Lockheed Martin Corp. (LMT:US) and Huntington Ingalls Industries Inc. (HII:US), two of the biggest U.S. defense companies, grabbed bigger slices of a shrinking federal contract market last year, a Bloomberg Government study found.
Many suppliers suffered as contracts sank 11 percent to $462.1 billion in the year that ended Sept. 30 from fiscal 2012, according to the report published today. The annual review of the top 200 federal contractors found that 53 percent experienced reductions from a year earlier.
Lockheed, still the top U.S. contractor, and No. 6 Huntington gained from work on large, protected defense programs, the study found. Lockheed is a prime, or direct, contractor for the Pentagon’s next-generation fighter jet, the F-35, and Huntington is building the Navy’s new aircraft carriers.
“These are almost too-big-to-fail programs,” said Duncan Amos, an analyst with Bloomberg Government in Washington and a study co-author. “They involve a lot of companies and a lot of employment, so no one wants them to go away. They are also the future of our Defense Department.”
The study ranks the leading vendors based on unclassified contracts from U.S. agencies. It counts only direct contracts and measures obligations, or promised funding.
Contract obligations don’t match sales data reported by companies because the U.S. government and vendors usually have different fiscal years. In addition, suppliers don’t record federal awards as revenue until they have been paid, which can take months or longer.
The drop in total contracts is the biggest annual decline since records began in 1984, according to Bloomberg Industries analyst Brian Friel, a review co-author.
Much of that decrease can be attributed to budget reductions, including sequestration, which forced agencies to make cuts under a 2011 agreement to lift the federal debt limit, according to the review.
Even so, the top 10 federal contractors, a group that includes No. 2 Boeing Co. (BA:US), based in Chicago, and No. 5 Northrop Grumman Corp. (NOC:US), based in Falls Church, Virginia, maintained their share of obligations. They had $131.7 billion, or 28.5 percent of the unclassified contracts in fiscal 2013, about the same as the prior year.
Huntington, based in Newport News, Virginia, jumped to No. 6 this year from the No. 10. Its awards rose about 8.5 percent from 2012, to $6.4 billion. That boost was partially due to the production schedule for the Coast Guard’s National Security Cutter, according to the analysis.
Among the top 10 suppliers, Bethesda, Maryland-based Lockheed gained the most. Its contracts surged about 20 percent to $44.3 billion in fiscal 2013 from $36.9 billion a year earlier.
Lockheed’s work on the F-35, the most expensive U.S. weapons system, accounted for 16 percent of company sales in 2013, according to federal regulatory filings.
Pentagon officials have said they will do their best to shield the F-35 from budget cuts. A Defense Department report this month said it would be forced to cut 17 of the 343 fighters the agency planned to buy from fiscal 2016 through 2019 unless Congress repeals automatic cuts.
Aircraft and medical supplies were the only categories, of 20 reviewed in the study, to report increases in contract dollars in 2013.
A decade ago, four health-care vendors were among the top 50 contractors -- now there are eight, Friel said.
“It’s guns or it’s grandmas,” he said. “Much of the increased spending on health care is tied to the military or veterans.”
UnitedHealth Group Inc. (UNH:US) made the biggest leap, vaulting 86 spots to No. 43 with $1.5 billion in 2013 awards.
The Minnetonka, Minnesota-based company became responsible for managing medical services for active-duty military, retirees and their families in 21 states last year. It defeated the incumbent, Phoenix-based TriWest Healthcare Alliance Corp., for the $20.5 billion contract in 2012. TriWest slipped from No. 19 to No. 34 in the 2013 rankings.
McKesson Corp. (MCK:US), based in San Francisco, improved to No. 10 with $4.7 billion in awards during fiscal 2013, from 11th place a year earlier. McKesson is the leading supplier of pharmaceuticals to the Department of Veterans Affairs, which has received budget increases as troops return home from war.
Leidos Holdings Inc. (LDOS:US), based in Reston, Virginia, and Science Applications International Corp. (SAIC:US), based in McLean, Virginia, joined the ranking after SAIC Inc., last year’s No. 7 supplier, split into two companies. Leidos ranked No. 23 and Science Applications International was No. 12.
Fuel was one of the most volatile categories.
BP Plc (BP/), the No. 2 fuel vendor and No. 27 supplier in fiscal 2012, dropped from top 200 list. The London-based company was barred from new federal contracts and other work after the 2010 Gulf of Mexico oil spill.
In March, the suspension was lifted after BP reached an agreement with the U.S. Environmental Protection Agency that let it resume bidding for federal work and federal oil leases.
“They’ll be back next year,” Amos said.
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