Lockheed Martin's CEO Hosts Leadership Transition Conference (Transcript)

 |  About: Lockheed Martin (LMT)
by: SA Transcripts


Good morning, and welcome to the Lockheed Martin Leadership Transition Conference. This call is being recorded. I'd now like to turn the call over to Mr. Jerry Kircher, Vice President of Investor Relations. Please go ahead, sir.

Jerry F. Kircher

Thank you, Allie. [Operator Instructions] On the call today are Bob Stevens, Chairman and Chief Executive Officer; Marilyn Hewson, President and Chief Operating Officer; and Bruce Tanner, Executive Vice President and Chief Financial Officer.

Statements made in today's call that are not historical fact are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ. Please see our SEC filings and charts posted on our website today at www.lockheedmartin.com for descriptions of some of the factors that may cause actual results to vary materially from anticipated results. With that, I'll turn the call over to Bob.

Robert J. Stevens

Hey, thank you, Jerry. Good morning, everyone. Thanks very much for making time for this call today, which I know we scheduled on short notice. By now, I trust that you are aware that our Board of Directors and I asked for and received Chris Kubasik's resignation on Friday.

Through our internal ethics process, an employee raised an allegation of improper conduct that was brought forward at the end of October. Within 3 days, an internal investigation, conducted by our legal and ethics departments, determined that the allegations were not frivolous. And the following day, we secured an independent outside law firm to conduct a thorough investigation.

This outside investigation confirmed the presence of a lengthy, close, personal relationship with a subordinate employee, and the ethics allegation was substantiated. We live and work here by a set of values. They are not negotiable. We have standards of ethics and integrity that we expect all to meet, and we have a Code of Conduct. In this instance, those values, those standards and that code were not met.

While I am deeply disappointed and genuinely saddened by Chris' conduct, I recognize that it was a personal failing, having no impact on either our operational or our financial results. And our clear and swift response demonstrates our unyielding commitment to holding every employee accountable for their actions. Fortunately, we have a strong leadership team and a robust succession plan that allowed the board and me to react quickly and appropriately to this situation.

As our press release on Friday stated, the board elected Marillyn Hewson, President and Chief Operating Officer and a member of our board, effective immediately. And she'll become our Chief Executive Officer on January 1. The board also asked me to serve as Executive Chairman throughout 2013 beginning at the start of the year.

Marillyn is an exceptional leader with impeccable credentials and a deep understanding of our business, customers, shareholders and employees. She is an example of the extraordinary bench strength we've developed through our talent management and development actions taken over many years. I'm confident that her extensive and diverse leadership and multiple roles during her career has prepared her to assume this new realm seamlessly.

She has been with our company for nearly 30 years and has served in both functional and general management assignments. She has had 19 specific assignments in our company, many of which I assigned to her over the last 12 years, and she has moved 8 times during her career. She has led 3 functional departments and has had profit and loss responsibility in 4 distinct and diverse businesses, all have shown marked improvement as a result of her leadership.

For the last 3 years, she's been running our largest business area, Electronic Systems. With more than 4,000 contracts and 45,000 employees in 44 states, Canada, Australia and the United Kingdom, and more than $14.5 billion in revenue, this business on a standalone basis would be larger than Textron or SAIC and would rank in the top 30 defense companies.

She's consistently grown revenue, expanded margins, generated cash and for the past 8 months, has been working directly with me on a daily basis to transition the executive office. She has been an exemplar in modeling ethics and integrity in her personal and professional life, and she will make an outstanding Chief Executive Officer.

Congratulations, Marillyn.

Marillyn A. Hewson

Thank you, Bob. Bob, I'd just like to then thank you and the board for the confidence you've shown in me to lead this great company. I look forward to leading Lockheed Martin as we begin our next 100 years of operations. And for those of you on the call who don't know me well, I look forward to working with you more closely in the future.

