By Doug Cameron
Lockheed Martin Corp. said Tuesday that it expects to return to
growth in 2016 even if lawmakers don't reverse the budget cuts that
would trim Pentagon spending over the next two years.
Chief Executive Marillyn Hewson also signaled the world's
largest defense contractor by sales is prepared to take on debt to
finance acquisitions, while reaffirming a commitment to continue
the buybacks and dividend increases that have helped its stock more
than double over the past two years.
Lockheed's organic sales have fallen over the past three years
and are expected to decline again in 2015 as the impact of Pentagon
cuts continues, and it joins smaller rival Raytheon Co. in
forecasting a return to growth in 2016.
Ms. Hewson also said a recent visit to the Middle East indicated
that customers for its missile defense systems and fighter jets
didn't plan to pare spending, even after the sharp fall in oil
prices.
"We're not really seeing a pullback on their expenditure on
national security," she said on a post-earnings' call.
Her comments came as Lockheed reported an 85% rise in
fourth-quarter profit that fell shy of analysts' expectations. Its
2015 guidance was also below consensus, though Lockheed has a
history of providing conservative January forecasts.
Its shares were recently down 1.8% at $192.24.
Lockheed and its peers have cut jobs and other costs to adjust
to lower Pentagon spending, while lower pension costs have boosted
cash flow, most of which has been returned to shareholders.
The company spent around $900 million on acquisitions last year,
mainly small bolt-on deals in areas such as cybersecurity and
commercial aerospace.
The drop in U.S. spending over the past three years hasn't
triggered the wave of consolidation that followed the downturn of
the 1990s, and executives continue to point to uncertainty over the
budget as the main barrier to larger deals.
Bruce Tanner, chief financial officer, said Lockheed's recent
deals would add around $750 million to sales this year, while
higher production of its F-35 fighter jet would help the return to
organic growth in 2016 and beyond.
The pace of growth hinges on whether lawmakers repeal the
sequestration cuts that would require another 10% across-the-board
cut in Pentagon spending in fiscal 2016. The Pentagon is expected
to present a budget on Feb. 2 calling for around $530 billion in
spending, some $30 billion above the level required by the
automatic cuts known as sequestration.
While industry executives, Pentagon officials and lawmakers all
agree that sequestration is an inefficient way to address budget
challenges, there is no widespread agreement on how to remove the
mechanism.
Lockheed has benefited from its positions on programs such as
the F-35 that have been relatively protected from budget cuts, and
is also bidding on two of the largest upcoming contract awards this
year. The planned new Air Force bomber program is expected to cost
around $80 billion, while a replacement for the Army's Humvee
trucks is forecast to cost more than $30 billion.
Ms. Hewson said its contender for the truck deal started life
through technology acquired in a small acquisition, and defended
Lockheed's recent record on internal research spending, which was
around 1.5% of sales last year, well below that of technology
companies.
Research-and-development spending by the big five U.S. defense
contractors has halved over the past five years, irking a Defense
Department that wants contractors to take on more risk and invest
more to counter growing threats from China and Russia.
"It's not as much a percentage of sales as an efficient
expenditure of dollars," she said, noting that much of Lockheed's
research came via indirect routes such as joint ventures.
Lockheed reported fourth-quarter profits of $904 million
compared with $488 million a year earlier, with earnings rising to
$2.82 a share from $1.50 a share. Full-year profit rose to $11.21 a
share and is forecast at $10.80 to $11.10 a share in 2015.
Some $250 million in sales from recent acquisitions helped
full-year revenue rise to $45.6 billion following declines in 2012
and 2013. Sales and orders this year are expected to be in the
range of $43.5 billion to $45 billion.
Write to Doug Cameron at doug.cameron@wsj.com
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