The New Reality: Embracing Change And Driving Affordability

Remarks By Robert J. Stevens
Chairman And Chief Executive Officer,
Lockheed Martin Corporation
At Lockheed Martin Media Day
Lockheed Martin Global Vision Center
Arlington, Va. - 06/17/2010

MR. STEVENS: I know this is the time of year when we all are preparing to participate in the air shows and part of the air show that's always been of great value to us has been the media dinner. As hard as this may be for you to believe, we enjoy the on-the-record discussions that we have with you because you give us a very interesting and comprehensive view of the world that we don't often get from other sources. We see that embedded in your questions and we certainly see that embedded in the conversations that we have around the table. So these discussions are very valuable to us.

But this year, as we contemplate participation in the air show, we've really changed our approach. And we're changing our approach based on our sense that we are all facing a new reality. And that is the phrase that we are using to describe a changing set of conditions when we talk to employees across our company.

The new reality is characterized by an escalating set of demands and increasing constraints on resources. And those increased demands and constraints on resources are simply bringing to our attention the need to redouble our emphasis on setting priorities and being very, very good stewards of the scarce resources that will be available.

In that spirit, we elected to reduce our participation in the air show this year by 50 percent, so I won't be going to the air show. Many of our corporate leaders won't be going to the air show. I assure you we will have the right people in the right place at the right time to conduct all the business of our company. We will meet with customers. We will meet with partners. We'll reinforce our relationships. We'll get good appraisals of our performance. But we will cut back on the overall expenses associated with the air show.

But we didn't want to lose the opportunity to be with you, so being the creative people that we are, we said: “Tell you what, let's have the air show dinner now with some minor exceptions. It won't actually be dinner. It will be a breakfast. And we won't be in London. We'll be in Washington and there won't be an air show.” But there are simulators and you can watch each other fly the simulators later on this morning. It's very exciting stuff.

So thanks for your flexibility. I know the notice might have been a little short, relative to your planning for the air show, but we're very grateful you're here with us this morning.

I'd like to talk for a few minutes essentially about an overview of our business and how we see the landscape. You all know we are in the business of global security. And when we examine the environment in which our customers are operating today, we see a world that is not only changing, but changing at an accelerating rate. There is more velocity in almost every aspect of the world that our customers view and there's more volatility that they have to deal with. So this environment is very clearly marked by increased complexity and an expanding array of challenges. I want to just run through briefly a checklist of just some of the top level security concerns that are unfolding today.

We have on-going operations in Afghanistan and Iraq. In the Middle East, there's accelerating tension between Israel and its neighbors.

There's a growing specter of conflict on the Korean peninsula. In March, there was a sinking of a warship, the Cheonan, with a loss of 46 lives. There is an apparent succession process underway with the leadership in North Korea between Kim Jong-il and likely his third son, Kim Jong-un. United Nations experts are now reporting that North Korea is exporting nuclear and ballistic missile technology to Syria, to Iran, and to Myanmar.

It appears that terrorist networks continue to expand and evolve, perhaps looking for safer operating bases or training areas, perhaps in Somalia, in Yemen, and other countries.

Evidence mounts that Iran continues to pursue a nuclear weapons program despite advancing sanctions by the United Nations, by the European Union.

While China continues to show enormous potential as a regional partner in trade and finance, a security partnership very much is in question today because there's significant ambiguity, given the withdrawal of military-to-military cooperation by the Chinese, given their reluctance in taking a more firm stand with North Korea based on the actions that the North Koreans have participated in, and based on their accelerating investments in sophisticated anti-access area denial technologies.

There are age-old threats like piracy that persist. And there are newer threats like cyber security that continue to evolve from data exfiltration of stealing information to the prospect of very significant area denial capabilities, with denial of service attacks that could shut down critical infrastructure.

The head of the U.S. Cyber Command, General Keith Alexander, noted that DoD systems, the DoD network, is probed amazingly 6 million times a day and it means since I started the remarks just a few minutes ago, DoD has probably had hackers attempt to get into that network 10,000 times.

I want to offer you a quote from General Alexander as he assesses the circumstances surrounding cyber security: "We face a dangerous combination of known and unknown vulnerabilities, strong adversary capabilities and weak situational awareness." That's very much our perception of the world as well.

So we look at this complex set of global security challenges as the demands that our customers have to face and in our mind's eye we like to look at situations on a demand and supply basis and when we think of the supply of resources that has to meet these demands, we think of financial resources, fiscal capability, the overall economic stamina of the country.

