Pentagon Turns to Alternative Contractors For Equipment
03 July 2009 - 2:28AM
Dow Jones News
The surprise selection this week of Oshkosh Corp. (OSK) to build
a high-priority truck for the U.S. military highlights a sea-change
in defense procurement.
The maker of iconic fire trucks is the latest example of the
Pentagon's increasing preference for contractors with can-do
capability over defense industry giants geared for lengthy
peacetime procurements.
The extended conflicts in Iraq and Afghanistan have created
demand for specialist equipment and services that previously
attracted little interest from Pentagon planners or traditional
defense contractors.
"There's been such an immediate demand for new equipment, it's
outstripped the ability of the normal contractors to deliver it on
time," said Dean Lockwood, an analyst for Forecast International
Inc., a defense consulting firm in Connecticut. The Pentagon has
"completely thrown out the normal procurement process."
Navistar International Corp. (NAV), the commercial truck and
engine maker, and diversified manufacturer ITT Corp. (ITT) are
among a band of companies that have won large contracts for
military hardware to counter specific threats to U.S. troops.
The prospect for further military sales has bolstered Navistar
and ITT's stock prices in recent months. Navistar has surged 169%
off its 52-week low in November, but early Thursday was trading
down 4.53% at $40.59 a share after failing to win Tuesday's
contract. ITT, meanwhile, is up 35% off its March low. The stock
was recently trading down 4.01% at $43.28.
Oshkosh won out over rivals bids from consortia including BAE
Systems PLC and General Dynamics Inc. (GD) for the $1.06 billion
contract to build 2,244 armored all-terrain trucks for U.S. troops
Afghanistan.
Oshkosh already makes large and medium-size cargo trucks for the
military, but had little previous experience with a high-priority
program like the patrol trucks, which are expected to help U.S.
soldiers pursue Taliban insurgents in Afghanistan's rugged,
mountainous landscape.
"We took a measured risk," said Oshkosh CEO Robert Bohn in an
interview. "This will help us get through the worst recession we've
seen in our lifetime."
He credited the win to an all-out effort by the company's
engineering staff and Oshkosh's ability to leverage its existing
truck components and its production capacity.
Oshkosh, whose brands include Pierce fire trucks and JLG
self-propelled work platforms, has struggled in recent quarters
because of falling demand for construction-related equipment.
Oshkosh's sales for the fiscal first half ended March 31 fell 18%
to $2.68 billion. The company reported a $1.21 billion loss amid
large charge-offs, compared with income of $109.9 million, or 1.47
a share, in the same period a year earlier. About 17% of the
company's work force has been laid off since last year.
In 2008, defense sales were Oshkosh second largest business
unit, accounting for 27% of its $7.13 billion in net sales.
The company's stock has more than doubled since the beginning of
the year, including a 27% increase on Wednesday. Oshkosh was
recently up 2.17% at $18.83 amid a marketwide selloff.
Navistar stunned the defense industry two years ago by raking in
billions of dollars worth of contracts for mine-resistant,
ambush-protected trucks, or MRAP. The company impressed military
planners with its use of a readily available commercial truck
chassis and engines for a heavily armored truck that could survive
roadside bomb blasts in Iraq. Like Oshkosh, Navistar was able to
deploy its own assembly lines to expedite production of the
vehicles. Warrenville, Ill.-based Navistar built more than
one-third of the 16,000 MRAPs purchased by the military.
Standard & Poor's Ratings Services put Navistar and its
customer financing arm on watch for a ratings downgrade Thursday as
the outlook for North American commercial truck demand remains
bleak for this year and next. S&P said Navistar's inability to
win Tuesday's contract for the new military truck eliminated a
potential revenue offset for lower sales of commercial trucks.
The MRAP and the smaller, more mobile variant of the MRAP being
built by Oshkosh were developed and tested in six months. Observers
note that many traditional defense contractors are at a
disadvantage in such accelerated procurements because they
typically rely on outside contractors for components and production
work outside of their core specialties, such as building aircraft
or ships.
Meanwhile, ITT's defense electronics business has been growing
at a 28%-a-year pace since the U.S. invasion of Iraq in 2003. In
2008, ITT's $6.3 billion in military sales accounted 54% of the
company's total annual revenue, up from $1.7 billion or 32% of
revenue in 2003.
ITT's other businesses, which include pumps for water treatment
plants and automotive components, have struggled in recent years
amid lower end-market demand and a downturn in the economy.
The White Plains, N.Y., company, which makes a variety of radio
equipment and night-vision goggles, is the U.S. military's leading
supplier of electronic jammers to disrupt the radio signals used to
detonate improvised explosive devices (IED) that target trucks
carrying U.S. troops.
ITT has built some 40,000 truck-mounted jammers. Prior to the
wars, such jammers were primarily used on aircraft, rather than
trucks.
"The Department of Defense did not view IEDs as a weapon that
could or would be used effectively by our enemies," said Bob
Pergler, director of business development for ITT's electronic
systems.
-By Bob Tita, Dow Jones Newswires; 312-750-4129;
robert.tita@dowjones.com