Middle East Deals Hit Lockheed -- WSJ

By Doug Cameron Features Dow Jones Newswires

Defense contractor books charges on two projects but boosts sales outlook

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Lockheed Martin Corp. said Tuesday it booked almost $200 million in charges on two Middle East contracts in a move that highlights the potential pitfalls of the more profitable overseas deals that have been driving growth for U.S. defense contractors.

The world's largest defense company by sales took charges on a new missile-defense system being developed for the United Arab Emirates and an Abu Dhabi-based aircraft maintenance joint venture, ending a multi-quarter run of forecast-beating earnings for Lockheed.

The company generated 27% of its revenue from overseas deals last year and is taking aim at a 30% share with prospective sales including F-16 jet fighters for Bahrain and India.

Overseas defense budgets in general have been growing faster than Pentagon spending, especially in the Middle East and Asia. Investors have recently become more cautious about the upward trajectory of domestic outlays under President Donald Trump.

Marillyn Hewson, Lockheed's chief executive, acknowledged the $184 million in Middle East charges to first-quarter earnings, but said she remains optimistic both ventures could fuel future sales growth.

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The company knocked a dime off its per-share earnings forecast for the year, though it also boosted its outlook for sales and cash flow.

Crucially, Lockheed still expects profit margins on its F-35 combat jet to continue rising, even as it works to cut the price tag on the most popular model to $80 million over the next several years. President Trump criticized the F-35's cost last year, though productivity measures have trimmed it to about $95 million apiece from around $100 million in the previous contract.

Lockheed has accepted a contract for one batch of the jets imposed unilaterally by the Pentagon to the company's displeasure last year, and after closing a second deal in February, aims to reach agreement on a third batch by the third quarter.

The F-35 is central to Lockheed's growth plans, and a follow-on multiyear deal for 440 jets could be valued at more than $30 billion, one of the largest-ever defense sales.

Lockheed's share price slipped 2.2% to $270.02 on Tuesday, after hitting a high on Monday.

The company now expects earnings of $12.15 to $12.45 a share this year on $49.5 billion to $50.7 billion in sales.

For the quarter to March 31 it reported earnings of $763 million, or $2.61 a share, down from $898 million, or $2.91 a share, a year earlier and 10 cents short of analysts' per-share estimate. Revenue rose 6.6% to $11.1 million.

Boeing Co., General Dynamics Corp. and Northrop Grumman Corp. all report earnings Wednesday, with Raytheon Co. -- the most exposed to export markets -- following on Thursday.

--Imani Moise contributed to this article.

Write to Doug Cameron at doug.cameron@wsj.com

(END) Dow Jones Newswires

April 26, 2017 02:48 ET (06:48 GMT)