And it's very clear to us that the resources that will be available to meet global security demands are under tremendous stress. They have been and that stress is likely to continue for the foreseeable future.

Secretary Gates has argued for regular real growth in the defense budget and we believe that's a wise course of action because historically we have watched what has been described as the boom and bust cycle in the defense budget. And we've all recognized the terrible inefficiencies associated with that boom and bust cycle, essentially leading to a circumstance where we pay a lot, but we may not get a lot of tangible security.

The Secretary has been relentless and we think really very eloquent and clear in demanding a new kind of focus from the Department of Defense, from the Members of Congress, and from the defense industry as well, to be extremely rigorous in determining what our requirements really are, to align our priorities with real world needs, and to ensure we do everything possible to make every dollar, every dime, every penny count.

He offered a speech at the Eisenhower Library in Abilene, Kansas on the 8th of May which was celebrating the 65th anniversary of V-E Day in which he said very clearly, "I don't want to cut the military budget. I do not want to cut military capabilities. But we've all got to turn our attention to reducing wasteful and unnecessary expenses."

I assure you at Lockheed Martin, we see the world through exactly the same lens and we intend to lead the way from the industry perspective in assuring that we're very good stewards of very limited resources. We think our leadership and our philosophy of continuous improvement has resulted in some noteworthy accomplishments along these lines. For example, recently we were named by Aviation Week as a top performing large company for the third consecutive year in the aerospace and defense segment, based on measures of operating excellence, capital efficiency, cost reduction, and value.

I will assure you it's taken a lot of hard work, by the people that are seated at your tables today and the 136,000 employees that they represent to earn that kind of distinction and none of us want to miss the opportunity to build on the momentum that we've established in the company.

As we look forward, we intend to be as persistent in an honest evaluation of ourselves, as you are in your evaluation of us and we not only are going to imagine the future, but we are going to create it at the pace our customers demand and at a price that our customers can afford.

Let me take a moment and touch on some of the top priorities that we're working on now and I'll start with the Joint Strike Fighter. Of course, this airplane is our most visible program, I think, in all of our collective experience in the room today. It probably measures in hundreds of years of experience in this business, that this program has had the greatest level of oversight and analysis and evaluation and I would dare to say the greatest amount of commentary that's ever been engendered on a program.

The Pentagon recertified the program earlier this month, reconfirming that the aircraft is essential for national security, that there is no more affordable alternative that can meet the mission demands of the F-35, that the management is in place and the systems are in place to assure performance and that funding will be provided and be provided on a priority basis. We felt that was a very important reaffirmation of the program.

We're focused on three core areas: executing our responsibilities in the development phase so we continue to reduce development risks on the program; improving momentum on the flight test program so that we can demonstrate the airplane's superior performance to our customers; and accelerating production through low rate initial production, driving down the learning curves which is going to be the key and cornerstone to the future affordability of the aircraft. We're showing substantial progress in each of these areas.

Year-to-date, we had planned to have 106 flights conducted in the flight test program. We've completed 113 tests as of this morning. We need to complete 118 tests by the end of the month, so we're tracking well to meeting that measure of accomplishment. We do have 394 flight tests planned for the year and we measure our performance not just day-by-day, but hour-by-hour in the flight test program.

These flights are demanding and they are challenging and by that I mean we are very much stressing and testing the airplane, including performance parameters like taking the airplane to altitude, shutting down the engine, and demonstrating the ability to restart the engine while the aircraft is in flight, demonstrating in-flight aerial refueling, demonstrating the ability to lift the entire combat load, and measuring and handling qualities of jet, transitioning from subsonic to supersonic, back to subsonic flight. And with regard to the STOVL aircraft, demonstrating the ability of the airplane to take off in progressively shorter runways. Many of you have seen the airplane hover, engage in a vertical landing, all important demonstrations of the capability of the airplane.

Eleven days ago, the carrier version had its first flight. Those who were involved in that flight test described it as absolutely flawless. And when the airplane landed, it landed ready and suitable for the next mission, a phrase that we refer to as “code one”, very rare for the first flight of an airplane to demonstrate that kind of quality. Seven days ago, the STOVL aircraft flew supersonically for the first time.

The conventional version and the STOVL versions of the airplane have already been in the flight tests. And we're conducting flight tests in three locations now, at our Fort Worth facility, at Edwards Air Force Base, and at Patuxent River Naval Air Station in Maryland.