Robert J. Stevens

Great. Thank you, Marillyn. So here's our plan. As our Executive Chairman, the board has asked me to devote next year to assuring continuity in the strategic, operational and financial dimensions of our business, which working with Marillyn, I am most happy to do. I'll be actively involved and engaged and willing to play any role to assure a successful transition.

We have exceptional people and extraordinary talent that is well-led. Their efforts resulted in the strength in the third quarter you just reviewed and solid performance this year, year-to-date. They remain focused, and they aren't going anywhere. We have an adaptable strategy that we've been successfully evolving over many years, built around a strong portfolio of systems and capabilities that are increasingly relevant in today's global security environment. We have financial flexibility and a strong balance sheet supported by an institutionalized cash-generation process. We have a significant backlog and operating momentum built on the continuous improvement process that aligns well with the affordability initiatives being undertaken by our customers. We have a deep leadership bench, giving us an enormously flexible response to any situation. We have a dedicated and fully engaged board. And we have an unflinching commitment to ethics.

The commitments that we've made previously are the commitments that we all have today. So Allie, with that introduction, let's open up the line for questions, please.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Joe Nadol with JPMorgan.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Bob, I was wondering if you could go into a little more detail on the Executive Chairman role, how you foresee it. Are you going to be in the office everyday? Is this a once-a-week thing? Just any more color on how this role is going to play out.

Robert J. Stevens

Yes, certainly, Joe. Thanks for the question. And I had a lot of discussion with the board and I've had a lot of discussion with Marillyn and our leadership team about this very subject. I think the first priority for me and the board is to assure a successful transition process. So that -- I think, it would be helpful if you all thought of the transition that Chris and I have been going through as a basic outline. And there are similarities in the transition that I will engage in with Marillyn. But there will also be some very distinct differences in different features. For example, Marillyn knows our operations in great detail. She understands the tempo of each business. She's been deeply immersed throughout her professional life having worked in these businesses and has had a long-standing and routine daily interaction with leaders across the corporation, who have been delivering on our commitments that did result in the strength of the third quarter. It has undergirded the performance year-to-date. There's very little that I could offer Marillyn about understanding the operations of this company. She understands our customers very well. She's known in the Department of Defense and in civil government agencies. She's overseen the Littoral Combat Ship, our missile defense programs, our precision-guided munitions, a very substantial part of our portfolio. As part of the last 9-month transition, she's been getting intimately involved in the F-35 program, the Aeronautics portfolio. So there are some areas there that we will be working on together in conjunction with Larry Lawson and leaders like that across the company. We will certainly want to focus more of our time and attention on assuring Marillyn gets to meet all of you and others in the investment community. I think that's an area where Chris, having served as our CFO, knew you and the dimensions of those responsibilities better. Marillyn and I will be working with Bruce Tanner and others in that conjunction. There are a variety of policy issues that I think we will certainly address. And that includes an increasing number of visits to the leadership in the 113th Congress that will be seated here on January 3. We'll talk a lot about sequestration. We'll talk a lot about budget formation. We'll talk a lot about concepts of operations for our customers and how we can help them, how we evolve our technology, all that portfolio of strategic capabilities that our company has to support our customers in their missions. So it will be very carefully choreographed. Relative to demands on my time, I'm very happy to work daily, hourly, weekly, whatever the requirements are. I've made no other plans. I've accepted no other responsibilities because it is absolutely critical for our customers that we get this transition right. And there is no distance whatsoever between Marillyn and I on this front or Marillyn and members of our executive team or anywhere else. What binds us together is a focus on the missions that our customers are engaged in. The global security environment is not less complicated. The economic stress throughout our customer communities is not going to diminish. We're going to focus on affordability. We're going to find the right strategies to take this businesses global. We're concentrating on our international markets. Marillyn and I and everyone else will do all that we need to do to make this a successful transition.


Our next question comes from Doug Harned of Sanford Bernstein.

Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division

A question for Marillyn. When you were looking now -- before this past week, you were looking at moving to become President. As you look at this now, and you're going to be CEO, how has that changed the way you're thinking about your priorities? I know it's been a short time, but about your priorities in terms of the things you want to get deeper into, areas you may want to focus on more in this new coming role.

Marillyn A. Hewson

Well, thanks for the question, Doug. I'll just start by saying that I've been a part of the development of the strategy and working closely with Bob for the last 8 months, both Chris and I. So it was a matter of us all 3 working together on the strategy for the company continuing forward, as well as the priorities and the challenges. So I think it just changes my role from being more of focused internally on a lot of the operational activities to allowing that to be covered by our outstanding executives that run our business areas. And then I will be taking it up at a higher level around the strategy, the interaction with our customers and our other stakeholders, like yourselves, in my role, working more on policy matters, looking at our overall talent development for the company. And so those will be the areas that I would primarily be focused on.


Our next question comes from George Shapiro of Shapiro Research. Our next question comes from Michael Lewis of Lazard Capital Markets.

Michael S. Lewis - Lazard Capital Markets LLC, Research Division

Marillyn, congratulations. Chris was a very strong advocate at Lockheed for progressing the JSF program with your customers. Is there any concern that the program could see any near-term implications with this recent management change? And now while I don't think it will, I think some investors may be interested in your comments around this.

Marillyn A. Hewson

Certainly. On F-35, I've been very much engaged in, for example, the negotiations on the LRIP 5 activity. I've been in those meetings, and so I think that won't change. I mean, we'll continue forward with that. I know the Department of Defense team for the F-35. And as I said, I've been engaged in the actual negotiations. My commitment is that I'm accountable for getting LRIP 5 negotiated and that I get LRIP 6 under contract and move forward with the program. The program itself, I believe, is progressing very well. I know that we give you an update quarterly on how the program is doing relative to our flight test program. And we are going to meet our commitments this year on delivering the aircraft that we've committed to. The support for the customer is strong -- from our customers is strong. And so we'll continue to -- I'll be very much engaged and we shouldn't -- we won't miss a beat on F-35.

Robert J. Stevens

And let me add, Marillyn, that in our initial contacts with our Department of Defense customers, which you would all appreciate we set about at the close of business -- after the close of business on Friday, the initial response has been an understanding of the situation that we faced here and an understanding of the actions that we've taken and a full measure of support for Marillyn in her new position, along with, I think, a very consistent request of all of us, "Don't lose focus on the commitments that you've made on the F-35, specifically, and on other programs specifically." So I don't think there's apprehension about the leadership change nor do I think that there's any apprehension that's warranted. Given the breadth and depth of Marillyn's experience and the continuity that we're going to have here that is really quite unlike transitions almost anywhere else that we've seen, our customers need the capabilities that we're working on, including the Joint Strike Fighter. They need us to focus on affordability. The need us to help them evolve their concepts of operations and provide new technologies. And that's exactly what we're all focused on doing. So we've got a very high level of support that was very welcomed and just reminds us that we have to place a high priority on meeting the commitments that we've made to those customers.

Marillyn A. Hewson

I'd just also like to add that, as I said, since I've been transitioning into the COO role, I have spent more time on the overall program in F-35, so it's not a new program to me. Within Electronic Systems, we have major elements in that program, with Autonomic Logistics Information System, the training activity that we're doing at Eglin, the Electro-Optical Targeting System, the Integrated Core Processor, all of those elements I've been involved in since day one, running Electronic Systems for the past 3 years. Just for the past 8 months, I've spent a lot of time in Fort Worth with the F-35 team. I've been engaged in the meetings for our negotiations with the customers. So as I said, we won't miss a beat in terms of moving forward on the F-35 program.


Our next question comes from David Strauss with UBS.

David E. Strauss - UBS Investment Bank, Research Division

Bob, when would we expect to hear an announcement in terms of who would fill Marillyn's position as COO, an announcement on the ES side? And maybe while we have you, any updated thoughts in terms of the outlook for the business now that we're post the election here?

