Interview: Lockheed Martin's Marillyn Hewson

This interview is an extended version of a​ piece published in the July 27 edition of Defense News.

Q. Why buy Sikorsky? Is this indicative of a shift toward​ platforms in Lockheed Martin's business strategy? A. The acquisition of Sikorsky is right in line with our strategy to grow the business. It expands our broad portfolio in aerospace and defense products and technologies, and extends our offerings internationally with a robust line of helicopter solutions for our global customers. It also opens up a new channel for our business in commercial helicopters and services. And we believe this is the best way to ensure Sikorsky continues to be a great supplier to the DoD, with more resources and stability than it would have had ​it ​spun off as a stand-alone entity. Q. Acquiring Sikorsky would make Lockheed the top maker of both helicopters and helicopter electronics. That raises vertical integration and some horizontal concerns at a time when DoD has said it doesn't want primes to merge. What makes you think DoD will support the deal? A. Today, both Sikorsky and Lockheed Martin operate in a highly competitive market. The addition of Sikorsky to the Lockheed Martin portfolio will not reduce the number of competitors in the helicopter segment, as we are not currently in the design and manufacture of helicopters. The transaction is complementary to our business and doesn't create vertical or horizontal market concerns. We stand ready to fully engage in the government's review process. Q. Did you have conversations with DoD before the deal was announced, and what are you going to tell them now to convince them to endorse it? A. As I do when we announce any significant change in our business, I reached out to our customers to share the news. I'm confident that the regulatory review process will be thorough, and we stand ready to provide any information that's required. We don't believe the transaction will reduce competition at any level, and we're confident it will deliver cost savings and increased innovation to our DoD customers. Q. Why sell your IT and cyber business, particularly at a time when many see that market as a growth sector? A. Our IT and technical services businesses deliver world-class capabilities and are performing exceptionally well. However, market dynamics and changing customer priorities​ have made it clear that these businesses could achieve greater growth and be more successful outside of Lockheed Martin. I would note that while the commercial cyber segment of our business is included in the strategic review,​ our government cybersecurity business will remain part of Lockheed Martin. Q. If defense spending has bottomed out, then what's the market growth rate from here, and how fast will you grow from year 2015 to 2020? A. I would just say that first of all, I am not sure it has bottomed out. We are hopeful that bipartisan support of the president's budget has been put forward, as well as with additional OCO funding has been identified for defense, that some of that will come to fruition. But there's a long way to go yet this summer on the budget discussion. So we will see how all that shakes out. It is encouraging to me that the ​president's budget was above the budget caps and the sequestration levels. There is clearly a recognition by the lawmakers that I speak to that we have so many global security challenges and needs to modernize our defense capabilities that we need to increase spending above the budget caps. That is encouraging to me, but as you know, there's a long way to go, because there is also the view from the ​administration that we need to make sure that on the non​defense side [spending increases] above the caps. So we'll just have to see how it plays out. Q. Do you look at your forward projections, though? Are you expecting an increase perhaps in one area, or are you playing multiple scenarios and building multiple plans? A. We are focused on sustained, profitable growth. So we want to continue to grow the company. Where we have been focusing our efforts is on the international side. We have met our target of 20 percent​ of our revenue from international sales, [and] we expect to increase that to 25 percent over the next few years. That is the area that we are focusing on for growth. At the same time, we hope that the defense spending will increase on the domestic side. As it does, we think we have the strongest portfolio, the best position for that market. As it grows, I expect that we will continue to see growth. Our biggest program, of course, is the F-35 [joint strike fighter], which represents a significant element of our portfolio, and that is on a good path. You probably saw recently that our customer announced that they want to pursue a block buy for the F-35. So just when you consider the stability and the growth of that program, along with air and missile defense, air mobility with the C-130J, that whole range of products and capabilities that we have in our portfolio — we would expect that we are well-positioned in a market that will grow both domestically and internationally. Q. At the same time, you've talked about share buybacks possibly out to 2017, which possibly is longer than many analysts are comfortable with. Are you confident in that strategy? A. We have made some commitments on our cash deployment. In terms of the next three years, we expect to have $15 billion of operating cash that we will return to our shareholders in the form of dividends and share buybacks. You know, for the last 12 years, we have had a double digit increase in our dividends to our shareholders. We have been on a path of share repurchases. It is just a normal process; we committed to get down to 300 million shares. So we've got some commitments along that, but that does not mean that we won't also ​be deploying cash to continue to invest for growth in our business. And capital equipment and other opportunities we have with our cash. Q. How do you respond to those who say that you can't protect the people, the R&D and invest in the business? And what are the areas ​you are going to be investing in with the capital that you have available? A. I think we have a very strong strategy, especially for a company that is continuing to stay on that path. So we will continue to meet the commitments