We'll deliver the first two production airplanes later this year on schedule. We'll likely roll those airplanes out in the third quarter of this year and ferry them in the fourth quarter of the year.

We're building momentum in our production program with Lots 2 and 3. And as I mentioned, negotiating Lot 4. Lot 4 is to purchase 32 aircraft. We believe Lot 4, even though the negotiations are not yet complete, but given the maturity of the negotiations and the discussions we've had with our customers, that Lot 4 will likely be about 20 percent below the cost estimate that was developed by the CAPE or the Cost Analysis and Performance Evaluation Group. And based on our discussions to date, we will likely take a fixed-price, incentive-type contract for Lot 4 which would be accelerating the application of a fixed-price contract by two years, based on the previous plan.

Full funding for Lot 5 was included in the budget request the President submitted in February. And that budget request, as you know, is being reviewed by the Congress. It is a little early in the congressional review cycle, but I will tell you, we all feel that we've had terrific support in the Congress on the program so far and we're very grateful for that level of support.

Our sense is that based on the values at which we have taken production Lots 1, 2, and 3, and the actual costs we have incurred in producing those production jets, as well as the position we're negotiating Lot 4, again about 20 percent below the CAPE number, that if we are able to secure the production volume that is necessary to drive down the learning curves and support that learning curve architecture on the program, our expectation is that the acquisition costs of the F-35 will be approximately comparable to a similarly-equipped F-18 or F-16 Block 60 airplane.

So I think there's lots of cause for optimism overall on the F-35 program and we continue to make progress against the set of objectives. But I do want to reinforce for you how very mindful we all are about the discussion of how much this program costs our tax payers and our country and our partners.

We understand the concerns that have been raised by many encouraging us to get this program right because it is so essential and we are absolutely committed to getting this program right, and we're determined to beat the Government's cost estimate and that is not a statement of disrespect.

We've had very candid conversations with all the leaders in the Department of Defense about our desire to improve upon the cost basis that is out there today and we intend to achieve that objective.

But while cost of the program is important, and we keep that in our mind's eye, no one talks very much about the cost to our country of not having the F-35. I've been doing work in this business for some time now, and I will tell you that the Holy Grail of fighter airplanes was to find one that could meet multiple mission demands and requirements, that could be used by multiple services, that would be suitable for export, that would have some level of commonality that would enable us to build partner capacity and would lower the total operating cost and life-cycle cost to the program. No one has really ever been able to achieve this objective because it is very demanding. It's very hard.

Today, three variants of the F-35 are flying, one for the Air Force, one for the Navy, and one for the Marine Corps. This airplane is supersonic and it is stealthy and other than the F-22 aircraft, no other airplane can make that claim. This aircraft can hover. It can land on a dime. It can be launched off an aircraft carrier. It has exquisite communications and incredible data management capability and that data management capability enables every other asset in the theater to perform more effectively and well because the joint strike fighter will be engaged in the mission.

It's been designed to meet the mission demands of eight partner countries and if it's anything like the F-16, and we rather suspect it will be, in the not too distant future we could someday have as many as 25 countries flying the F-35, all operating seamlessly with unprecedented levels of interoperability which would achieve the essential goal in the Quadrennial Defense Review of effectively building partner capacity, so that we have security partners in the 21st century.

This one airplane will do the mission work of a dozen. And that fact, I think, goes largely unreported. To replace a dozen fighter inventories with a dozen development programs, each with their own challenges; a dozen independent production lines, each with varying efficiencies and varying supply chains; a dozen training facilities, each with their own construction, their own curriculum, and their costs; and a dozen logistics tales, each with their own complexities, would cost far more than the cost of the Joint Strike Fighter, and likely bring a dozen times a dozen complexities to the forefront as well.

So we have faced some pressures on this program and we're very aware of where those pressures have been with regard to cost and schedule. We're working aggressively to meet them. We have a great partnership with those who oversee the program in the Department of Defense, and I think together, we're effectively meeting the challenges of the airplane.

We are here achieving something that really has not been done before. And while it's good to talk about cost, I hope we can also talk about value. And I think this program is going to be one of the greatest things our company has ever participated in and we are a company with some modesty who has done some wonderful things over the decades and I'm confident that it will be one of the best investments the United States, our partners, and our allies, have ever made relative to our cooperative security.

