Wednesday, January 25, 2017

Lockheed Martin 2017 Guidance Falls Short: Defense contractor has grappled with President Trump over cost of F-35 fighter aircraft program

The Wall Street Journal
Updated January 24, 2017 5:25 p.m. ET

Lockheed Martin Corp. sought to reassure investors on Tuesday, saying for the first time that its F-35 combat jets, its largest program, would become more profitable despite pressure by President Donald Trump to cut costs.

In December, then President-elect Trump started criticizing the cost of the plane as “out of control.” Since then, he has met with Lockheed Chief Executive Marillyn Hewson twice, followed by the world’s largest defense company recommitting to cutting the F-35’s price.

This is being done through an existing cost-cutting plan and producing more of the planes to generate economies of scale.

Ms. Hewson said she discussed with Mr. Trump the cost-cutting plans and efforts to make the plane less expensive to operate, and Lockheed hopes this year to secure contracts for two batches of the jets.

Lockheed confirmed Tuesday that it expects the next group of F-35s to cost less than $100 million each, matching a Pentagon target that existed before Mr. Trump’s criticism. Ms. Hewson said on an investor call that Lockheed is close to a deal with the Pentagon to sell 90 more planes, including the F-35A model being used by the U.S. Air Force, at a price of less than $100 million.

Investors had been concerned that Mr. Trump’s intervention would hurt profits on the F-35 program and remained cautious in case the company is forced into making additional cost cuts.

“It’s not about slashing our profit,” Ms. Hewson said on an investor call of her F-35 discussions with Mr. Trump.

The company expects profit margins on the plane to continue rising, by almost one percentage point this year compared with 2016, and catch up with those of its existing military jets such as the F-16.

The F-35’s cost has fallen with each deal, and the Pentagon last year imposed a contract on Lockheed that priced each F-35A at $102 million. The Pentagon said it expects the price of the next batch of the jets to fall 6% to 7% in the deal now being negotiated.

The Pentagon’s goal is to cut the cost of the main version of the plane to $85 million in inflation-adjusted dollars by 2019, a target Ms. Hewson reiterated on Tuesday.

“For Lockheed to not concede anything new in the discussions on the program may not be ‘The Deal’ that President Trump is hoping to advertise,” said Robert Stallard at Vertical Research in a client note.

Lockheed on Tuesday reported forecast-beating fourth-quarter earnings, though its initial 2017 profit guidance fell short of expectations and caused shares to fall more than 3% on the New York Stock Exchange. The share price recovered slightly as the day wore on, closing down 1.8% at $252.91.

The company said annual sales could surpass $50 billion for the first time in 2017, and the free cash that has powered its big stock-buyback program is also set to rise, alongside margins at the aerospace unit that makes the F-35.

However, its profit guidance for 2017 included a lower-than-expected pension tailwind, and the company also flagged a potential accounting issue at its Sikorsky helicopter arm.

The company expects earnings per share of between $12.25 and $12.55 for 2017, below the $12.87 consensus among analysts surveyed by Thomson Reuters. Revenue is expected to be between $49.4 billion and $50.6 billion as it boosts F-35 production.

For the December quarter, Lockheed reported a profit of $988 million, or $3.35 a share, up from $933 million, or $3.01 a share, a year earlier. Revenue climbed 19% to $13.75 billion.

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