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A Lockheed C-17 Globemaster transport flies over an aircraft show.

Lockheed Sees 7% Sales Growth Next Year After Spinoff of IT Unit

Oct. 25, 2016
Earnings for 2016 will be higher than expected for the defense contractor compared with forecasts that weren’t made public before the $4.6 billion divestiture of an IT division in August.

Lockheed Martin Corp. said sales would grow 7% next year as the world’s largest defense contractor provided a first look at its underlying business since spinning off an information-technology division in August.

Earnings for 2016 will be higher than expected compared with forecasts that weren’t made public before the $4.6 billion divestiture, the Bethesda, Maryland-based company said in a statement Tuesday. Lockheed expects profit of about $12.10, compared with a July forecast ranging from $11.15 to $11.45 a share. Sales are projected grow to $46.5 billion, up from an earlier prediction of $46 billion to $46.2 billion.

The stock rose 1.9% to $236.60 at 9:02 a.m. in New York, before the start of regular trading, as the company forecast strong gains from a complicated series of transactions over the past year that included buying United Technologies Corp.’s Sikorsky helicopter division.

“Their outlook for 7% revenue growth next year is pretty impressive,” Douglas Rothacker, an aerospace and defense analyst with Bloomberg Intelligence, said by phone. “Granted, not many have given 2017 outlooks yet, but I think you’d be hard-pressed to find a defense contractor generating growth like that.”

Lockheed CEO Marillyn Hewson is expected during a conference call Tuesday to provide more detail on the company’s strategy for businesses centered around aircraft, missiles and air-defense systems.

While the new Lockheed is coming into sharper focus, there are still several key unknown elements that could shape year-end totals, starting with continuing negotiations for the largest low-rate initial production F-35 contracts. 

If talks wrap up this year as Pentagon officials have suggested, Lockheed’s cash from operations for the year would be greater than $5.7 billion, the company said. If collection slips to 2017, the total would be about $700 million less. Production has continued on the contracts initially authorized in 2014 and 2015. The company said it has about $950 million of cash exposure and $2.3 billion in termination liability exposure.

Quarterly projections were “muddied by a range of methodologies” that analysts used to model results amid several moving parts, said Jason Gursky, a senior analyst at Citigroup Inc. The largest and most complex: the impact of the $4.6 billion spinoff of Lockheed’s IT division to Leidos Holdings Inc. through a tax-free transaction, he said in an Oct. 9 report.

Accounting rules require Lockheed to update its full-year guidance as if the technology and services business had been “gone all year, partially offset by the share retirement” from the transaction, Gursky wrote. Company executives had suggested that they would lower the 2016 forecast since the former business contributed about $1 a share to earnings.

Adjusted third-quarter earnings rose to $3.61 a share, handily exceeding the $2.89-a-share average of analysts’ estimates compiled by Bloomberg. Sales reached $11.6 billion, while analysts expected $11.5 billion.

Analysts will look for an update on the F-35 fighter jet program, the Pentagon’s most-expensive weapons system. The status of stalled contract talks that had forced Lockheed to spend about $900 million by midyear as it funded manufacturing itself will be of particular interest, Douglas Harned, a defense analyst at Sanford C Bernstein & Co. Inc., said in a report last week.

Lockheed peers General Dynamics Corp., Boeing Co., Northrop Grumman Corp. and Raytheon Co. are scheduled to report earnings later this week.

By Julie Johnsson

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