Lockheed CEO Doesn’t See Downscaling of Defense in Next Administration

The following interview with Lockheed Martin (LMT) CEO Robert Stevens was conducted on April 25, 2008*.

Conventional political wisdom holds that the next president is unlikely to support defense spending growth at the levels President Bush has consistently advocated.

But given the continued demands of U.S. troop deployments to fight in Iraq and Afghanistan, the wear and tear on equipment resulting from those conflicts, and the aging of legacy planes and ships, some military and industry leaders say the U.S. needs to spend more, not less.

One person vitally interested in those discussions is Robert Stevens, chief executive of Lockheed Martin, the nation’s largest defense contractor. Stevens met with reporters where Lockheed held its annual shareholders meeting. Here are excerpts:

We will have a new administration next year and possibly a shift in defense policy. Recently, your industry group, the Aerospace Industries Association, put out a study saying the nation needs to spend more on defense systems procurement. Does this country have a rational, well thought out defense strategy? Does it need to have a discussion or a debate about defense policy?

From our point of view our country...is having that debate. We’re active participants in that debate. There are some very different views. Some of those views continue to mature.

The fact we’re having an election here is pretty good testimony to the fact that the security strategy we’ve had in this country for more than 200 years has enabled the democracy to function well. We can discuss all these issues in public, in open political discourse, and people can state their views candidly, and we can develop a good national security policy.

The presidential candidates are talking a lot about Iraq, but there doesn’t seem to be much discussion of defense policy beyond the situation in Iraq.

We’re always hopeful to hear more views. But there has been discussion about national security policy, what role America plays in the world, how we play that role. The degree to which we need to make the right investments--sometimes spending money is making a long-term investment in the security of this country.

Are you concerned there will be retrenchment by the next administration in regard to defense investment?

I don’t believe, in any wholesale fashion, there will be. The reason I say that is the sense that we have, and the sense I think others have, of the demands in the global-security environment. I think those demands do require investment, and those investments are a prudent application of resources to protect a $14 trillion economy and 300 million American citizens.

Has Lockheed had to change how agile it is to get new technologies to the front faster to meet new threats? Has that been an adjustment for Lockheed?

I think it depends on what aspect of security we are describing. Some elements of security have a more natural long cycle. And some have a more natural short cycle. The situations you’re describing, insurgency and counterinsurgency, they change by the minute.

One of the interesting challenges of our business is to make the right investment in the right technology to align with the right systems in the cycle we’re talking bout. Some parts of our business are adapting to the short things and some parts of our business are thinking 50 years from now. If you want to challenge yourself intellectually, tell me what you think the world will look like 50 years from now. We have more than a dozen programs that have been active and in-service for five decades. It is not an exaggeration for us to talk about, in our planning horizon, not the next four quarters but the next 40 years.

We know that we have to have the flexibility to adapt quickly, flexibly, and without huge cost...when the nation needs that.

I’ll give you an illustration. A satellite was destroyed in orbit. The principal guidance system that enabled that shoot-down was the Aegis system aboard the USS Lake Erie, a Lockheed Martin product. That system was never designed to guide anything into a satellite intercept. But in a matter of 40 to 45 days it was reprogrammed and turned into a near-perfect intercept. I think near-perfect is going to be the standard against which we should measure ourselves.

* This interview was conducted by and appears courtesy of Bob Cox of the Fort Worth Star Telegram. The full interview is located here.

Disclaimer: This interview is not meant to be construed as an endorsement of Lockheed Martin or its stock. As CEO of the largest defense contractor, we thought the interview presented some interesting perspectives on the defense sector which would be of value to the readers of the SPADE Investor Newsletter.

Comments

[CrossProfit_:]

As countries scramble to secure basic necessities for their population; food in addition to energy sources, global tension rises adding risk to confrontation.

This may subside, but no President will be willing to put at risk the population of the U.S. in a time of rising international tension. This is in different context than in the past yet is in accord with basic human nature.

Shortages creates hardship which in return leads to hording which in return can lead to trade barriers which can lead to confrontation.

Let's hope that things work out differently this time around, departing from the last 2000 years of world history. LMT and the defense industry is there to back up the possibility that nothing has changed.

Disclosure: This is the personal opinion of a CrossProfit analyst and may not reflect the opinion of crossprofit.com.

2008 May 08 05:16 AM