Good morning, 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.
Thank you, Allie. As we begin the session, I would like to request that callers limit their time to only one question, then return to the queue to enable others to pose their questions. On the call today are Bob Stevens, Chairman and Chief Executive Officer, Marillyn Hewson, President and Chief Operating Officer, 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 a description 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.
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 you're aware that our board of directors and I asked for and received Christopher 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 three days, an internal investigation conducted by our legal and ethics departments determined that the allegations were not frivolous, 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, 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, we have a code of conduct. In this instance, those values, those standards, that code were not met. While I am deeply disappointed and genuinely saddened by Chris's conduct, I recognize that it was a personal failing, having no impact on either our operational or our financial results. 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, a member of our board, effective immediately, she'll become our Chief Executive Officer on January the 1st.
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 in multiple roles during her career has prepared her to assume this new role 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 eight times during her career.
She has led three functional departments and has had profit and loss responsibility in four distinct and diverse businesses. All have shown market improvement as a result of her leadership. For the last three 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 U.K., 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 eight 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.
Thank you, Bob. Bob, I'd just like to again 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. 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.
Great. Thank you, Marillyn. 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 to date. They remain focused, 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 a 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. Allie, with that introduction, let's open up the line for questions, please.
Ladies and gentlemen, if you have a question at this time, please press star, then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, in the interest of time, we are limiting you to one question. Please return to the queue for any follow-up questions. Our first question comes from Joe Nadol of JPMorgan. Please go ahead.
Thanks. Good morning. 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 every day? Is this a once-a-week thing? Just any more color on how this role is going to play out.
Yes, certainly, Joe. Thanks for the question. 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. 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. 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 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 nine-month transition, she's been getting intimately involved in the F-35 program, the Aeronautics portfolio. 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. That includes an increasing number of visits to the leadership in the 113th Congress that will be seated here on January the 3rd. 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 mission. 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 business 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 C. Bernstein. Please go ahead.
Good morning.
Good morning.
A question for Marillyn. 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.
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. It was a matter of it's all three working together on the strategy for the company, continuing forward as well as the priorities and the challenges. I think it just changes my role from being more focused internally on a lot of the operational activities to allowing that to be covered by our outstanding executives that run our business areas. 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.
Those will be the areas that I would primarily be focused on.
Our next question comes from George Shapiro of Shapiro Research. Please go ahead.
Morning, George.
Allie, let's go to the next one.
Our next question comes from Michael Lewis of Lazard Capital Markets. Please go ahead.
Thank you. 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? Now, while I don't think it will, I think some investors may be interested in your comments around this. Thank you.
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, so that won't change. We will continue forward with that. I know the Department of Defense team for the F-35, as I said, have been engaged in the actual negotiations. My commitment is that I'm accountable for getting LRIP 5 negotiated, 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's doing relative to our flight test program, we are going to meet our commitments this year on delivering the aircraft that we've committed to. The support from our customers is strong.
We'll continue to. I'll be very much engaged, and we won't miss a beat on F-35.
Let me add, Marillyn, that in our initial contacts with our Department of Defense customers, which you would all appreciate, we set about 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. 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. They 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. We got a very high level of support that was very welcome, and just reminds us that we have to place a high priority on meeting the commitments that we've made to those customers.
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, but it's not a new program to me. Within Electronic Systems, we have major elements in that program with the 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 three years. Just for the past eight 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. 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 of UBS. Please go ahead.
Good morning.
Morning.
Bob, when would we expect to hear an announcement in terms of who would fill Marillyn's position as COO and announcement on the ES side? Maybe while we have you, any updated thoughts in terms of the outlook for the business now that we're post the election here?
I'm going to take your question and break it into two pieces. Marillyn can talk about Electronic Systems and the recent reorganization that she engineered. When I look at the top organization, and I think part of your question is, will we fill the role of chief operating officer? 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. 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. 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. 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. 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. 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. I'll ask Marillyn to comment on that.
