Robert J. Stevens will retire as Lockheed Martin’s CEO at the end of the year, handing the reins to President and Chief Operating Officer Christopher E. Kubasik as the company braces for steep cuts to U.S. defense budgets.

Stevens, 60, has led the Pentagon’s largest contractor since 2004, overseeing its transition from a financial basket case to one of the aerospace industry’s top financial performers. But his tenure also has seen stinging criticism of Lockheed from the Defense Department and Congress for program delays and cost overruns, most notably on the F-35 Joint Strike Fighter. Stevens plans to remain chairman of the board until January 2014.

The 51-year-old Kubasik has long been viewed as the company’s likely next CEO. Stevens relinquished the title of president to him at the start of 2010, and Kubasik had earlier served as chief financial officer and run the company’s Electronic Systems business. “The succession is not a surprise, although the timing is perhaps a year or two earlier than we would have expected,” says JP Morgan analyst Joseph Nadol. Stevens is more than four years shy of Lockheed Martin’s mandatory retirement age of 65.

Kubasik, a finance veteran and onetime partner at accounting giant Ernst & Young, joined Lockheed Martin in 1999. He is no stranger to thorny negotiations, having headed discussions for the company with the U.S. Air Force when the Lockheed Martin Joint Air-to-Surface Standoff Missile was found to have shortcomings in testing in the last decade.

That experience should serve him well as contractors’ profits and execution on big-ticket defense programs come under increased scrutiny in a lean budget environment. A significant portion of Lockheed’s future profit is tied up with the outcome of the tumultuous F-35 development. Kubasik also inherits the challenge of replacing thousands of workers who are expected to leave the Bethesda, Md.-based company during the next few years due to retirements and attrition.

Stevens’ retirement was announced April 26 and coincided with the release of first-quarter earnings. The 25-year veteran of Lockheed Martin will leave big shoes to fill, having overseen the reinvigoration of a company that just a decade ago was hobbled by a patchwork of cultures, accounting structures and quality-control systems, and reeling from a disastrous foray into commercial telecom. In 2011, Lockheed Martin ranked first in Aviation Week’s Top-Performing Companies rankings of large contractors for an unprecedented fourth consecutive year.

Stevens also has won high marks for moving aggressively to reduce the company’s cost structure through layoffs and buyouts in preparation for much leaner defense budgets.

The normally low-key CEO has complained loudly that another $500 billion in automatic defense spending cuts — $53 billion of which is scheduled to go into effect next January unless Congress changes the law — will be devastating to Lockheed Martin and other contractors.

Kubasik will be replaced as president and COO by Marilyn Hewson, who currently runs the Electronic Systems business. Her successor will be named later in the year.