OSK Oshkosh Corporation

By Doug Cameron 

The first signs are emerging that falling commodity prices are starting to hurt U.S. defense exports, as companies deal with varying levels of demand for equipment, especially in the Middle East.

L-3 Communications Holdings Inc. and Oshkosh Corp. said they are facing tougher business conditions in the Middle East, with budget pressures from falling oil revenues leading government customers to push back on signing off on contracts on trucks and communication-related equipments.

On the other hand, Raytheon Co., and its counterparts at Lockheed Martin Corp. and Northrop Grumman Corp., say they have seen strong demand from the region.

Analysts suggest that this reflected some changing priorities among overseas buyers, with a focus on boosting air defenses and munitions stockpiles.

The Middle East is the largest export market for U.S. defense companies, which have been selling billions of dollars in combat aircraft, missile defense systems and other equipment to the region.

"The Mid-East has slowed down, and Australia as well," said L-3 Chief Executive Michael Strianese on an investor call, adding that demand has strengthened in other parts of Asia.

Oshkosh, a big maker of mine-resistant military trucks, said a hoped-for deal to sell hundreds of its M-ATV armored vehicles to a Middle East nation failed to materialize last quarter, forcing the company to trim its 2016 guidance.

Wilson Jones, the company's chief executive, said on an investor call that he learned the unnamed customer had frozen its budget last quarter, and was reviewing its spending plans.

Mr. Jones, who recently visited the region, said he remained confident of completing the deal at some point.

Oshkosh, previously, has sold hundreds of the trucks, which analysts said was its most profitable product, to the United Arab Emirates.

Defense export sales are notoriously lumpy, and negotiations can take far longer to complete than domestic deals as customers wrangle over work-sharing, technology transfer and pricing.

U.S. companies have invested heavily to boost exports, in part to counter a decline in Pentagon spending that only now is starting to recover.

Exports account for a fifth of the total revenue across the largest contractors.

Many of these companies have set up local bases and partnerships with local companies to split the work and to win more deals.

Other defense executives this week said such efforts were bearing fruit, with overseas sales continuing to expand, even though U.S. products have become relatively more expensive as the dollar strengthened.

"If anything, we're seeing a stronger demand than a slowdown," Raytheon's Chief Executive Tom Kennedy told investors Thursday, after returning from a recent trip to the Middle East.

Raytheon derived 31% of its sales last year from overseas, the highest proportion among big U.S. contractors, as countries look to acquire its Patriot air defense system and Paveway laser-guided bombs.

"There's probably been some re-prioritization," said Rob Stallard at RBC Capital. "It doesn't mean the projects that have been moved down the list are toast--it just means they'll take longer."

Write to Doug Cameron at doug.cameron@wsj.com

(END) Dow Jones Newswires

January 28, 2016 23:29 ET (04:29 GMT)

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