Lockheed sees growth ahead; at least for now

Lockheed Martin expects to see its sales grow 2 percent next year and is so far not worried about the impacts of an extended continuing resolution to its results for this year.

But that could change if the current stopgap funding bill gets extended beyond its Dec. 8 expiration date and freezes all government spending including defense at current levels, CEO Marillyn Hewson told investors in Lockheed’s third quarter earnings call Tuesday.

A prolonged CR could create “some impact against our 2018 orders profile and corresponding backlog level with the potential of other impacts depending on the duration,” Hewson told analysts on the call. But as Lockheed's "large backlog is already funded," Hewson does not see significant impacts from the current CR.

The government’s 2018 fiscal year began Oct. 1 with a CR after only five months under a full-year appropriations bill for fiscal 2017.

Lockheed’s third quarter call and initial 2018 outlook give a glimpse into how government contractors are thinking about the end of the calendar year and the start of 2018 and the prospect of government funding that includes prospects for defense spending increases.

Both the House and Senate versions of the next National Defense Authorization Act allot higher funding for the military than President Donald Trump’s proposal of $603 billion. The House’s version calls for $621.5 billion and the Senate’s version calls for $640 billion. Both versions exceed the $549 billion spending cap under the Budget Control Act.

Lockheed has one factor in its favor in that the share of international business in its revenue mix is growing. Hewson told investors the company is on track for 30 percent of this year’s sales coming from overseas versus last year’s 27 percent. And within the U.S., Hewson sees broad support for defense spending increases and adjustments to the BCA caps.

“When I look at the bipartisan support for defense and the move to try to get through this budget so they can move on to tax reform and other things, I feel pretty good about that,” she said.

There is another headwind Lockheed and its defense peers are facing in that revenue recognition standards are changing. Formerly industry-specific, new accounting guidelines aim to standardize practices across all sectors. All public companies have to adopt the new standards for next year and some have even chosen to make the move this year.

A good source on the specifics of those changes is MarketWatch reporter Francine McKenna. She explained the impacts on all industries in this July report, and what it means for government contractors in particular here in this August story.

Take Lockheed’s guidance for the remainder of this year for instance. Under the old guidelines, Lockheed’s sales outlook for 2017 comes out to $50 billion-$51.2 billion.

The new guidelines bring 2017 forecasted sales down by approximately 2 percent to $49 billion-$50.2 billion. Lockheed’s outlook for 2-percent sales growth next year is based on that range.

I will direct you to one key item in McKenna’s second story: General Dynamics and Raytheon have adopted the new standards for this year and have already stated impacts to their results. General Dynamics and Raytheon report third quarter results Wednesday and Thursday, respectively.

Shares in Lockheed traded 3 percent lower in the afternoon session on third quarter revenue and earnings that missed Wall Street’s consensus.

Third quarter revenue of $12.17 billion was 5.4 percent higher than the same period last year but was short of analysts’ $12.81 billion expectation. Space systems was the only segment out of four to post a decline and Chief Financial Officer Bruce Tanner told analysts it could fall next year by “mid-single digits” on lower satellite volumes.

Third quarter earnings of $3.24 per share came in 2 cents below what Wall Street expected. The company lifted its full-year earnings guidance to $12.85-$13.15 per share from the previous $12.30-$12.60 range.