Defense Firms Aim for Windfall -- WSJ

By FeaturesDow Jones Newswires

Lockheed, rivals look to invest tax gains in weapons instead of offering lower prices

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 30, 2018).

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U.S. defense executives urged lawmakers and federal officials to let them invest the windfall from new tax rules in weapons research rather than on lower prices for the Pentagon.

Lockheed Martin Corp. on Monday said it expects its tax rate to fall more than a third, to below 18%, and pledged to boost investment in new weapons and training. The world's largest defense company by revenue also said it would make a $5 billion payment to its pension fund.

"Our aim is to use these benefits to differentiate ourselves in the global marketplace," said Chief Executive Marillyn Hewson. Lockheed said it plans a modest rise in spending after a record 2017 to around $1.3 billion in each of the next two years, alongside unspecified boosts for training and to its venture capital arm.

Like rivals Northrop Grumman Corp. and Raytheon Co., Lockheed said the tax reform would help stimulate investment that would help U.S. defense firms maintain their technological edge on potential adversaries such as Russia and China.

With defense company profits and margins at record levels, analysts say the tax changes could also prompt lawmakers and Pentagon officials to recover some of the windfall through lower prices. Defense executives said that would be a mistake.

"I think it would be self-defeating for our customer community because it ultimately would discourage us from investing on their behalf," Northrop Grumman Chief Executive Wes Bush said on an investor call last week. "It would discourage us from the type of things that we need to be doing to support their capacity and technology needs for the long-term."

Northrop, which is building the new B-21 bomber, is boosting capital expenditure to $1 billion this year, an 11% increase from 2017. The company plans to maintain that level over the next two years and could raise it further if it wins some big new contests, such as replacing ground-based nuclear missiles.

Raytheon, maker of the Patriot missile-defense system, is lifting capital spending by 50% this year compared with 2017. Like Northrop, it is also hiring thousands of new staff, reversing the sharp decline in sector employment over recent years. Raytheon Chief Financial Officer Toby O'Brien said in an interview that he hadn't seen any indication the Pentagon would push for lower prices.

The Pentagon's acquisition team hasn't said how they might approach contractors' gains from tax reform. Byron Callan, an analyst at Capital Alpha LLC, said the Trump administration's focus on encouraging military spending to grow sales and employment meant clawbacks in the short term were unlikely.

"Could that change in a new administration? That's an absolute possibility," Mr. Callan said.

Pentagon officials have in recent years criticized the low level of investment by some big defense companies at a time when companies have returned billions of dollars to shareholders in the form of stock buybacks and dividends, helping drive share prices to record levels.

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

(END) Dow Jones Newswires

January 30, 2018 02:47 ET (07:47 GMT)

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