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US: Lockheed's New CEO Facing Tough Challenge

by Renae MerleWashington Post
March 8th, 2004

Robert J. Stevens, who will become chief executive of Lockheed Martin Corp. in August, faces the tough task of building upon the transformation that his predecessor wrought at the $32 billion Bethesda defense firm.

Stevens is taking over from Vance D. Coffman as a rising federal budget threatens to slow defense spending, Pentagon views of high-tech warfare shift and Lockheed continues to have problems with two high-profile programs: the F/A-22 and F-35 fighter jets.

"I would caution investors not to take too much stock in Bob Stevens ascending to the CEO post," said Robert Friedman, aerospace and defense equity analyst for Standard & Poor's Equity Research Services. "Anyone who steps into the CEO post is still going to have a tall order to fill."

Stevens has said Lockheed's information technology capabilities -- including software that links fighter pilots and ground troops, processing centers for government checks and database integration -- are central to the firm's future. About 25 percent of Lockheed's revenue last year -- $8 billion -- came from information technology services, a company spokesman said. It is "the fastest-growing segment of our business," Stevens said last month.

Coffman is credited with integrating Lockheed's businesses after a decade-long acquisition binge that included the purchase of 17 companies. Lockheed is now the dominant company in the fighter aircraft industry and has a portfolio that includes such diverse businesses as launching satellites and processing millions of Social Security benefit checks. Coffman, 59, will stay as non-employee chairman until 2005, but will leave day-to-day management of the firm to Stevens, 52.

Stevens has been preparing for his move into the chief executive's office for years, many industry analysts say. He joined the company in 1996 when Loral Corp., where he was general manager, was bought by Lockheed during the industry's consolidation. He then rose quickly from the job of strategic planner to chief financial officer in 1999.

Lockheed was struggling at the time, as its acquisitions were proving difficult to integrate and several strategic and financial missteps, including an investment in telecommunications, had disappointed shareholders.

Stevens, who earned a master's degree in business from Columbia University, soon changed perceptions on Wall Street. He restructured the firm's internal reporting process to give top management -- and shareholders -- better insight into how the business units were performing. Then he helped reorganize Lockheed's aeronautics and space operations, eliminating 2,800 jobs and saving $200 million a year in overhead.

"He really put some discipline and teeth into the financial management system," said Paul Nisbet, defense analyst for JSA Research Inc.

In 2000, Stevens was made president and chief operating officer. "While Lockheed achieved many successes during Coffman's tenure, we view the change [in leadership] positively as we believe Bob Stevens is well known and well regarded by investors," David Strauss, defense industry analyst for investment firm UBS, said in a research note.

But not everyone is sure Stevens's experience will be enough. "Although he is credited with clearing up Lockheed's operational inefficiencies, he is still going to have to face the specter of slowing growth in the U.S. defense budget, dysfunctional Pentagon procurement policies, an increasing proportion of lower-margin cost-plus contracts, and Lockheed's mediocre returns on capital," said Friedman, of Standard & Poor's.

Among Stevens's most pressing issues will likely be the questions surrounding the F/A-22 Raptor and F-35 Joint Strike Fighter. Both have been lambasted for years by Congress for their technical problems and escalating costs.

The future of the F/A-22, a stealth fighter jet, is again in question after the Army's recent cancellation of another expensive program, the $39 billion Comanche helicopter. Both programs have been targets because they were developed during the Cold War, prompting critics to wonder if they were still needed.

"It does not appear that an aircraft as advanced and expensive as the Raptor is required to address near-term air defense threats," Christopher Bolkcom, a specialist in national defense at the nonpartisan Congressional Research Service, told a House panel last week. "U.S. air forces today operate with impunity."

Lockheed officials have played down criticism of the program, noting that the jet is expected to enter service next year. The plane was originally developed to square off with other air fighters, but has evolved to include the ability to hit precise ground targets. "We've got an incredibly capable airplane here and in its sophistication it has some complexity," Stevens said during a Bear Stearns & Co. investor conference last week. But he acknowledged: "By this time I thought we would have been performing better on this program and delivering higher margins."

Stevens declined a request to be interviewed for this article but company insiders and outside analysts expect him largely to follow the path laid out by Coffman in pursuing growth. That means a continued focus on a recovery in the commercial space business, which has struggled along with the collapse of the telecommunications sector.

Lockheed signed contracts to build five and launch 11 commercial satellites last year, making it the industry leader in both categories, according to company officials.

"The [feeling] is that the decline has at least been arrested, and we may be at the bottom of that slump in demand. And then with the economy recovering, depending upon the rate of that recovery, there may actually be some future demand growth," Stevens said last month.



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