2016 Media Day
Remarks as Delivered by
Chairman, President and CEO
Marillyn A. Hewson
March 15, 2016
Chairman, President and CEO
Marillyn A. Hewson
"Lockheed Martin: Positioned for Growth with a Future-Focused Portfolio"
Good morning, everyone. Thank you for joining us for Lockheed Martin’s 2016 Media Day.
We look forward to hosting this event each year because it gives us the opportunity to update you on what’s happening across the business, and to share with you the challenges and opportunities we see ahead of us.
As always, I want to thank you for investing the time to be here. You play a critical role in keeping our customers, policy makers, and the public informed. And, we appreciate all you do to help tell our story.
Today, I’d like to talk about how we’re positioning Lockheed Martin for the future. I’ll first provide an update on our recent performance. Then I’d like to share my perspective on how the current environment is affecting our customers and our business, and how we’ve positioned Lockheed Martin to help our customers succeed today and in the years ahead. Then, I’ll be happy to take your questions.
In the face of a very challenging business environment, 2015 was a stand-out year for Lockheed Martin. We continued our industry-leading performance by focusing on our customers’ most pressing requirements today, and evolving our portfolio to anticipate their future needs.
We reshaped the Corporation through:
- The acquisition of the world-class helicopter company, Sikorsky Aircraft;
- The disposition of our Government IT and Technical Services business through a transaction with Leidos expected to close later this year;
- We realigned our retained IS&GS programs into other business areas; and
- We also combined our Energy businesses under Missiles and Fire Control.
We’re very excited about how we’ve reshaped our strong portfolio of products and capabilities.
Financially, we exceeded all of our commitments in 2015, and achieved record levels in backlog, orders, and international sales. We sustained our strong competitive performance, with a number of key strategic wins for the Corporation, including:
- The U.S. Army’s Joint-Air-to-Ground Missile;
- Germany’s selection of our Medium Extended Air Defense System;
- Australia’s Air 5428 Basic Flight Training program;
- The U.S. Air Force’s C-130J Multi-Year 2 contract;
- The Missile Defense Agency’s Long-Range Discrimination Radar; and
- A number of international missile defense contracts.
Today, I’m confident that we are well-positioned to provide our customers with the mission-essential capabilities they require, while continuing to deliver solid financial performance for our shareholders.
Looking to this year and beyond, our business will continue to be shaped by the environmental factors that our customers face. The security and economic environment is as complex and dynamic as our customers have ever known.
When James Clapper, the Director of National Intelligence, presented his Global Threat Assessment to the Senate last month, he talked about the fact that “unpredictable instability” has become the new normal for threats across the globe, a trend he sees continuing for the foreseeable future.
And everything we see supports his assessment.
Violent extremism continues to spread. And, the unprecedented rise of ISIL, Boko Haram, and other militant groups shows no sign of abating.
Terrorist attacks continue to occur with alarming frequency in Europe, Asia, and Africa.
And, as Iraq is making inroads against terrorists within its borders, the drop in oil revenue and a lack of trained troops threatens its ability to mount a prolonged assault.
The tenuous ceasefire in Syria has not resolved the inherent instability across that nation, and efforts to establish a unity government in Libya show little sign of progress.
Turkey is being drawn further into these regional conflicts, as it attempts to balance its national security needs with its concerns over the rise of traditional adversaries at its borders.
In the face of these conflicts, we’re also seeing a record level of migrants – the largest number of people on the move since World War II – and it’s likely to grow even higher this year.
State actors like Russia and China continue to invest heavily in many advanced capabilities, including sophisticated cyber programs. Iran and North Korea are conducting cyber espionage on a global scale. And non-state actors like ISIL, pose unique cyber threats as well.
Add to that the challenges of extreme weather, climate change, environmental degradation, a rising demand for food and water, and outdated infrastructure worldwide, and you can see why Director Clapper’s assessment holds such credence.
It’s clearly a complex threat environment our customers are facing, and we want to remain well-positioned to help them address these unprecedented challenges. That requires a clear understanding of their priorities and their constraints.
So, I’d like to share with you our perspective on what we see occurring in the U.S. and internationally, and what it means for our business.
