Delivering Affordability, Securing The Future

Remarks By Robert J. Stevens
Chairman And Chief Executive Officer,

Lockheed Martin Corporation
Arlington, Va.  05/24/2011

Official Transcript

I’d like to welcome you here to our second annual Media Day in Washington. I think many of you who know us well may recall that at the summer air shows at Le Bourget or Farnborough, we have always had a media dinner, because we very much look forward to catching up with you, giving you a sense of how we’re looking at the world and our business and getting from you some idea of the way you see the world in which we’re operating changing. Last year, however, we made the election to cut back our presence at the air shows and that cutback was associated with the broader portfolio of cost reduction and affordability initiatives that we’ve had across the company, which is why we’ve opted for this breakfast instead.

Peeling back our attendance at the air show, which has included reducing infrastructure by about a third, and reducing our staffing by a little more than half, has resulted in an expense reduction of about $2.5 million. So I’ll report to you today that this new format works pretty well for us. My hope is that the new format is working pretty well for you.

In the room, as Ron mentioned, we have our Senior Executive Leadership team. After we are done here, the facility is available for you, and we have people throughout the facility who will be able to engage in the discussion with you and answer the questions that you have. What I’d like to do is to start with just some brief comments and a brief overview of the business and then we’ll open the floor for discussion.

First let me say, speaking for all 126,000 of our employees, I want to offer a heartfelt expression of gratitude to Defense Secretary Robert Gates as we near the end of his most distinguished tenure. You know the Secretary has a wonderful sense of humor and he is very fond of poking fun at Washington, which he has described as a place where so many people are lost in thought because it’s such unfamiliar territory. Now that certainly doesn’t apply to the Secretary. We’ve engaged in many conversations with him. I don’t think anyone has been more thoughtful or more trusted in Washington. It’s been a great good fortune for us to work with him. He has a debt of gratitude from all of us, I think from our nation and I can tell you he will be missed.

We’re also very much looking forward to working with Director Panetta as he makes the transition to the Department of Defense. He brings a hugely interesting background and extensive experience as an Army intelligence officer, as a Member of Congress, as a Director of the Office of Management and Budget. He has been the Chief of Staff at the White House. And his tenure as Director of the Central Intelligence Agency has certainly been demanding and challenging and we’re very much looking forward to working with him.

We all know that the challenges that we’re going to together are significant. The global security environment that we see is only growing more volatile and more complex, while economic resources are sure to be constrained as we all focus on debt and deficit reduction. That’s why we’ve been giving cost reduction and affordability a top priority across our company.

Since our last Media Day that we had here last year, we’ve consolidated facilities, we’ve divested two businesses, we’ve implemented a Voluntary Executive Separation Program, which has drawn down from our senior executive leadership ranks about 600 people, or about 26 percent of that workforce. We’ve scrubbed capital. We’ve reduced expenses. We’ve frozen the salaries of our senior most executives and we’ve been critically examining every process, every purchase and every transaction that we engage in to try to get as lean, as focused, and as agile as we can possibly be.

Two years ago we had 146,000 employees. We now have 126,000 employees. And that number may well continue to decline. And I will tell you this kind of contraction is very painful for us. And one of the worst things that I ever have to do is tell good people that we no longer have work for them, but these are extraordinarily demanding times and we cannot fail to take action.

As difficult as the actions that I have described to you have been, they have directly contributed to affordability and cost reduction. For example, we estimate that the Voluntary Executive Separation Program will reduce net costs by $350 million over the next five years and by about $105 million dollars a year each year thereafter. And the facilities consolidation at our Mission Systems & Sensors business will reduce costs by about $160 million dollars.

In 2011, we’ll be targeting several hundred million dollars in additional overhead cost reductions that have been built into our forward pricing rates. And we’ll continue to tighten our span of control, optimizing our supply chain where we think there may be some opportunities for lean development, applying lean methods across our company and providing transparent cost estimates as we shorten cycle times in our drive for continuous improvement.

We’ll also fully engage with our government customers to assure that requirements on our programs are stable, that funding is adequate, that redundancy in reviews or reports is eliminated, and that “should” cost assessments are realistic and uniformly applied.

Additionally in this business, nothing substitutes for solid execution. And I’m pleased to say that the majority of the programs that we are working on are on plan. The F-35 is one of the programs that has faced some challenges, clearly, and after the thorough review last year that included the technical baseline review and an independent manufacturing review, performance on this program is now showing marked improvement. In the flight test program this year—and I want to give you some information as of the 23rd of May because that is the level of detail with which we watch performance on the Joint Strike Fighter—we are 60 flights, or 20 percent, ahead of the overall flight plan. That’s 357 flights accomplished against a plan of 297.

