Defense News: Pentagon Rushes Millions of Dollars' Worth of Weapons to Iraq

It's been a busy seven days for America's military-industrial complex -- or at least, for the export arm thereof. From November 5 through November 12, 2014, the U.S. Defense Security Cooperation Agency has notified Congress of no fewer than four separate international arms sales that the Pentagon intends to facilitate. Total value: about $3.7 billion.

Funding the fight for Iraq
$697 million of these sales are destined for Iraq, where the local government is engaged in an existential fight -- with U.S. assistance -- against insurgent forces from ISIS. While the Obama Administration continues to resist putting American "boots on the ground," on Wednesday, the DSCA sought Congressional approval for a sale of up to 2,000 Advanced Precision Kill Weapon Systems (APKWS), worth $97 million, to assist the Iraqi military in its fight.

BAE's APKWS in action. Source: BAE Systems.

Produced by British defense contractor BAE Systems (BAES.Y 1.32%), the APKWS is essentially a hardware upgrade kit -- a "plug and play, point and shoot" solution that, when attached to a standard 2.75-inch Hydra rocket (such as those that Iraqi Apache attack helicopters are equipped with), converts the unguided rocket into a "laser-guided rocket." Thus, the new weapons will give the Iraqi Army Aviation Command what BAE calls "a low-cost surgical strike capability" for its helicopters.

Separate and additional to the Kill Weapon Systems contract, DSCA also sought Congressional approval to sell Iraq $600 million worth of spare parts for such systems as M1A1 Battle Tanks, M1070 Heavy Equipment Tactical Trucks, M88A1/2 Tank Recovery Vehicles, M198 Towed Howitzers, M109A5 Self Propelled Howitzers, plus armored vehicles, heavy trucks, Humvees, and other equipment. Defense contractor General Dynamics (GD -3.97%) will run point on the sale (if approved), serving as principal contractor.

Meanwhile, elsewhere in the world
While DSCA's highest-profile arms contracts involved Iraqi military aid, the really big money this past week has been in arms sales elsewhere around the world, specifically in Australia and Korea.

At the same time as DSCA was notifying Congress of intended Iraqi arms sales, it also advised of a plan to sell four C17A Globemaster III military transport aircraft to the Australian military. Boeing (BA -2.87%) will serve as principal contractor on this deal, although other companies -- such as Pratt & Whitney, which builds the planes' F117-PW-100 engines (of which 19 will be sold), and Northrop Grumman, which builds the AN/AAQ-24V Large Aircraft Infrared Countermeasures (missile defense systems) for the aircraft, will also benefit from the sale. In total, this contract promises to produce more than $1.6 billion for the companies involved.

Boeing's C-17 Globemaster. Photo: Wikimedia Commons.

And finally, last Wednesday we noted a single DSCA notification to Congress -- this one concerning a $1.4 billion arms sale -- in which Lockheed Martin (LMT -0.20%) and Raytheon (RTN) will be the primary beneficiaries. Together, the two companies manufacture the well-known PATRIOT air defense system -- and South Korea has asked Congress for permission to purchase a whole slew of PATRIOT equipment for its new Korea Air Missile Defense (KAMD) system:

• 136 Patriot Advanced Capability (PAC-3) Missiles
• 2 Flight Test Targets (Patriot-As-A-Target (PAAT) modified short-range tactical ballistic missiles)
• 8 Missile Round Trainers
• 10 Fire Solution Computers
• and many more items of related equipment.

What it all means to investors
As U.S. defense budgets come under pressure from the Sequester, and from continuing, sizable budget deficits, international arms sales become increasingly important to shore up the revenue streams of America's defense contractors.

At last report, Raytheon was leading the pack of defense contractors doing the best job of diversifying its business internationally. Here's how the rankings stand at present, among the companies discussed above:

*Excluded from this table are Boeing and Pratt & Whitney parent United Technologies, which while having sizable defense businesses, are primarily civilian contractors; and BAE Systems, which as a British company, naturally derives most of its revenues from outside U.S. borders. For the sake of completeness, however, the international sales percentages of these three firms are 56.6%, 62%, and 60.4%, respectively. Source: S&P Capital IQ.

As the past week's DSCA notifications to Congress show, however, all four of these companies -- all seven of the firms discussed above, in fact -- are hard at work trying to improve their scores, and score more international arms sales. For this, of course, they really need to get Congress to approve the sales, about which DSCA has now notified them.

Luckily for these defense contractors, Congress has never refused to approve a foreign arms sale after receiving notification that it's in the works.