Here in the U.S., we’ve seen defense budgets begin to stabilize, and our military and intelligence customers have reaffirmed their commitment to meeting their national security needs. All of which adds some predictability to our business, so we can plan and invest accordingly.
The passage of the Department of Defense Fiscal Year 2016 Budget Appropriation, which represents the first increase since 2012, gives us, and the DOD, more stability in the short term. This budget recognizes the need to allocate additional resources to meet rising global security challenges.
Our portfolio of products and technologies is aligned with the DOD’s priorities, and as a result is well-supported in the budget. For example, it includes funding to purchase 11 more F-35 Joint Strike Fighters than the President’s Budget Request.
Another example is that the U.S. Marine Corps indicated it would start buying CH-53K King Stallion helicopters to replace its aging fleet of CH-53E Super Stallions. In Fiscal 2017, they plan to purchase two CH-53Ks, and by 2021, that will grow to 14.
And, NASA received its largest budget increase in a decade, including strong support for the Orion and Space Launch System programs.
Of course, we recognize that the future of the Defense budget will be shaped by the next Administration, as well as by the outcome of Congressional elections in November.
In this environment, with limited program opportunities, competition remains intense among our traditional competitors. And, at the same time, we see new entrants looking to disrupt some of our markets. In fact, there are cases where we are seeing competitors – new and old – accepting unprecedented risk to gain or hold market share.
Given finite resources, we expect some of these competitors to accept opportunity costs in some of their core businesses, in order to deliver on customer commitments in others.
While many might see these factors as overwhelming or even insurmountable, we see an opportunity to rise to the challenge.
We are prepared to meet these challenges, adapt to this dynamic environment, and grow our company. Our traditional strengths will continue to form the foundation for this success.
Specifically, we will maintain a strong alignment with our customers’ most important priorities; we will continue to deliver exceptional program performance and unparalleled innovation; and, we will retain our strong commitment to financial discipline, bringing affordability to our customers and exceptional value to our shareholders.
Along the same lines, cost reductions, improved operational efficiency, and portfolio restructuring have made us a leaner, more agile, and more focused company.
Today, our rebalanced portfolio is stronger, with greater growth potential, higher levels of cross-product synergies, and additional cross-market opportunities.
All of that makes me confident that we’re well-positioned to succeed and grow in this new competitive environment.
One area where we expect the majority of our growth potential to come from in the years ahead is our international customers. While we see global demand for security products continue to increase, this demand is being met with economic headwinds that have the potential to slow global defense spending in some areas.
For example, we're starting to see some pressure on the budgets of countries that rely on oil revenues for a significant portion of their income. And a sustained strong U.S. dollar could further pressure international sales.
However, global growth is expected to continue, albeit more slowly than in the past. And as the U.S. has shifted foreign policy priorities, many partners are assuming an increasing share of regional security responsibilities.
Today, security considerations are particularly acute among our key customers in Europe, the Middle East, and Asia, where growing conflict is driving many of our current and prospective customers to increase their defense budgets and accelerate buying.
In each of these regions, Lockheed Martin is working with our partners to ensure we can deliver the capability, technology, and security they require. Each region is unique, and their needs differ in the face of varying threats.
So allow me to touch on each region in turn, and talk about how Lockheed Martin is helping our customers to address their most pressing challenges.
First, let’s turn to Europe.
Still in fragile recovery from the Eurozone sovereign debt crisis, Europe faces its most challenging security environment since the end of the Cold War. The security environment is driving greater investment in defense, relative to GDP growth, with defense spending forecast to stabilize, or even increase steadily for the first time in years.
The expansion of Russia’s military presence in Eastern Europe continues to drive concerns about regional stability – and has also revitalized NATO, with a clear threat and purpose.
The European Union is also struggling to respond to the surge of migrants and refugees, and a rise in Islamic terrorism.
I attended the Munich Security Conference last month, where I heard a great deal of concern from attending nations about Russia and its regional intentions. NATO Secretary General Jens Stoltenberg said at the event that NATO is undertaking the biggest strengthening of collective defense in decades – “not to wage war, but to prevent war.”
