* Company Focus 8/29/2007

Military contractors that set up utilities, prepare food or make
bulletproof vests are getting a big boost from the conflict. Here's who's
getting the most money.

By Michael Brush

In a few weeks, Gen. David Petraeus and the Bush administration will
report to Congress on the progress of the U.S. military's troop surge in
Iraq.

But some of the war's winners are already clear: military contractors
who supply everything from bodyguards to bombs, clean socks to
ready-to-eat meals. "For the companies involved, this has been a real gravy
train," says William Hartung, who tracks defense spending for the New
America Foundation.

The White House has proposed military spending of $647 billion in 2008.
Adjusted for inflation, that would be the highest level since World
War II -- topping even expenditures during Vietnam and the Reagan years,
calculates Hartung. The current request for Iraq-related spending for
2008 is $116 billion, which would raise total Iraq war spending to $567
billion.

Who's getting all that money? Sometimes it can be difficult to tell.
"There isn't good visibility on where the money goes," says Steven Kosiak
of the Center for Strategic and Budgetary Assessments. But you can get
a snapshot of who's been getting a good chunk of the Iraq-related
spending in two ways.

- Talk back: What's your view on companies that profit from the Iraq
war?

The first step is to scour a vast database of more than $400 billion in
annual government contracts, more than 70% of which are from the
Department of Defense. It's called the Federal Procurement Data System. I
turned to a private contractor of my own, Eagle Eye, for some (free)
expert assistance in navigating the database.

Eagle Eye mined the database for all Iraq-related contracts from 2003
through 2006 (the most recent year for which numbers are available).
That catches everything from spending on base maintenance and bulletproof
vests to ammo and combat boots. We tallied the numbers to find the top
10 companies out of thousands of contractors.

The second step is to look at the Pentagon's own budget to see which
companies are building the major weapons systems that support the war in
Iraq.

** The Top 10 It's no surprise that KBR Inc. (KBR, news, msgs), a
division of Halliburton (HAL, news, msgs) during the years we examined, tops
the first list, compiled by Eagle Eye, with $17.2 billion in
Iraq-related war revenue for 2003-2006. KBR is one of the largest construction
and energy field-service companies in the world. It has a long history
of collaborating with the U.S. government on war-related construction.

- Videos: Recent news on Halliburton

In Iraq, KBR has been working on base construction and maintenance,
oil-field repairs, infrastructure projects and logistics support. KBR got
about a fifth of its revenue from the Iraq war in 2006, according to
our calculations.

"We are proud to serve the troops," says a KBR spokeswoman. "We are
providing the troops with essential services and the comforts of home that
allow them to stay focused on the dangerous and important missions
they face daily."

Continued: The No. 2 slot

But why does a private-equity shop called Veritas Capital Fund take the
No. 2 slot? That's easy. It specializes in investing in defense and
aerospace companies. So Veritas owns a portfolio of companies -- and has
a stake in others -- that pull down big Iraq-related contracts.

DynCorp International (DCP, news, msgs), which Veritas bought in 2005
and spun out last year, offers security services and police training, as
well as logistical services. Veritas' McNeil Technologies provides
interpreter and translation services to the military and U.S. government
agencies in Iraq. Another of its companies, Wornick, supplies military
rations.

It's also no big surprise that U.S.-based companies like Washington
Group International (WNG, news, msgs), Fluor (FLR, news, msgs), Perini
(PCR, news, msgs) and Parsons are on our top 10 list. They've landed many
of the contracts to restore, repair and maintain oil fields, power
plants, schools, public water systems and military bases. But the award of
contracts to build the U.S. Embassy in Baghdad to First Kuwaiti General
Trading & Contracting left many analysts scratching their heads.

Environmental Chemical does munitions disposal, while International
American Products sets up systems that deliver electricity to military
camps. L3 Communications (LLL, news, msgs) offers security screening
services, linguists, training and law-enforcement services, and some
equipment replacement. 10 companies making the most in Iraq* (millions of
dollars)Rank CompanyAmount


*Goods and services contracted specifically for Iraq. Source: Eagle Eye


Two companies that have seen their revenue shoot up the most in the
ongoing military buildup -- largely because of Iraq-related spending --
are Armor Holdings and Renco, according to Hartung's calculations. They
don't make our list because their overall defense-related revenue is too
small. But they have done phenomenally well.

Armor Holdings, which sells vehicle and personnel armor, saw
defense-related revenue shoot up 2,747% between 2001 and 2006, to $634.9 million.
Armor is now a division of BAE Systems (BAESY, news, msgs).

Renco, which makes the extra-wide all-terrain vehicle known as the
Humvee, saw Defense Department revenue rise 1,260% over the same period, to
$1.9 billion.

** Misspent funds Not all of the Iraq-war money is well spent. "Because
of the urgency of the war, a lot of these contracts have been subject
to less scrutiny," says Hartung. Another problem is that the war has
been funded outside of the regular defense budget process. Instead, it
gets funded through "emergency" spending bills called supplementals,
which offer much less detail and get less scrutiny on Capitol Hill.

Hartung believes we've only seen the tip of the iceberg in allegations
of fraud and corruption related to Iraq war spending. "Congress is
starting to look into it, but it has not yet gotten down to specific
questions," says Hartung.

Details of wrongdoing are being uncovered by the Office of the Special
Inspector General for Iraq Reconstruction, and you can also find
summaries of misconduct here.

** Hidden winners Of course, there's a vast collection of military
hardware and technology from fighter jets and naval vessels to spy
satellites that are used in the Iraq war effort. But they're paid for by the
broader Pentagon budget, so they won't show up in a scan of the federal
procurement database for Iraq-related spending.

To see who has benefited from the underlying buildup in defense
spending under the Bush administration for the Iraq war and other anti-terror
and defense efforts, I calculated who got the most in Department of
Defense contracts from 2002 through 2006. You can see the top seven in my
second chart.U.S. Department of Defense contracts* (billions of
dollars)

*More than $25,000 for any field of operation. Source: Department of
Defense

While all of these companies have benefited from the Bush
administration' s defense spending ramp-up since the terror attacks of Sept. 11,
2001, not all are equally exposed to the Iraq war effort, says defense
sector analyst Paul Nisbet of JSA Research.

In addition to ships and Gulfstream planes, General Dynamics (GD, news,
msgs) makes ground vehicles and ammunition, so it generates a fair
amount of revenue directly from Iraq war spending. But Lockheed Martin
(LMT, news, msgs), which is working on next-generation military aircraft
and also makes military electronics and satellites, has little direct
exposure to the war, says Nisbet. Neither does Northrop Grumman (NOC,
news, msgs), which makes ships designed to last three decades or more.

- Videos: Recent news on Lockheed Martin

Of all the companies on my second list, KBR saw some of the biggest
revenue gains from the Iraq war. It was No. 37 on the Defense Department's
top-100 list of military contractors in 2002. By 2006, KBR had climbed
to No. 6.

Michael Brush

At the time of publication, Michael Brush did not own or control shares
of companies mentioned in this column.

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