You know we have a lot of other airplane programs beyond the F-35 that we're happy to talk about in discussion including the F-16, the C-130J, the performance of the C-5M, and to the extent we can, maybe some advanced development projects.

Let me turn for a moment to the Littoral Combat Ship. We're under contract for two vessels. As a testament to the competence in our ship design and in its capabilities, the Navy elected to deploy our first ship, the USS Freedom two years ahead of schedule. On her recently concluded maiden deployment, Freedom's crew seized five tons of cocaine in four successful drug interdictions. During those missions, we had some terrific feedback from the crew who were very pleased with the performance of the ship and pleases us to no end.

Our second ship, the Fort Worth, is 50 percent complete and that program is running on cost and on schedule.

We are now one of two competitors for the final design and that decision which we expect around August will result in an award of two ships in production with an option for eight more ships. So the buy has been described as a 10-ship purchase, but it will be 2 ships with an option for 8 more against the total prospect of 55 ships domestically.

We've already had expressions of interest from navies around the world which we feel is understandable because of the ship's size, its performance capability, and its modular architecture, all of which has great appeal to international customers. And when we think about ways to meet our customers' objective of affordability, bringing in international customers lowers the cost of every ship that America buys.

We're pleased that our ship's design and operational performance are earning interest from around the world and we were pleased that Freedom is again underway at sea on her way to the Pacific this morning.

Of course, LCS is just one of a dozen or more major initiatives in our electronics system business area. We are also focused here on missile defense programs, radars, affordable precision weapons, network upgrades for the United States Navy surface fleet, and next generation vehicles for the Army and the Marine Corps.

Let me offer a word about Space Systems. In April, President Obama announced the Orion Program would be reshaped into a crew rescue vehicle rather than a crew exploration vehicle which means that it will be launched unmanned. It will dock with the International Space Station and provide a rescue vehicle if astronauts were ever required to evacuate the space station.

We believe this new capsule will be launched within the next few years and would leverage the significant technology advances that our team achieved since the original Orion contract award in 2005. We're very much looking forward to working through the details of the crew rescue vehicle with NASA and continuing our work on the human space flight program through the Orion contract.

Last month, we also provided the Air Force at Cape Canaveral with the first advanced extremely high frequency satellite. We are preparing for a launch at the end of July aboard Atlas V and Advanced EHF, as you know, will add to the fleet of secure military communications satellites.

To give you a sense of performance of the scaling difference here, just one Advanced EHF satellite provides more communications capacity than the entire Milstar constellation system flying today. We're under contract for three satellites, but anticipate a possible doubling in the program to six satellites as the military assesses its priorities for secure communications in space.

In our Information Systems and Global Solutions business, we recently announced plans to divest two lines of business, our Enterprise Integration Group and our Pacific Architects and Engineers company. This decision reflected our commitment to assure a well-crafted, strategically-tailored portfolio.

In the case of EIG, the decision reflects the Government's growing concerns about potential conflicts of interest that would constrain the growth potential this company would otherwise enjoy. Beyond these divestitures, we have realigned our readiness and stability operations and our savvy technology business to fit with our simulation training and support business. These three units have formed a new line of business called Global Training and Logistics and that business resides in Electronics Systems.

We were also proud to once again have been named the number one contractor in Washington Technology's top 100 list of Government IT providers. This is a distinction our company has earned for the 16th consecutive year, and it's important in the information technology field to have breadth and depth of experience in contact and performance. It creates a very rich environment for us to understand the demands that our customers have and be able to appropriately tailor high-value solutions to meet those demands.

Our IS&GS work focuses on supporting war fighters, advancing cyber security, and serving the public in a variety of ways including supporting the U.S. Census. We're processing as many as 2.5 million forms a day in what is arguably one of the largest and most sophisticated data capture jobs in the country.

So I hope that these few operational highlights serve to illustrate our corporate life focus on program execution and affordability and our commitment to complete key milestones on schedule, to continuously improve our quality, and to continuously focus on our customers' needs.

I look ahead with a sense of tremendous optimism, even though there are stresses in the environment that we see. Because our product portfolio is well aligned with our customers' needs, our programs have been well supported in the budget submissions, and our capabilities are garnering increasing interest and support from international customers around the world.

Most of all, I must tell you, my optimism and the optimism of our leadership team is borne in the 136,000 people that we represent. They are intrepid. They are absolutely committed to unimpeachable standards of ethics and integrity and business conduct. They are creative and they are ready to help our customers meet the challenges of the 21st century.

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