The Pentagon had a huge week earlier this month -- and almost everything happened on just one day.
On Tuesday, Aug. 11, the U.S. Air Force announced that it was awarding an "analysis, design, development, production, installation, integration, test, and sustainment" contract of simply staggering size. Valued at up to $20.9 billion, this single contract is worth nearly as much money as the Pentagon awards for contracts in an entire month.
But who will share in all of this loot, and what will they have to do to get it? That's what we're here to find out.
The Pentagon named 25 companies to participate in the contract, which goes by the unassuming name "Training Systems Acquisition III." Thirteen of the winners are federally defined "small businesses," none of which you've probably ever heard of.
The remaining 12 winners are all large Pentagon contractors -- and many of them you have heard of. Grabbing just a handful of the more prominent names out of the middle of the alphabet, for example: L-3 Communications (NYSE:LLL), Lockheed Martin (NYSE:LMT), and Northrop Grumman (NYSE:NOC) all won the right to bid.
What did they win?
As the name implies, the Training Systems Acquisition III, or TSA III, contract is an umbrella contract for the purchase of equipment and services that the U.S. Air Force will use to train its pilots, mechanics, and other airmen dealing with the air fleet. Sources confirm that TSA III will be used to pay for flight training and simulation systems, for example, and also for IT services.
Specific models of aircraft covered by TSA III are not discussed in the announcement, but the very size of the contract -- again, this is for $20.9 billion -- suggests that there won't be a lot of aircraft that are not covered by it. And of course, just about every company that plays a role in building any airplane currently flown by the Air Force, or building equipment that goes into those aircraft, has won a place at the table, from which they will be able to bid on individual task orders over the course of this 10-year contract, which wraps up in August 2025.
Other sources confirm that, in addition to the U.S. Air Force per se, task orders will be awarded under TSA III for work benefiting the U.S. Air Force Reserve and Air National Guard, as well as international buyers of U.S. aerospace hardware under foreign military sales contracts.
What will they do?
In a contract as big as TSA III -- and as long-running -- it's hard to be precise about the kind of work that the companies working on the contract will be asked to perform. L-3 Communications, for example, is known to be a major force in flight simulators and weapons training systems. The L-3 division responsible for these kinds of products is the company's largest, pulling down $4.7 billion in revenues last year, and earning 11.4% operating profit margins thereon.
Lockheed Martin, too, has a large "mission systems and training" division. According to data from S&P Capital IQ, MS&T is only Lockheed's third largest (of five) divisions. But even so, it did $8.3 billion in business last year, which is 77% more revenue than L-3's "electronic systems" business produced. Lockheed Martin's profit margin on this business was inferior to L-3's -- but still respectable at 10.1%.
Bringing up the rear, Northrop Grumman groups its training business under "technical services." Capital IQ data shows this Northrop division generating only $2.8 billion in business last year, making it both Northrop's smallest business unit as well as the smallest business of the three surveyed here. At only a 9.3% operating profit margin, it's also the least profitable of the three.
What it all means to investors
Clearly, the awarding of $21 billion worth of work is a big deal for the lucky companies that won a place under the umbrella contract. It's going to be an even bigger deal for any of the smaller companies -- or large companies with small training divisions -- that manage to win a disproportionate percentage of the task orders to be handed out under TSA III.
At present, all we know are the initial participants, of course. During the next decade (!), we'll make certain to keep you updated as the specific task orders get awarded.
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 321 out of more than 75,000 rated members.
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