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.
Thank you, Ali. As we begin the session, I would like to request that callers limit their time to only one question and 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 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 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 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. Marilyn 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 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 market 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 $14,500,000,000 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, Marilyn.
Thank you, Bob. Bob, I'd just like to again thank you and the Board for the confidence you've 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.
Great. Thank you, Marilyn. 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 Maryland, 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 Q3 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 abilities 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. So Ali, with that introduction, let's open up the line for questions, please.
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 Naidal 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 And I had a lot of discussion with the Board and I've had a lot of discussion with Marilyn and our leadership team about this very subject. I think the first priority for me and the Board is to assure successful transition process. So 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 Maryland, but there will also be some very distinct differences in different features.
For example, Maryland 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 Q3. It has undergirded the performance year to date. There's very little I could offer Maryland 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 Agency. 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 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 Maryland 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 New you and the dimensions of those responsibilities better, Merrill 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 mission. 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 Whatsoever between Maryland and I on this front or Maryland 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. Marilyn 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. Please go ahead.
Good morning. Good morning. A question for Marilyn. 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.
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 it's 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 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 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. Please go ahead.
Good 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. Marilyn, 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 And your comments around this.
Thank you. Certainly. On F-thirty five, I've been very much engaged in, for example, the negotiations on The LRIP5 activity, I've been in those meetings and so that won't change. I mean, we'll continue forward with that. I know the Department of Defense team for the F-thirty 5 and as I said have been engaged in the actual negotiations.
My commitment is that I'm accountable for getting LRIP5 negotiated and that I get LRIP6 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 committed to. The support for The customer is strong from our customer is strong and so we'll continue to be very much engaged and we shouldn't we won't miss a beat on F-thirty 5.
And let me add, Marilyn, 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 Marilyn 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-thirty 5 specifically and on other programs specifically. So I don't I 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 Maryland'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 There are concepts of operations and provide new technologies and that's exactly what we're all focused on doing.
So 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-thirty 5, 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 Agilent, The electro optical targeting system, the integrated core processor, all of those elements I've been involved in since day 1 running 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-thirty five team. I've been engaged in the Meetings for our negotiations with customers. So as I said, we should we won't miss a beat in terms of moving forward On the F-thirty five program.
Our next question comes from David Strauss of UBS. Please go
ahead. Good morning. Good morning. Bob, when would we expect to hear an announcement In terms of who would fill Maryland's position as COO and 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.
I'm going to take your question and break it into 2 pieces. Marilyn can talk about electronic systems in 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 is applies To me and Marilyn 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 Marilyn 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 Marilyn to comment on that.
Sure, Bob. You may when we 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 that time, we determined it 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 put out Several weeks ago where we will in effective December 31, go we will take out the electronic systems sector level And we will take the 3 companies that we have today and they emerged into 2 companies that will 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 and GS, which you're all familiar with and then the other two business areas replacing Electronic Systems, Our Mission Systems and Training and Missiles and Fire Control.
We have, as Bob said, some outstanding executives that lead those two business areas. Gail 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 $50,000,000 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 Ruble of Jefferies. Please go ahead.
Thank you very much. Marilyn, 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'll 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 Because after we're all as a corporation, we are a technology leader and we need that innovation and technology and ideas every day. 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 and growing our 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 it almost 30 years with this company is what brings people here. I 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 Patriot's is in 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's that passion that I have and the people of Lockheed Martin have that I think makes us such a great company. And then most importantly It 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
And Howard, I'll add and this I know you're going to find this extraordinarily hard to believe. People seem to like Maryland more than they like 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.
Our next question
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?
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 Marilyn 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 on 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'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 equivalent and compelling. I have spent an enormous amount of time during my tenure literally over 8 years and literally starting as my first Today 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 a 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 Maryland because every employee in this company did the very same thing for me. And I'm grateful to them and Marilyn 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. Please go ahead.
Thanks. Good morning. Marilyn, could you just touch on maybe what you're looking at as 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 two things in constructs, can you are there two things that lead to the top of the page on both? Thanks.
Well, certainly the number one priority for us as a corporation is the F-thirty five 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-thirty 5 will certainly be a large component of that.
The fighter programs, other fighter programs we have, airlift are A lot of areas in cybersecurity and energy and of course in space systems, we have a rock solid set of Products and services that we provide as well with our government satellites, SIBRS, GPS III, a range of things that we are doing there, including those shuttle replacement As well. So in terms of challenges looking out and priorities, it is Bet 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 get increasingly escalates, as I look at the Yes. Our environment, I mean, it's basically we do have a proven business strategy. It's demonstrated through the results that we've had this year And we'll continue to have and 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 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 jobs 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.
We're coming up on the 30 minutes, Ali. 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 but and hopefully this question hasn't been asked before. But Marilyn, 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 budget 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 on DuBois?
Well, we've seen this coming. We always compete on 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 In recent years to address our cost structure to look at how we can make our products more affordable for our customers and they continue to see The greater level 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 every day 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 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, Ali, 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 moment 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 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. 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 Ali, thank you again.
Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.