You might think that these would be boom times for defense contractors, given the duration of the war in Afghanistan and the continuing focus on security in the long wake of 9/11. But those forces are counterbalanced by the Department of Defense’s efforts to rein in costs and shift spending to projects more aligned with the realities of current warfare.
Lockheed Martin Corp. has experienced this duality in spades. Last fall it announced that earnings had risen 8% year over year, yet its stock price fell almost 7% as investors wondered how it will fare amid shifting DoD priorities, not to mention the impact of the recession.
Executive vice president and CFO Bruce L. Tanner took those developments in stride. In his nearly three decades with the company, he has weathered plenty of ups and downs, and he says that more lie ahead. The company has seen some contracts curtailed and others pass it by completely, including a $2.1 billion satellite project that Iridium Communications recently awarded to a European consortium. But Lockheed continues to expand into new lines of business, and Tanner is committed to keeping the company focused on the big picture. He recently spoke about the many ways in which that challenge manifests itself.
You’ve spent your entire career at Lockheed. Presumably that gives you certain advantages as a CFO?
It does. For one, it has allowed me to see several cycles both within the economy and within our industry, including some enormous consolidations that took place after the fall of the Berlin Wall. I’ve been part of a company that was sold, I’ve been part of a company that’s acquired many businesses, and I’ve seen many reform initiatives. Another advantage is that this is a small industry, much smaller today, in terms of the number of players and the number of those employed, compared with when I started. Our customers are people who started off as lieutenants and captains and are now generals and admirals, and we know each other. This is a very long-cycled business of relationships.
Not only is your business built on long-term relationships, but it also depends on long-term contracts. Has that insulated you from some of the recession-oriented realities faced by, say, a consumer products company?
The recession has manifested itself differently for us, and in some ways has had less of an impact. We did see some near-term impacts, such as the decision to terminate the Presidential helicopter program, to not extend F-22 production beyond the 187 under contract, and to cancel a couple of other programs, but those are hard to directly associate with the recession. It was just some belt-tightening within the DoD that Secretary [Robert] Gates decided to do. We still had 6% sales growth last year, and we’re expecting about 4% this year.
Your status as a defense contractor may have insulated you from the recession, but it also creates its own vulnerability as the United States reevaluates its defense strategies. To what degree can a company like Lockheed diversify or become more nimble?
All told, about 85% of our revenue comes from U.S. government sources, but only about 60% is from the DoD, which may surprise a lot of people. We’ve become pretty diverse, particularly with IT services. We’ve been the largest IT provider to the federal government for 16 straight years. We also expect to increase our global sales, which account for about 14% of revenue today, to 20% over the next two to three years. The other big [opportunity] is that we have a much stronger balance sheet. There was a time earlier in my career when we had $13 billion or $14 billion worth of debt. Now, we have just over $5 billion and we’re a much larger company. All in all, I like our current balance-sheet position because it provides us with the flexibility and firepower to be opportunistic in a volatile environment.