Robert J. Stevens

Yes, I'm going to take your question and break it into 2 pieces. Marillyn can talk about Electronic Systems and the recent reorganization that she engineered. When I look at the top organization, I think part of your question is will we fill the role of Chief Operating Officer. I've been doing this long enough to have worked through a variety of organizational models for us. And as our Chief Executive Officer, I've served in that capacity with a Chief Operating Officer and I've served in that capacity without a Chief Operating Officer. As we look forward, we're not going to fill in the immediate sense that Chief Operating Officer role. And the reason for that applies to me and Marillyn in exactly the same way. We both grew up in the operations of this company and we understand the internal process dynamics here of how you engineer complex systems and how you ultimately produce, deliver and support those systems in the field. So our DNA is very similar in that respect. We have an incredible array of extraordinarily talented Executive Vice Presidents running our business areas. Many of you have met them and know them. And they are, in a sense, Chief Operating Officers for their areas of responsibility. And they can be relied upon to focus on the execution dynamics. And what Marillyn and I do, along with others here, is allocate resources in a way that help facilitate their ability to get that job done. So in this construct, we're going to our strengths. And our strength is this incredible understanding of our operational capacity and the integration of our businesses. We also recently undertook an organizational realignment to further articulate the pieces of Electronic Systems to have a more agile, responsive, customer-focused, customer-oriented organizational structure. And I'll ask Marillyn to comment on that.

Marillyn A. Hewson

Sure, Bob. When I was announced to move into the role of transitioning to the Chief Operating Officer and President of the corporation, it presented another opportunity for us to revisit the structure of the organization. And at the time, we determined that with all of the aggressive steps we've been taking to take cost out of our cost structure, it seems the opportune time for us to flatten the organization. So many of you may have seen the announcement that we've put out several weeks ago, where we will -- effective December 31, we will take out the Electronic Systems sector level and we will take 3 companies that we have today and they will merge into 2 companies that are large enough to be business areas. So Lockheed Martin on January 1, instead of being 4 business areas, will be 5 business areas. Those 5 business areas: Aeronautics, Space Systems, IS&GS, which you're all familiar with. And then the other 2 business areas replacing Electronic Systems are Mission Systems and Training and Missiles and Fire Control. We have, as Bob said, some outstanding executives that lead those 2 business areas: Dale Bennett, who will head Mission Systems and Training; and Rick Edwards, who will head up Missiles and Fire Control. So with that, we're able to save $50 million a year, and importantly, as Bob said, be better aligned and streamlined our interaction directly with our customers as we move forward.


Our next question comes from Howard Rubel of Jefferies.

Howard A. Rubel - Jefferies & Company, Inc., Research Division

Marillyn, for a moment, maybe you'd like to talk about your management style and approach. How do you get the most out of people?

Marillyn A. Hewson

Sure, I'd be happy to do that. I think as a leader, it's very important that the leader sets the course for the organization and lays out the strategy of where we're taking the organization. So that is a style I'm very much focused on, clarity in my communication style so that everybody understands the direction that we're going. I think it's also important that a leader put in place an environment where people can do their best work, where they feel comfortable to bring their best ideas forward because after all, as a corporation, we are a technology leader and we need that innovation and technology and ideas everyday. So we create that type of environment for them. And then once that is put in place, to make sure that we are listening and we're focused on how we, across the business, listen to our customers, listen to our people in growing a business and that talent -- and making sure that the talent is there across the organization in terms of talent development. I think at Lockheed Martin, one of the things that's important to me in my 30 years with -- almost 30 years with this company is what brings people here. I think people are here because they are really focused on doing something larger than themselves, then that's what we'll do. That patriotism, that purpose, that being involved with the company, where they can be working on some of the most incredible activities and most important work in the world, and that passion that I have and the people at Lockheed Martin have that I think makes as such a great company. And then most importantly, is this rock-solid commitment to ethics. That is the foundation of our company. It doesn't waver. And as a leader, I will ensure that as we move forward.