That focus on collective defense is heightening the need for interoperability among allies. Which is why the demand for Lockheed Martin products in Europe like the F-35 and MEADS is on the rise.
With eight of the nine F-35 partner nations as members of NATO, the F-35 will be the backbone of future air operations, enabling full interoperability, information sharing, and enhanced partnerships. In the years ahead, the F-35 will provide capabilities throughout NATO that are currently uniquely held by the U.S.
With the F-35B receiving Initial Operating Capability from the U.S. Marine Corps last year, and the first delivery of an F-35A from the new Final Assembly and Check-out facility in Cameri, Italy, the F-35 Lightning II continues to garner attention from customers around the world.
Last year, we delivered a record 45 F-35s to our customers, and we’re on track to deliver 53 aircraft this year, including 5 from the Italian production facility.
Similarly, our MEADS missile defense system continues to draw interest from European allies.
Just last June, Germany selected MEADS for its national missile defense program, signaling the establishment of a next generation European Air and Missile Defense capability that is expected to be a core system within NATO for many years to come.
Last month, I was in Germany and Poland, where leaders of both nations reaffirmed their desire for greater interoperability, and closer economic and security ties with other NATO allies.
In fact, in Poland we have just reentered discussions with the Ministry of Defence, about how MEADS could meet their air and missile defense needs.
And Turkey is reassessing its needs, and sees MEADS as a potential solution as well.
We also see continued interest in many of our other high-performing national security products, such as the Black Hawk, the C-130J, and the PAC-3.
I believe that partnerships among nations will only strengthen in Europe in the challenging years ahead. And Lockheed Martin has the proven solutions to help our customers in the region meet their NATO and national security priorities.
Now let’s turn to Asia.
Defense investment across Asia is expected to continue to grow strongly over the next decade, as sovereign nations seek to modernize defense capabilities in the face of increasing regional threats.
In particular, there are growing concerns about China’s aggressive military build-up and maritime claims, and North Korea’s increasingly unpredictable actions. As a result, we believe that our allies in the region will seek stronger ties with the U.S.
Economic conditions in Asia, while not immune to China’s slowdown, are expected to remain robust. Once approved, the Trans-Pacific Partnership agreement will be a cornerstone of U.S. economic policy in the region, and is expected to increase economic ties and the region’s importance in years to come.
In fact, Japanese Prime Minister Abe reinforced this message when I met with him in Tokyo last summer.
The U.S. rebalance to Asia continues to be a major theme driving regional activity, as reflected in the U.S.’s efforts to establish new defense agreements, ease sanctions, and strengthen military cooperation with many countries, including Vietnam, the Philippines, and India.
Furthermore, DOD foreign assistance programs in South-East Asia are focusing on boosting regional capabilities in maritime security and domain awareness.
Lockheed Martin is providing our expertise to assist in these efforts. For example, in September, Japan will receive its first F-35 – joining Australia, Italy, the Netherlands, Norway, the United Kingdom, and the United States, and later in the year, Israel.
While this first aircraft was assembled in the U.S, 38 of the F-35As in Japan’s Foreign Military Sale Program of Record of 42 aircraft will be assembled and delivered in-country, from the Nagoya Final Assembly and Check-Out facility that Lockheed Martin established with Mitsubishi Heavy Industries.
In Australia, this past November, we opened a state-of-the-art center for the development of submarine combat systems in Adelaide. In collaboration with Saab Australia and Thales Australia, the laboratory will provide innovative equipment in a simulated operational environment to realistically test and validate the Royal Australian Navy’s concept of operations for the next generation of Australian submarines.
Our Aegis platform is performing exceptionally well for our customers, and we see opportunities to provide this capability to additional partners in the Asia Pacific. Today, Aegis provides four of Japan’s Kongo class destroyers, and two Atago class destroyers with advanced sea, air, and undersea threat-detection capabilities.
South Korea has also purchased additional Aegis units to bolster its naval fleet. The U.S. pivot to the Pacific will continue to drive attention and resources to the area. And thanks to our close partnerships with a number of nations in the region, we are well-positioned to help them promote their national and maritime security missions.