we have made to shareholders in terms of returning cash, operating cash, to them, and we will also continue to invest in our business, in research and development. Last year, we were up for the third consecutive year. ​We will continue to be up in our research and development spending. We will continue to invest in the business. We have invested in capital equipment, we've opened up new labs, we've expanded facilities, [and] you will continue to see us do that. Now, we may do some restructuring in other areas where we think we have over-capacitiy. That is just normal keeping the business structure in line with the business base. And then, in terms of growth, in terms of our employment, likewise we just need to keep going forward. Our intent is to continue to grow the company, which means that it will be good for our customers, it will be good for our employees, it will be good for our shareholders. Q. The Pentagon is looking more toward​ Silicon Valley. Does that change the way you are thinking about the business, this competitive environment, and the role of new and innovative companies? A. You know, the defense industry, our company specifically, is known for being an innovator. The lifeblood of our company is technology development. We are going to continue to invest in innovation. We have the most sophisticated and most unique fifth-​generation fighter. Look at our satellite and spacecraft capabilities. Orion is an excellent example of deep space exploration. My point is, look across our portfolio. I would argue that we are investing to keep our current portfolio relevant, and we are investing for the long term, so that we can provide advantages for our customers against adversaries or in areas of scientific discovery that they want to pursue. We have to start using Silicon Valley, just as commercial companies do. So we're there, and we're across the company and around the world. Q. What about investing in new technologies? A. We invest in various acquisitions for unique capability. We have an advanced technology center in Palo Alto. We invest a lot in our business. If you look at our labs or any one of our five business areas, each one of them has an element that is focused on new technology, while at the same time for the portfolios they have, looking at upgrades to that capability. Look at the C-130, for example. The first one was delivered in 1954. We're on C-130J — it has tremendous backlog and is in great demand around the world. The US government is looking at a multiyear buy. Things we produce ... ​we are going to continue to invest and keep them for the long run. At the same time, look at our space exploration and look at our satellites. Look at what we are doing in missile technology. I think we are there in terms of being focused on where we put our funds. We might do a joint venture with a company, we might invest in a company. We might buy a company. Yes, we are going to take advantage of the technology that is in the marketplace. And we are going to develop it internally. Q. What are you doing to deploy an agile workforce, and is your workforce agile enough? Is that something you consider? A. Absolutely. What we do is take our core competencies and move them to near adjacencies. If I think about some of our acquisitions we have made in the past year, for example, looking at [the] cybersecurity arena with Industrial Defender, which is a company that has cybersecurity capabilities and manufactures control systems [in relation to] oil and gas and chemical and electric utilities. Bringing that together with our IT cybersecurity in cross-pollination of those workforces allows us to bring a broader solution to our customers. That would be one good example of that. ​ We are bringing that workforce together with our defense and intel workforce, it opens up the breadth of solutions that we can provide to our customers, and makes us stronger in that way. I think we have an agile workforce. We have 112,000 employees across our company and we have a whole range of capabilities. When we need to bring engineers to bear on a problem or an opportunity, we can drop them across the corporation. Q. How do you drive cultural change within a company like Lockheed Martin? How are you trying to re-craft this legendary big company to try and make it more agile, to try to make it more customer focused? A. I think as a company, the focus we have is that the customer is at the center of everything we do. When you put that in place, that is what provides value for our company. First off, really focus on the customer at the center. We are going to be providing value to the customer, and whatever we do for our customer, ultimately, that is what is going to be good for our employees and our shareholders and others. So that's the fundamental. Out of that, we are making sure that we ingrain, throughout the company, a customer-focused culture — one that says the first priority is the customer. We need to listen to and understand what their needs are. We need to be responsive to those needs. We need to move out with action to address their needs. We do that. I believe it permeates almost everything else we do. It even changes the ways you operate inside the company. If you get the mindset around the customer as the center of everything we do, that's what, to me, drives the right behavior. The question of agility that you raised, and the other element that we try to make sure ​that [what] we are creating is a culture of innovation, because that is the life blood of our company. Innovation that we produce is the value we provide to customers. It is all connected back to the customer. And to have an innovative culture, you have to create an environment where people can do their best work, where they feel their ideas are listened to, that they know they can be at the table alongside their colleagues and put their best thinking forward. That they expect acceptance. They can provide that input and present their best ideas that way. Q. There is a lot of hand-wringing, of course, over the LRS-B [Long Range Strike-Bomber] contract being awarded. There is speculation, depending on which way it goes, that it could really kick off another round of M&A activity. Does that change your outlook at all, whether you are successful or not successful in that? Talk about your current outlook on