Defense Firms Aim for Windfall -- WSJ
January 30 2018 - 3:02AM
Dow Jones News
Lockheed, rivals look to invest tax gains in weapons instead of
offering lower prices
By Doug Cameron
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).
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)
Copyright (c) 2018 Dow Jones & Company, Inc.
Raytheon (NYSE:RTN)
Historical Stock Chart
From Aug 2024 to Sep 2024
Raytheon (NYSE:RTN)
Historical Stock Chart
From Sep 2023 to Sep 2024