Robert J. Stevens

And Howard, all I'll add in this -- I know you're going to find this extraordinarily hard to believe. People seem to like Marillyn more than they like me. I don't understand that and I have to do a little more research there. But she is a genuinely likable person, who understands people and connects with people in this company at an individual level. It's really quite remarkable. And I must say in all seriousness, I've learned a lot from her in our ability to work together over the years.


Your next question comes from Sam Pearlstein of Wells Fargo.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Bob, I guess, I'm trying to just understand and trying to ask it a little bit more delicately. But you had the opportunity when you announced the transition before. You could have ended up with this structure. This isn't the one you originally chose. So I guess, why did you go down the other path in terms of Chris ultimately becoming the successor? What skill set do you think was best suited for that and why the change?

Robert J. Stevens

Sure. We look at team mechanics here and the ability to field a team that's going to handle all of today's challenges and all of tomorrow's future opportunities. And I thought the combination of resources with Chris and Marillyn was a very compelling ability to take quite different people with different backgrounds and assemble them, along with our other colleagues here. And probably, part of the philosophy that I've never really spent time with you in describing is built on the notion that we are a team sport. And I will tell you that I sit in the CEO position here, and I know that position gets illuminated in a lot of interesting ways. For example, we had a very solid third quarter. And I would guess that somebody might think that Bob Stevens had a very good quarter. Well, the truth is, 120,000 people in Lockheed Martin had a good quarter because a lot of the illumination I receive is a reflected glow. What that glow comes from putting a combination of resources together, and those resources have to be qualified and competent for their jobs. Now what we've learned, since our last call together, was the circumstances involving Chris' conduct here. And that conduct disqualified him from further service on the executive team at Lockheed Martin. That does not mean we don't have other combinations of resources that are equivalent and compelling. I have spent an enormous amount of time during my tenure, literally over 8 years and literally starting as my first day on the job with our Board of Directors, talking about senior leadership, talent management and talent development. That resulted in our Full Spectrum Leadership program. That resulted in our Center for Leadership Excellence. And it's resulted in many, many conversations with our board about this array of leadership talent. And what we wanted was an all-weather team that could handle any circumstances, seen or unforeseen, as we recognize there's greater volatility in the landscape everywhere. No one expected us to be dealing what we're dealing with now. But I'm absolutely certain of the few things. Marillyn Hewson is ready now to be the Chief Executive Officer of this company. Our board believes that and I am certain of that. Our team is ready now to take on any challenges and all the opportunities that we see in the environment. There are no doubts. There may be some distinctions about how we change the gearing in our transition plan, who we'll interface with first and how we assemble ourselves around priorities, but there is absolutely no doubt about the future direction of this corporation. Every employee in this company will rally around and support Marillyn because every employee in this company did the very same thing for me. And I'm grateful for them, and Marillyn and I and the team here are grateful for their support. And we will keep pressing on here.


Our next question comes from Myles Walton of Deutsche Bank.

Myles A. Walton - Deutsche Bank AG, Research Division

Marillyn, could you just touch on maybe what you're looking at is the biggest 3- to 5-year challenge for the corporation and also the opportunity? And it's a little early to think about legacy, I know. But as you think about those 2 things in constructs, are there 2 things that leap to the top of the page on both?