M&A. A. We are working with Boeing, as you know, in pursuit of LRS-B. It is a top priority for the US Air Force. They've highlighted that it is a very important investment priority for them. It is a critical mission that we are proud to be partnered with Boeing, in order to pursue bringing our capabilities. Both of our companies have very deep experience, and will bring the resources and capabilities and the full measure of our two companies together, to provide the best solution we can in support of that. In terms of its impact on the industry with who wins, that is really not top of mind for me. We have a strong, broad portfolio. This is a very important program for us, one we are pursuing. But we have many other important programs and it is not going to have a big impact on our company if we were to not succeed — although we have every intention of winning with that partner on that program. Supply and demand in our industry will always drive the economics of the industry. As we were talking about earlier, if you can see some way for growth and other opportunities, we will have to see how companies shake out on that. As is always the case in the industry, and no one program will drive that. Q. One of the proposals [Pentagon acquisition head Frank Kendall] had was getting a greater insight into a company's IRAD, the money that he's reimbursing. Do you have any concerns about that approach? What can you share with us about what advice you've been passing on to him? A. I think what Secretary Kendall has come out with Better Buying Power 3.0 is wanting to have more oversight. I think where companies are spending their IRAD dollars, setting up a process where you have to have a sponsor to approve your independent research and development. To his credit, he's been open to listening and [having] ​a transparent dialogue with industry on how that would work. I think he is working out the details on how it will work. We have an open discussion on it. We've had some discussions where he is starting to put some of his team. ... That is what has been very positive, is his focus on listening and having a discussion about how to make this work. I understand from him what his desires are, and why he is putting something like this in place. What I've shared with him and with others is that we don't want something in place that is cumbersome or might drive the wrong behaviors. You want the company to be focused on the long term and you want us to be investing in research and development, as you know. Sometimes something that you may invest in, it may not work the first time, and you've got to invest some more. You've got to be there all the way through as you are in the trial and error phases of getting the technology out. The thing I would say. It is early days in terms of his getting the rules or process around how he wants that to work. We are listening and trying to work with him on making sure it doesn't drive the wrong behavior. Q. On sequestration: How does the industry play the end game in the last six months of 2015 before the train really goes off the tracks [with a potential continuing resolution] and sequestration comes back? How does the industry have to make this case to lawmakers, to tell them that "the fact that we did a lot of mitigating crap does not necessarily mean that things will not be OK"? A. I think we are delivering that message every day. I am, and I know my colleagues are and our industry associations are doing that, as is our customer. It is the same message, whether you talk to customers or you talk to industry. Our customers are facing brutal security challenges, and they don't have the money to modernize and deal with the conflicts that are out there today. It is not in the best interests of our national security. We are looking at sequestration as an across-the-board cut that's indiscriminate of what our strategy is. You have to have a national security strategy. You have to, first and foremost, protect our citizens and work with our allies and friends around the world, to deal with the bad guys. If you don't have the resources to do that, you cut somewhere, whether it is your readiness or ability to modernize. If you don't modernize or invest in new technologies, you are going to have a gap you can't recover from. So all of those elements that you refuse from the customers that we support in the defense arena is exactly what you are going to hear from industry. Will it also impact our capability that we can provide? Yes, because where do our customers go to get that technology? Where do they go to get the productions of those systems? They go to industry. If you are not there to produce, you can't have the capability. It is not good for the nation overall. You will see an erosion of engineering talent, you will see an erosion in technology development and the innovation that needs to happen in order for us to keep an edge in our military superiority, so that we can have the best capabilities to protect our citizens. Q. At the same time, a lot of members seem to say, "Oh, the industry doesn't need it. Look at Lockheed, buying back shares." How do you handle that? A. I will tell you that you would expect companies to run their companies and do the things they have to do to be able to meet their financial and operational commitments they have made. We've got to continue producing the programs that we have. If I don't right-size the business to the business base, my costs are going to go up and the system that I provide is going to cost my customers more at a time when their budgets are so constrained that they can't afford it. If I don't do the things I do to attract capital from Wall Street, to say, "Is that company being well run, do I want to invest in that company," then I am not going to be able to have the funding that I need to invest in research and development that ultimately provides our customers and our country with the best technology. It is our job as leaders of a business entity to be focused on sustained, profitable growth, and attracting capital from our investors, so that we can then provide the customer with the best that we can. And I would hope that's what our lawmakers want every one of the companies in our nation to do, is to run our businesses well so that we can create value.

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