Each variant, the conventional take off and landing variant, the carrier variant, and the Short Take-off /Vertical Landing (STOVL) variant, is ahead of plan on accomplishing test points. In fact, overall, 33 percent ahead of plan and that has a lot to do with increased productivity such that each test flight that we’re flying is generating more test point results. And in particular the STOVL aircraft, which is getting particular attention, is 42 flights, or 37 percent, ahead of plan this year. It’s achieved 154 flights against a plan of 112. It has completed 96 vertical landings this year and 106 vertical landings in total. We now are preparing for sea trials with this aircraft, moving it to the USS WASP later this fall.

Software development on the program continues on plan and the current software flying on the airplane is demonstrating good functionality and solid stability. The full mission simulator is now at Eglin Air Force Base in preparation for the start of flight training this fall. And we have delivered the first two production aircraft. We now have 61 aircraft in backlog and we’re looking forward to negotiating Lot 5 later this year.

We’re tracking five critical milestones with our customers this year because these milestones represent events that are critical in demonstrating the forward movement on the program. They are those short take-off/vertical landing variant sea trials on the WASP that I mentioned to you. The F-35C, the carrier version, has to demonstrate ship suitability in Lakehurst, NJ. We need to release the Block 2 software to the flight test. We need to release the Block 1 training system to the training base at Eglin Air Force Base. And we need to complete the testing of the static fixed test article. All five of those milestones are tracking to plan. We’ll keep you updated on those as we conclude the year.

The C-130 airlifter continues to perform well for our customers after more than 50 years in production. So when I look around the room I see that this airplane has been in production longer than some of you have been alive, but when I look at a few tables, that’s not a uniform exception I can assure you.

Last month the C-130Js of the 772nd Expeditionary Airlift Squadron, which is operating out of Afghanistan, set a record of 81 air drops to combat troops. Now I understand that may not make headlines everywhere, but that is a very big deal here. And given the sound performance of the airplane and the solid level of demand—we think the global demand for the airplane might well be in the 150 aircraft or greater volume level—we’ll deliver a record 33 C-130Js this year.

On May 7th, the first Space-Based Infrared System (SBIRS) geo-synchronous satellite was launched aboard an Atlas V rocket. That launch was the 50th consecutive successful launch of the United Launch Alliance. The satellite is now on orbit and it is going through a pre-planned checkout phase which will likely conclude in June and so far it is doing well.

We have been very pleased that our recent work for the Missile Defense Agency, particularly the role that we played in the complete and successful destruction of an intermediate range ballistic missile target has been described by the agency as flawless. We like that word “flawless” and we don’t hear it very much, so maybe in your notes you would write down “flawless.” Our AEGIS system now serves as the baseline for the phased adaptive approach for missile defense, not just for the United States but for international partners as well.

Our Next Generation Identification System for the FBI went live a few months ago as we support the mission to rapidly and accurately identify the worst-of-the-worst terrorists and criminals and that system is performing well.

And our Littoral Combat Ship continues to meet performance expectations. The USS Freedom has distinguished itself at sea. The Fort Worth, which is the second ship, is 87 percent complete. It is on cost, it is on schedule. We’ll start sea trials later this year and we’ll deliver this ship to the United States Navy next year. And the next two ships, the Milwaukee and the Detroit, are under contract and, based on good performance, we see international interest rising on this program.

Overall I must say we feel confident that we have a solid portfolio that is relevant and it is well positioned to meet the expanding array of demands that our customers will encounter as they look to the future.

But in this time of great challenge, as our company adapts to all these changes that we’re facing, perhaps the area in which I am most proud is the area where we have remained very constant. And that area is the character and culture of this enterprise by maintaining absolute integrity and the highest ethical standards in business conduct, principled leadership and dedicated professionalism in all that we do, and responsible corporate citizenship.

Last year our employees volunteered 1.3 million hours to community service to help improve the lives of others. That is not a unique or rare circumstance for us. For the prior six years, our employees have volunteered more than a million hours each year to community service.

And two weeks ago in Afghanistan as they were forward deployed with our forces, four of our employees were enveloped in an attack on a forward operating base. Two were wounded, one very severely, and two were killed. They were not the first among us to lose their lives in the service of our customers and their missions. I received an email from one of the ground forces that they were with asking us to relay their gratitude to the families of those who had fallen. Because, in their words, our employees, quote, “had their back.” I assure you at a forward operating base from a grunt’s point of view that is exceedingly high tribute and that is one of the reasons for us the work that we do is very personal and we take our responsibilities so seriously.

And across our company, all 126,000 of us are all in. And that means we’ll focus on our customers, we’ll focus on their missions, and we’ll continue to focus on the work we do to support them. We all feel that it is a great privilege to serve the people that we get to work for.