U.S. defense companies dodge flak on Saudi Arabia weapons sales

A who's who of U.S. business leaders have publicly distanced themselves from Saudi Arabia's efforts to modernize its economy following the killing this month of dissident journalist Jamal Khashoggi inside the Saudi consulate in Istanbul. But one group of American chief executives -- defense company CEOs -- have stayed under the radar as Washington debates longtime U.S. business ties to the kingdom that include billions in weapons sales.

That changed this week as two major U.S. companies that have sold weapons and other defense systems to Saudi Arabia for decades -- Lockheed and Raytheon -- finally weighed in during earnings calls with Wall Street analysts, outlining what they expect to sell to the kingdom in the next few years. Their top executives didn't offer much detail, but it was more information than what the heads of General Dynamics, Boeing and Northrop delivered during their calls with analysts this week. 

Billions in business at stake

The kingdom has spent almost $90 billion on weapons and defense systems from U.S. contractors since the 1950s, including roughly $5.5 billion last year, according to The Washington Post. Saudi Arabia has been the single largest market for American defense contractors over the five years ending in 2017, with nearly one-fifth of total U.S. weapons exports flowing there.

President Donald Trump recently defended the U.S.-Saudi commercial ties -- especially when it comes to supplying the kingdom with arms -- by claiming the relationship creates hundreds of thousands of U.S. jobs. Much of America's economic growth of late stems from government and military spending, according to The Wall Street Journal.

How Mr. Trump and Congress handle the now-strained relationship with Saudi Arabia matters greatly for defense companies, which have seen their industry's stock prices rise more than 40 percent since Mr. Trump won the White House in November 2016. 

The U.S. government must approve military sales to foreign countries, so defense contracts are complex and often are filled over many years. For each direct sale, a foreign buyer negotiates with a U.S. defense contractor, and the contractor in turn secures an export license through the State Department, according to a federal guide for foreign buyers.

Lockheed Martin: combat ships, anti-ballistic missile systems

Lockheed Martin (LMT) CEO Marillyn Hewson was asked about the political situation in Saudi Arabia, and Lockheed's exposure to it, by Bernstein analyst Doug Harned on Tuesday's earnings call. Her response: "Most of these agreements that we have are government-to-government purchases, so anything that we do has to do with following strictly the regulations of the U.S. government."

She cited a $450 million contract awarded in July for combat ships for the kingdom as the latest example. 

For 2019, Lockheed expects less than $500 million in sales to Saudi Arabia and less than $900 million in 2020, CFO Bruce Tanner said on the call. "So, not a huge amount of dependency on the activity even though the opportunities we've described are much larger than that, obviously," he said.

Tanner cited the Terminal High Altitude Area Defense, or THAAD, anti-ballistic missile system as one of those "much larger" opportunities. That potential contract, valued at $15 billion over time, is now considered at risk, Bloomberg reported this week.

Lockheed reported $14.3 billion in overall third-quarter sales. For the first nine months of 2018, the defense contractor had about $39.4 billion in total sales sales and $3.8 billion in profit. Its shares are down 3.1 percent for the year, more than the S&P 500's decline of 0.6 percent, but Lockheed's stock is up 20 percent since President Trump's election.

Raytheon: Patriot missiles

Raytheon (RTN) CEO Thomas A. Kennedy echoed Hewson's comments on Thursday when he was asked by Vertical Research Partners analyst Rob Stallard about Raytheon's exposure to issues in the Middle East. Kennedy said the maker of the Patriot missile does business in 80 countries and doesn't depend on any one customer for the bulk of its business. 

Kennedy emphasized that Raytheon follows "the direction and position of the U.S. administration, which we're right behind in making sure that we understand where they're going and that we're lock and step behind them."

Raytheon revenue from its Saudi Arabia contract accounts for about 5 percent of 2018 sales so far, CFO Anthony O'Brien said on the call. In 2019 that amount should be "flattish" by comparison, he said, adding that the company sees "a couple of follow-on" contracts in the fourth quarter and a "major award" for radar next year.

Raytheon, which posted $6.8 billion in sales for the third quarter, reported $19.7 billion in revenue for the first nine months of the year and nearly $2.1 billion in profit, according to results posted Thursday. Like Lockheed, shares are down 3.1 percent for the year and have climbed 20 percent since Mr. Trump's election.

Raytheon has "supported the Kingdom of Saudi Arabia" for more than 50 years, Kennedy said. "So I'm pretty confident that we'll weather this complexity -- it's really kind of a geopolitical environment we have right now, and we're working through that."

General Dynamics: Light-armored vehicles

General Dynamics (GD) CEO Phebe N. Novakovic sidestepped a question from Vertical's Rob Stallard on whether the Saudi situation had any impact on the company's order backlog by noting that Canada is her biggest customer. (Canada has had its own dispute with the kingdom in recent months that could affect arms deals between the two countries.)

"So I don't know what the backlog is," Novakovic said. "We don't look at it in that regard. I will tell you the largest contract we have is with the government of Canada [for a light-armored vehicle]. We are continuing to build that vehicle on schedule, and we see no indication that that contract has changed, the status of that contract has changed in the moment. So, steady as she goes."

General Dynamics reported $9.1 billion in sales for the third quarter. For the first nine months of the year, it had $25.8 billion in sales and $2.4 billion in profit. Shares are down 15 percent for the year, but they're up 5 percent since Mr. Trump's election.

Boeing and Northrop: The sounds of silence

Not one Wall Street analyst asked a question about Saudi Arabia on Boeing's or Northrop Grumman's earnings calls. Boeing (BA) and Northrop (NOC) both declined to comment earlier this week on whether executives were attending the now-controversial Saudi investment conference known as "Davos in the Desert" that took place this week.

Boeing reported almost $25.2 billion in third-quarter sales, including $5.7 billion in its defense unit, and $72.8 billion in sales so far this year, with $17.1 billion in the defense unit. It shares are up 20 percent year-to-date and more than 140 percent since Mr. Trump was elected. 

Northrop had $8.1 billion in third-quarter sales and $21.9 billion so far this year, with profits of $1.1 billion and $2.6 billion, respectively. Northrop's shares have declined 12 percent year-to-date but have climbed 15 percent since President Trump's election. 

 Here are the U.S. corporations that contract with the Department of Defense, along with the money committed to them last year.  

-- CBS MoneyWatch's Irina Ivanova contributed to this report. 

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