Moving on to the Middle East, turmoil continues to embroil the region, as several fractured states, including Syria, Yemen, and Libya struggle with civil war, while others teeter closer to the brink due to falling oil prices, youth unrest and unemployment, and lasting sectarian tension.
Although ISIL’s gains in Iraq and Syria have been checked, it has been able to spread its activities across borders, especially as fighters return to their home countries. It appears that widely-distributed local actors will continue to execute terror attacks with an increasing level of sophistication.
Earlier this year I was in Saudi Arabia, and just last week I returned from the United Arab Emirates. During both of those visits, their government leaders made it clear to me that regional security and terrorism are at the top of their concerns.
Our customers are looking to us to help them provide security solutions for their citizens, while also assisting them in developing the infrastructure to diversify their economies. That’s why we’re looking for opportunities to meet their national security requirements, and to also invest in the development of the local industry.
A great example is our plan to explore new helicopter production opportunities in Saudi Arabia in partnership with Taqnia Aeronautics. The agreement could lead to direct involvement in the assembly of Sikorsky S-70 Black Hawk helicopters in the Kingdom.
In the UAE, we marked the first year of operation of our Center for Innovation and Security Solutions in Masdar City. We established the Center to create a high-tech, reconfigurable collaboration space that enables us to create enduring partnerships with colleagues and customers in the UAE and the region. Through the Center, we are able to leverage our shared strength in innovation and advanced technologies to enhance security and economic growth in the UAE and throughout the region.
I visited the Center last week, and met with students from Masdar Institute, who were participating in a training program on flight simulator scenario development. At the end of the training, these certified students will be able to develop scenarios for the UAE’s commercial use.
Another example in Abu Dhabi is our partnership with Mubadala in the Advanced Military Maintenance, Repair, and Overhaul Center, also known as AMMROC. This joint venture, which was established in 2010, brings together world-class companies in a Center of Excellence for providing maintenance and support of the UAE’s F-16s, C-130s, and many other platforms.
These are just some of the many partnerships we’ve developed in the Middle East, and the benefits they are creating in the region. Across the world, we’ll continue to stay close to our customers, to support both their national security needs, and their long-term economic priorities.
Each of our customers, here in the U.S. and around the world, is facing unique challenges. We must adapt and innovate to ensure we have the right products and solutions to address their needs, today and in the future.
The ability to develop the solutions to help our customers meet these dynamic challenges requires commitment and investment by industry, government, and its partners. At Lockheed Martin, we know we must take the long view, despite any short-term budget pressures, and continue to invest in research and development that yields the types of innovative technologies needed to confront the global challenges I’ve discussed today.
That’s why we increased our independent research and development funding in 2015, for the fourth consecutive year, to $839 million dollars.
And, we invested $9 billion dollars in the acquisition of Sikorsky to strengthen our core businesses, acquire key technologies, and extend our capabilities in new markets. We also executed many significant cooperative research and development programs to advance new technologies in partnership with several government agencies, universities, and labs.
No one knows where the next great technological breakthrough will come from. However, I can guarantee it won’t come from innovations that were never funded.
Advances in autonomy, data analytics, ubiquitous connectivity, materials, biology, and quantum computing all have the potential to create disruptive solutions for decades to come. Moreover, the innovations that will incorporate these emerging technologies are increasingly commercial and international.
At the end of the day, we know that new growth depends on our ability to rapidly create new business models, product offerings, and disruptive technologies. That focus on innovation has always been a core competency of Lockheed Martin.
Every day over 60,000 engineers are focused on developing the most innovative solutions the world has ever seen. From the U-2, to the SR-71, to the F-35, Lockheed Martin has delivered unparalleled innovation in aerospace and global security.
As the world becomes more complex, the demand for innovative, cost-effective security solutions continues to increase. We know that our customers are under continual, accelerating pressure from a wide range of threats, and that Lockheed Martin’s innovative solutions continue to provide warfighters with the edge they need, across a wide range of military and humanitarian operations.
Across the Corporation, we are working hard to expand our innovative mindset to every aspect of our business operations. From cross-Business Area collaboration, to customer engagement, we know that our innovative solutions will be what distinguishes Lockheed Martin in the marketplace, on the battlefield, and in the vastness of space.
