have Army ammunition contracts, which each won on its own last year as demand increased.

General Dynamics, the fourth-largest U.S. defense company, will serve as the team's integrator, responsible for supply-chain management, while Winchester will be the principal manufacturer of the ammunition. Israel Military Industries would be a "significant production partner" and SNC would provide select amounts of ammunition.

Edina, Minn.-based Alliant, which produces more than 80 percent of the Army's small-arms ammunition, had sought to win the additional work by offering to produce cartridges at a converted commercial-ammunition plant in Minnesota, and by teaming with other companies. Alliant's team included American Ammunition Inc. of Miami, Remington Arms Co. of Madison, N.C., and foreign suppliers including Companhia Brasileira de Cartuchos of Brazil and Poongsan Corp. of South Korea.

Alliant will likely benefit from the additional ammunition demand anyway as the company may become a subcontractor to General Dynamics, Alliant spokesman Bryce Hallowell said. Alliant may be able to supply parts of the ammunition that Alliant alone produces, including metal linking clips to hold rounds together, Hallowell said.

"We look forward to exploring ways to help the Army meet its requirement," Hallowell said.

The award to General Dynamics has "no material impact" on Alliant, because the company hadn't included a win in its financial forecasts, and the Army still needs Alliant to keep increasing its own production capacity, said JSA analyst Peter Arment. He rates Alliant's shares "buy" and doesn't own them.

Alliant has more than tripled small-caliber ammunition production to 1.2 billion rounds a year since winning the contract to manage the Army's Lake City plant in 1999. The 10-year contract was valued at $1 billion when it was awarded. The company said sales of ammunition in the quarter ended July 3 rose 24 percent to $247 million.

The company is working with the Army to expand the Missouri plant's capacity to as much as 1.5 billion rounds a year, Lt. Col. Matthew Butler, Army product manager for small- and medium-caliber ammunition, said earlier this month. The Army needs to be able to buy as many as 2 billion rounds a year, he said.

The Army plans to buy its first 1.2 billion rounds of small-arms ammunition annually from Alliant, and the next 300 million from General Dynamics, he said. For amounts above 1.5 billion rounds, Alliant will supply the first 300 million, with the remainder coming from either Alliant's Lake City plant or from General Dynamics.

The top three U.S. defense contractors are Lockheed Martin Corp., Boeing Co. and Northrop Grumman Corp., respectively.