Lockheed CEO warns of potential order hit if US 'budget constraints' are not fixed

Key Points
  • Lockheed Martin CEO Marillyn Hewson warned Tuesday of potential order impacts if there are federal budget constraints beyond Dec. 8.
  • A measure passed last month keeps the government operating through early December but also impacts the Pentagon's spending.
  • The defense giant's CEO also urged Congress to address the budget caps to allow for more defense spending that she sees as "vital to our nation's security."
  • Still, Hewson added, "I feel pretty bullish about our portfolio and where we are going even if we were to face additional budget caps."
Marillyn Hewson, the Chairman, President and Chief Executive Officer of Lockheed Martin.
Carl Court | AFP | Getty Images

Lockheed Martin CEO Marillyn Hewson on Tuesday urged Congress to pass a budget for the full fiscal year and warned if lawmakers fail to do so it could potentially impact the defense giant's future orders.

The current short-term spending bill, or continuing resolution, was passed last month and keeps the federal government operating through early December but doesn't provide for the remainder of fiscal 2018, which started Oct. 1. It also keeps the Pentagon budget essentially at last year's levels, potentially impacting new defense start programs and creating other issues that could have consequences for military readiness.

"The federal government is currently operating under a continuing resolution for fiscal year 2018 that limits the Department of Defense expenditures to previous fiscal year levels through Dec. 8," said Hewson in remarks during the defense giant's third-quarter earnings conference call. "With a large portion of our backlog work already funded from prior fiscal years, we do not expect significant impacts to our 2017 financials for this current short-term CR."

Hewson added, however, "Should the continuing resolution and its associated budget constraints be extended beyond Dec. 8, we would anticipate some level of an impact against our 2018 orders profile and corresponding backlog levels with the potential of other impacts depending on the duration of the CR."

Still, the CEO said she was "encouraged" to see both chambers in Congress pass their versions of the National Defense Authorization Act "in a broad show of support" for higher defense spending. The NDAA sets forth the Pentagon's budget and major programs for the next fiscal year.

Indeed, the House in July passed an NDAA with a base defense budget of about $593 billion and the Senate last month approved a bill with a target of about $611 billion, before so-called Overseas Contingency Operations war funding. In fact, the NDAA bills passed exceeded the current statutory budget caps and are above President Donald Trump's $575 billion request.

"We have been a strong voice on the Hill ... trying to get our lawmakers to address the budget caps," said Hewson.

A conference committee is currently working to resolve differences between the two NDAA bills before sending the legislation to the president.

"It remains to be seen which measures will be adopted in the final National Defense Authorization Act and what levels of funding will be provided in a separate appropriations process," said Hewson.

The Lockheed executive noted that since the NDAA amounts exceeded the current budget caps there is legislation required to adjust the spending limits. At least 60 votes in the Senate are needed to repeal the caps or adjust them, meaning there will need to be some Democrats supporting the effort since the GOP controls 52 seats at present.

"Passage of this legislation will require bipartisan support," Hewson said. "We continue to urge our lawmakers to work towards an agreement, which modifies the budget caps, provides the defense funding required to capitalize our military assets and delivers to our military the resources vital to our nation's security."

F-35 Bravo Lightning II stand ready on the deck of amphibious assault ship USS Wasp for day two of the first phase operational testing in the Atlantic Ocean in this handout photo taken May 19, 2015 and provided by the U.S. Navy.
U.S. Navy | Reuters

Meantime, Hewson was asked about scenarios in 2018 given the murkiness of federal spending and said Lockheed — maker of the F-35 advanced stealth fighter jet — still has "a number of programs" that remain "well supported" by both the House and Senate versions of the NDAA.

"Even with the CR, we are not going to see an immediate impact," she insisted. "What it affects is if it extends in the next year," although she added she's "actually feeling optimistic that it's not going to do that."

As Hewson sees it, Lockheed also has a growing international business so it's not entirely dependent on Pentagon contracts.

Earlier this month, the U.S. approved a $15 billion deal for Lockheed Martin to sell its THAAD missile defense shield system to Saudi Arabia. The same Terminal High Altitude Area Defense missile launch system is being utilized in South Korea to defend against the missile threat from nuclear-armed North Korea.

Last year, about 27 percent of Lockheed's sales were to international customers. "We are not totally reliant on the U.S. government budget for our growth going forward," she said.

The Lockheed executive added that the Bethesda, Maryland-based company's defense portfolio remains strong and it is "continuing to win business."

In July, the Pentagon announced a $5.6 billion order for the 11th batch of the advanced fighter aircraft. The F-35 Joint Strike Fighter has made Lockheed's Aeronautics segment its largest segment in revenue.

In the third quarter, the Aeronautics segment posted revenue of $4.7 billion, an increase of $583 million, or 14 percent, compared with a year ago. The company said the rise was primarily due to higher net sales of about $540 million for the F-35 program.

Lockheed has previously said it expects international orders for the F-35 will reach about 50 percent of all the fighter jet's orders in the next five years. Besides selling to the U.S. military, the fifth-generation fighter has customers from nine other countries.

"We have just won in the past quarter, and of course the F-35 continues to grow and be well supported," said Hewson. "I feel pretty bullish about our portfolio and where we are going even if we were to face additional budget caps."

Overall, Lockheed's financial results for the third quarter were a miss in terms of total revenue and earnings per share. The company also produced a preliminary forecast for 2018 that some viewed as mediocre.

On the earnings miss, Lockheed's stock closed down more than 2 percent Tuesday. The stock remains up about 25 percent this year.

EPS from continuing operations in the third quarter came in at $3.24 per share, below Street consensus of $3.26, according to Thomson Reuters. Total revenue was $12.2 billion, which is up 5 percent from a year ago but fell short of the $12.81 billion projected by industry analysts.

As for the outlook for 2018, Lockheed sees sales growth of about 2 percent, but that's at the lower end of Street estimates.