Marillyn A. Hewson

Well, certainly, the #1 priority for us as a corporation is the F-35 program. And we've talked some about that earlier, but that will be a challenge for us and a priority for me personally for years to come. But most certainly now, as we get through the development program and continue on to delivering jets. The second one is the international expansion. As you know, our strategy is certainly to grow in our domestic market, but most certainly, to grow internationally. And with our air and missile defense activity, the F-35 will certainly be a large component of that. The fighter programs, other fighter programs we have, airlift, a lot of areas in Cyber Security and energy. And of course, in the Space Systems, we have a rock-solid set of products and services that we provide as well with our government satellites, SBIRS GPS-3, a range of things that we are doing there, including those shuttle replacements as well. So in terms of challenges, looking out and priorities, it is F-35, growing internationally, working with Bob and making sure our lawmakers find an alternative to sequestration, and then dealing with the fiscal pressures they're going to continue to have as the global security environment continues to get -- increasingly escalates. As I look at our environment, I mean, it's basically we do have a proven business strategy. It's demonstrated through results that we've had this year and we'll continue to have. And as you look back over a decade, we have continued to line up our portfolio, which is very strong, to our customers' priorities. We will continue to invest in that portfolio to keep it relevant. We are also taking aggressive steps as you know to take out costs for our products and on our processes as well. But not only take out costs from an affordability standpoint but to invest in new technologies and into new capabilities that our customers need to help them take down their total operating costs for the products that they have. We're investing in our people, too. We want to make sure we've got the right people in the right job, and that we're continuing to develop them, and then looking way beyond today, continuing to invest in the technologies and new capabilities that's going to keep us on the forefront of our industry as a technology leader.


I'm assuming we have one question left. Our final question comes from George Shapiro of Shapiro Research.

George Shapiro

Sorry about getting disconnected before and hopefully, this question hasn't been asked before. But Marillyn, I wanted to ask that Bob clearly had the big benefit of defense budgets growing throughout pretty much his whole tenure. You're likely to face the opposite with defense budgets shrinking. So how does that change your strategy and your thinking about how to run the corporation for the next 5 or 7 years versus under Bob?

Marillyn A. Hewson

Well, we've seen this coming. We always [indiscernible] our external environment as leaders, as we look at our strategy. So we're not going to see a major change. We've been through this before. And as you can see, we've been very proactive as a leadership team in taking actions in recent years to address our cost structure, to look at how we can make our products more affordable for our customers as they continue to see their greater level of demands while at the same time, we're facing the economic pressures that we have. So we're going to continue to focus and rely on our talent of our workforce that is here everyday and our new innovations in order to address some pressures that we'll certainly see in the global security environment. I think, as I said a few minutes ago, we have a very strong portfolio and we're well aligned with our customers' priorities and we are constantly listening to our customers, adjusting that portfolio in order to meet their needs as we move forward. We have the talent, we've got the capabilities, we have a very strong backlog as a corporation. And we'll weather this, and we will excel in this environment.

Robert J. Stevens

Allie, I want to thank you for your help on the call today. Let me -- for those who joined us today, thanks so much for your time. Let me leave you with a couple of thoughts. And the thoughts for me assemble around how proud I am of our company, even though we've had to face a difficult and very sad situation. For an employee of this company to come forward when they believed they had information about improper conduct and when that improper conduct was about the highest levels of the company and yet they came forward with confidence and real clarity without fear of reprisal, believing in the leadership, believing in the process and believing in our commitment, I think, is rare in today's business climate. And I'm so very proud of the people in this company involved in that process, who put their faith in our values and our commitment to one another.

We've invested over the years an enormous amount of time in talent and leadership development. And I think the return on that at times is hard to measure, except it's not hard to measure today. Because we have a ready-now team to face any circumstance that an uncertain global environment might bring our way without hesitation, without even a moments of pause. And I will tell you that we have interchangeable parts among our leaders here, that many of our leaders can play more than 1 role. I was absolutely confident we had talent to be the Chief Executive, to be a Chief Operating Officer, to be a Chief Financial Officer or whatever else this company may need because we are steadfastly focused on our customers' mission, our obligations to them, our commitments to the investors of capital here that we will do the right thing and focus on returns and our commitments to our employees. And I think we're living by those commitments, and we will continue to do that as we move forward. So I very much thank you for your time today. We all look forward to talking to you again in January. Thank you. And Allie, thank you again.


Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.

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