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. At that time, we determined with all of the aggressive steps we've been taking to take cost out of our cost structure, it seemed the opportune time for us to flatten the organization. Many of you may have seen the announcement that we put out several weeks ago, where we will, effective December 31st, we will take out the Electronic Systems sector level. We will take the three companies that we have today, and they are merged into two companies that are large enough to be business areas. Lockheed Martin, on January 1st, will instead of being four business areas, will be five business areas.
Those five business areas, Aeronautics, Space Systems, IS&GS, which you're all familiar with, and then the other two 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 two business areas. Dale Bennett will head up Mission Systems and Training, and Rick Edwards will head up Missiles and Fire Control. With that, we're able to save $50 million a year. 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. Please go ahead.
Thank you very much. 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?
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. 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 every day. We create that type of environment for them.
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, and growing a business, 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 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, and that's what we do. It's that patriotism, that purpose, that being involved with a company where they can be working on some of the most incredible activities and most important work in the world.
That's that passion that I have and the people of Lockheed Martin have that I think makes us such a great company. 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.
Howard, I'll add, and 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. I must say, in all seriousness, I've learned a lot from her in our ability to work together over the years.
Our next question comes from Samuel Pearlstein of Wells Fargo. Please go ahead.
Good morning.
Hi, Sam.
Bob, I guess I'm trying to just understand and trying to ask it a little bit more delicately, 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. 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?
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. 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. 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. 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.
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. That glow comes from putting a combination of resources together, and those resources have to be qualified and competent for their jobs. What we've learned since our last call together was the circumstances involving Chris's 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 equivalently compelling. I have spent an enormous amount of time during my tenure, literally over eight 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, it's resulted in many conversations with our board about this array of leadership talent. 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. I'm absolutely certain of a few things. Marillyn Hewson is ready now to be the Chief Executive Officer of this company. Our board believes that, 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, 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. I'm grateful to them, Marillyn and I and the team here are grateful for their support, we will keep pressing on here.
Our next question comes from Myles Walton of Deutsche Bank. Please go ahead.
Thanks. Good morning. Marillyn, could you just touch on maybe what you're looking at as the biggest three-to-five-year challenge for the corporation and also the opportunity? It's a little early to think about legacy, I know. As you think about those two things in construct, are there two things that leap to the top of the page on both? Thanks.
Certainly the number one priority for us as a corporation is the F-35 program. 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. With our air and missile defense activity, the F-35 will certainly be a large component of that. The other fighter programs we have, airlift, a lot of areas in cybersecurity and energy.
Of course, in Space Systems, we have a rock-solid set of products and services that we provide as well with our government satellites, SBIRS, GPS III, a range of things that we are doing there, including the shuttle replacement as well. 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 that they're going to continue to have as the global security environment continues to increasingly escalate. As I look at our environment, basically, we do have a proven business strategy. It's demonstrated through the results that we've had this year and will continue to have. As you look back over a decade, we continue 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 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 that 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 jobs, and that we're continuing to develop them. 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.
Our next-
Allie, we're coming up on the 30 minutes. Allie, we still have some folks in the queue.
I'm showing we have one question left.
Okay.
Our final question comes from George Shapiro of Shapiro Research. Please go ahead.
Yes, sorry about getting disconnected before, and hopefully this question hasn't been asked before. 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. How does that change your strategy and your thinking about how to run the corporation for the next five or seven years versus under Bob?
Well, we've seen this coming. We always compete on our external environment as leaders, as we look at our strategy. We're not going to see a major change. We've been through this before. As you can see, we've been very proactive as a leadership team in taking actions in recent years to
To address our cost structure, to look at how we can make our products more affordable for our customers as they continue to see the greater level demands, while at the same time we're facing the economic pressures that we have. We're going to continue to focus and rely on our talent of our workforce that is here every day and our new innovations in order to address the 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 and 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.
Hey, Allie, I want to thank you for your help on the call today. For those who joined us today, thanks so much for your time. Let me leave you with a couple of thoughts. 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.
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. 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 moment's pause. I will tell you that we have interchangeable parts among our leaders here, that many of our leaders can play more than one 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. I think we're living by those commitments, and we will continue to do that as we move forward. I very much thank you for your time today. We all look forward to talking to you again in January. Thank you. Allie, thank you again.
Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.