We know we must continue to disrupt ourselves before our competitors can, investing in the breakthrough technologies that will define the future. And I’m confident that we’re doing just that.
Our technology strategy is fully integrated with our business strategy and focused on our customers’ needs, today and in the future. I’ll share with you just a few of the non-classified technology advancements we’re working on that I’m especially excited about.
Let me first start with Hypersonics.
Lockheed Martin continues to invest in propulsion technologies and advanced materials needed for hypersonic speeds. We know that higher speeds allow quicker response times to increasingly mobile threats, and the ability to project strength more rapidly around the globe.
Lockheed Martin has a legacy of making fast aircraft, such as those in DARPA’s Hypersonic Test Vehicle programs.
We accomplished several breakthroughs on HTV-3X. And we’re now producing a controllable, low-drag, aerodynamic configuration capable of stable operation from take-off, to sub-sonic, trans-sonic, super-sonic, and hypersonic to Mach 6.
And most importantly, we’re proving a hypersonic aircraft can be produced at an affordable price. We estimate it will cost less than $1 billion dollars to develop, build, and fly a demonstrator aircraft the size of an F-22.
The other DARPA program, the HTV-2, has demonstrated robust and stable aerodynamically controlled flight at speeds greater than Mach 20.
It has also employed a number of innovative technologies to enable long-duration, maneuvering, hypersonic flight, including:
- Thermal protection systems;
- Aerodynamic shapes that are maneuverable;
- Navigation, Guidance, and Control improvements; and
- Long-range communication capabilities.
Based on this experience, we are supporting two customer efforts right now, including the Tactical Boost Glide, and the Hypersonic Air-Breathing Weapon Concept.
The technology could also enable hypersonic passenger flights, and even easier access to space. And I’m confident that Lockheed Martin has the technical experience to make it happen.
As weapons and aircraft become more capable, our ability to defeat them must mature as well. For decades, we’ve been advancing laser weapon system development. Lockheed Martin is demonstrating that laser weapon systems can effectively stop land, air, or sea targets in their path.
We’ve already shown that our technology can accurately disable targets with pinpoint accuracy, from over a mile away. Our solution brings industry-leading efficiency into a low size, weight, and power package, one that has been designed to be easily maintainable and integrated into a variety of military platforms.
In fact, our ALADIN laser has operated in field testing for two years with no need for realignment, proving both the effectiveness and the reliability of the equipment. And, today, we’re building a 60-kilowatt Laser for a U.S. Army ground vehicle that will be delivered later in 2016.
The last example I’d like to talk about is in the area of Autonomy.
Lockheed Martin’s unmanned portfolio for air, ground, and undersea operations includes systems that take on the riskiest of jobs, like exploring dangerous territory, extending mission reach and visibility, or even fighting wild fires, all, while keeping people out of harm’s way.
There is a growing interest from the military in the Unmanned Ground Vehicle market, for reconnaissance missions, search and rescue, soldier mobility, and cargo transport in war zones.
There is also opportunity to expand into commercial markets, such as railroads, mining, site transportation, and public services. To meet this emerging requirement, we are working on the Next Generation of Unmanned Systems.
We see a future where manned and unmanned platforms work together as a complementary system, and we are in the early stages of demonstrating these blended operations.
In summary, it’s an exciting time for Lockheed Martin. The significant accomplishments, outstanding performance, and portfolio shaping we achieved in 2015 have positioned us to adapt to the dynamic environment and thrive.
While we can’t tell you with absolute certainty what the future will hold, I’m confident we are better positioned than ever to meet the challenges and opportunities it presents. Our future-focused portfolio will allow us to meet our customers’ evolving needs, and drive growth in the years ahead. That growth will enable us to invest in the innovations that will define the NEXT next-generation. And we’re optimistic about what the future will bring.
Today, you’ll hear more about these solutions from a number of experts and leaders from across our Corporation. Ask questions. Learn more. I think you’ll be impressed.
Thank you again for your time and your interest. Now I’d be happy to take your questions.
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