Marillyn Hewson took the reins of Lockheed Martin in January, succeeding Bob Stevens, who had held the position since 2004. (Staff)
Lockheed Martin has again topped the Defense News Top 100 defense contractors list. Despite the overall decline of revenue on the list, Lockheed reported an increase of 2.1 percent in defense revenue, maintaining a $13.5 billion lead on its closest competitor, Boeing.
But while the company’s position on the list is the same, its CEO isn’t. Marillyn Hewson took the reins of the company in January, succeeding Bob Stevens, who had held the position since 2004.
Despite good returns in the past several years, Lockheed faces reduced US Defense Department spending, pressure from shareholders to maintain large dividends and share repurchases, and the difficulty of finding savings when companies have already thinned their ranks.
Q. Lockheed Martin is one of the only companies that managed to grow last year despite budget cuts. What is the impact of sequestration on the enterprise now, and what is the growth strategy if — as almost everybody in Washington expects — sequestration remains in place?
A. We have already given an outlook that our sales would be down this year as a result of sequestration. We did some modeling and it is very difficult to plan at all right now around sequestration. So we did some modeling early in the year and we actually even shared with our shareholders an estimate — it is purely an estimate based on our portfolio with the US government — that we might have an impact of up to $825 million in sales.
We are not seeing a significant impact yet, but the year is not over. We have had some contracts that have been impacted; we have a couple hundred people that are going to be on furlough. So we have had some impact, but not at what we expect. We do expect that, as the US government makes its decisions, we will see more impact as a result. We have a strong portfolio that is still continuing to be in great demand, I think, both domestically and internationally and that is the strength of Lockheed Martin, and that is a differentiator for us.
Q. Bruce Tanner, your CFO, recently said he feels good about the 2014 budget, but that sentiment does not appear to be widely shared in DC. Why does there appear to be a disconnect between what the company is saying and what most people believe?
A. I think what you are reflecting on is that the FY14 budget that was put out did not take into account sequestration, so that is two different things. I think a lot of our programs were well supported through that budget, but it did not have sequestration taken into account. So if it continues as the law and if there are not changes, then we will have to line up with what decisions the US government makes on how sequestration will manifest. I think that it can be disruptive on continuity programs, it can be disruptive for labor, for supply chains and for a whole range of things. We have said for a number of months that we do expect if sequestration goes to its full order, that will have an impact on our industry.
Q. When do you think the impact is going to be most profound?
A. We are so far along in FY13 that ... I think it is going to be in ’14 and ’15 and beyond if it stays at that level it has been cited.
Q. Your stock is fetching the highest dividend of any US prime. What other ways do you have of making sure that you are presenting a good investment case for folks downstream so that your current investors are happy, but you also attract future investors?
A. Well, I think just fundamentally we have a strong business because we have an integrated strategy that makes sense across our corporation and it has been delivering results for many years, and we are still on the path of that strategy. We have a strong, broad portfolio that is well aligned with customer’s priorities, both domestically and internationally. We still see a strong demand for our products and capabilities, and that is because we have been investing strategically over the years to make sure that we are well aligned with that.
We have got a topnotch leadership team, well-seasoned and who have been in this business for a long time and know what they are doing. We focus a lot on investing in growth both in our innovation and our process and being able to provide affordability to our customers. I would say the other primary reason we are strong is because we perform well.
Q. [Former COO] Chris Kubasik, however, was clear until his departure that he did not think you could sell to the shareholders the idea of the company investing significantly in research and development along the lines of what the Pentagon wanted. Is that still the company’s position or has it changed?
A. You know, we have a balanced cash deployment strategy. We look at and we have made this commitment to our shareholders over the years that we will return 50 percent of our free cash flow to shareholders year over year and we have been on that path. Last year, of course, we had a 15 percent increase in that dividend, but we provided significant dividends, double digit, for the last 10 years and we will continue to look at that.
We will continue to do share repurchases, we will continue to invest in research and development. We will continue to look at where we want to put our dollars into strategic investments that allow us to continue to grow the company. So we will make those decisions around what is best for the company. If it means investing for a program that gives us a good return on that investment, then that is the decision we will make just as any company would do.
Q. [Former Lockheed President and CEO] Norm Augustine famously said that the history of commercial diversification by defense contractors is unblemished by success. Yet the company appears again to be flirting with commercial diversification, at least based on some of the press releases. What is the fundamental view that you guys take to a commercial diversification strategy?
A. Moving into adjacent markets, as we say, whether it is commercial or other markets, is all about staying with our core capabilities and technologies and moving into those markets doing what we know to do. Then if we are moving into a new market, we may consider partnering with a company that is involved in that. We may consider other ways that we really bring the experts in to move into the new market. So I do not think that is a change for us and we have been successful in moving to, for example, we have Sim-Industries, which is our commercial aircraft simulator business that we bought in the Netherlands, and it is making great strides and continuing to grow.
We just signed up a contract with a company in China to do ocean thermal energy conversion to build a 10 megawatt plant that will help to power their resort. So we have not gone far afield from something that we do not know what to do.
Q. Do you expect the Pentagon to continue paying for defense contractors’ pension costs? With a full sequestration scenario, it becomes very, very hard for the department to cover those costs.
A. I do not see any indication that there is a change.
Q. Is that something that you are concerned about or not concerned about in terms of it changing?
A. Our pension is part of our costs structure that we bring forward in doing business. I do not think it is any different in how a commercial company prices their products or their labor force costs.
Q. Today’s Lockheed is the product of the 1990s consolidation. What is different in this downturn from the last one, and what is the Lockheed Martin of 2020 going to look like?
A. I think something that’s different is that, for the last downturn there was a lot of recapitalization that occurred prior to the downturn. This time around, we have used up a lot of systems in the wars that we were fighting and there is not the same amount of budget to go do the recapitalization. Another thing that is different this time around is that, while in the last downturn we were seeing a reduction in the threats, we are not. We are seeing an escalation in the global security environment and the threats that are out there and the unpredictable nature which our customers have to face.
What will Lockheed Martin look like? We are very much growing our international business and so I think if you were to look out five to 10 years from now, our global footprint will be broader, we will have more international business — probably more than a quarter of our business will be international, and today we are at about $8 billion of our revenue is international. And you will see probably a stronger presence in cybersecurity. That is a very important competence we have, and you will continue to see that grow. Energy is an area that we bring a lot of capabilities to.
Q. The Pentagon does not want the big primes uniting. Nobody knows what the budgetary scenario is going to be, so nobody really knows how to price and value anything. Under what circumstances, as you map out your acquisition strategy, do you see yourself being a seller, and under what circumstances do you see yourself being a buyer in your portfolio?
A. We always look at our portfolio and shape our portfolio and the markets that we are operating in, and we are always paying attention to potential acquisitions that would be high-quality properties. I think I am really happy with the portfolio that we have today.