It was hardly surprising when announced this spring that Chris Kubasik would succeed Robert J. Stevens as CEO at the start of 2013. The world's largest defense contractor had telegraphed the move two years ago, when Stevens relinquished the title of president to Kubasik, who was once a partner at accounting giant Ernst & Young and joined the company in 1999.
But he will take the top job under less than ideal circumstances: next January also happens to be when $500 billion in automatic cuts in U.S. defense spending could begin taking place under a legislative process known as “sequestration.” Lockheed Martin has warned that if Congress does not avert the cuts, it will be forced to lay off 10,000 employees, or 8% of its workforce. The company already has reduced its staff, including senior management, during the past two years as it seeks to get ahead of leaner Pentagon budgets. Kubasik met with AW&ST Editor-in-Chief Anthony L. Velocci, Jr. and Managing Editor Joseph C. Anselmo at Lockheed Martin's headquarters in Bethesda, Md., to discuss his plans to maintain the company's strong profit margins, what he is telling its 29,000 suppliers, and his close oversight of the over-budgetJoint Strike Fighter program.
AW&ST: You'll be taking the reins of the company under a difficult set of circumstances. How do you size up the challenges ahead of you?
Kubasik: Running a major corporation really is a team sport. We have a core executive management council that helps shape the direction and is involved in the operations of the company. At the end of each year, we do an analysis and ask, “How did we do?” We always end up saying, “This was a really tough year.” I've pretty much convinced myself that every year is going to be tough. If the market is growing 5%, we want to grow 6-7%. And if the market is declining, we obviously want to decline less than our competitors.
Should we expect any significant changes in the direction in which you steer the company?
I don't see any. I've been part of the executive leadership team working with Bob [Stevens] for more than a decade. I've developed the strategy with him, and over the last 3-5 years I've been very involved in all the executive placements. So the team that he has in place is also the team that I was a part of selecting and identifying. With that as the backdrop, and our eight-month transition, I don't foresee any blips or change in direction.
For the past 2-3 years, investors have been worried that the Pentagon's push to put more risk on contractors is going to eat into profit margins. But that has not happened—you just had a great quarter. What do you attribute that to?
The margins are holding up probably because we are leading the industry in making tough decisions and focusing on affordability. We have 18% fewer employees today than we did a couple of years ago. We implemented and executed flawlessly a voluntary executive separation program—26% of the executives, directors and vice presidents—to thin out the organization's structure and cut costs. When I last looked, we've taken out more than 1.5 million square feet of facility space, and we've got a plan for a couple million more. At the end of the day, people and infrastructure are what drives cost. We've reduced both.
Can you make those margins stick?
I think we can. We have four businesses, and going back 10-12 years, we've tailored a strategy for each one. There was a 3-5-year run where information technology was a white-hot market growing at double digits, and now it is not. Our aeronautics business wasn't growing because thewas declining, but now the F-35 is going to ramp up. Missile defense is growing. International used to be 13% [of sales] a couple of years back and now we're at 17% and we want to be at 20%. When you look at what threats are out there and what capabilities are needed—missile defense, situational awareness, cargo aircraft, tactical fighter aircraft—our portfolio differentiates us. I look at our portfolio in totality. The individual pieces will be up and down.
Many of our readers may point out that the Joint Strike Fighter is costing much more than originally projected and is behind schedule. How does that square with your affordability imperative?
This is a big, complicated program, with the U.S. Navy, Marines and Air Force, all the international customers, our suppliers and teammates. By all accounts, people have seen an improvement since we did a rebaselining in 2010. We've exceeded our flight-test schedule. We are doing the best we can to manage the underlying infrastructure and the cost it takes to build the aircraft.
I get a report every night between 10 and 11 p.m. that gives me the status of the program, relative to flight test, test points and other challenges. Probably the last thing I do every night before I go to bed is read my F-35 report. Most nights I go to sleep [immediately afterward]. Occasionally, I make a few phone calls first. We watch this seven days a week. There is not a person in this company that is not aware of the importance of this program.
In hindsight, is it possible that Lockheed Martin came in with too low a bid, given the complexity of the program and the customers' expectations?
I don't see that. Like every program, there have been changes in funding and requirements, and you discover things as you're pushing the envelope and the state of the art. The volume of any product is going to drive the cost down more than any single cost-reduction initiative. That's why I've been so focused on international [sales]. That's the key that is going to make a big difference.
Lockheed Martin is on the hook to deliver the JSF low-rate initial production III and IV aircraft by the end of the year. Will you meet that deadline?
It's close. We experienced a 10-week strike in Fort Worth that just ended a month ago, and that could drive some challenges as to whether some aircraft get delivered late this year or early in 2013. We're in dialogue with our customer, and they know the challenges.
Will you have to go to a third shift?
Those are decisions we work with our customer. We can, but it tends to drive up the cost of the aircraft.
The JSF's 2A software was running behind. Is that back on schedule?
It was a little behind, but we're gaining on it. Software is tough to measure. We [estimate] we were 90 days behind, and we're working to reduce that. I'm reluctant to give a specific number, but we probably can cut that challenge in half.
Lockheed Martin Skunk Works built the RQ-170 unmanned aerial vehicle that went down over Iran. Why was it not equipped with a self-destruct mechanism?
You'll have to ask the Air Force about that. It was their platform.
What contingency plans do you have in place if sequestration kicks in five months from now?
There could be at least a 10% cut at a program-by-program level, so in the near term we worry about the workforce. We've talked about the need to issue WARN notices [federally mandated layoff warnings] to comply with the law. We're preparing to issue those later this year, if there's no change to sequestration. We've been reviewing the impact on our supply chain and have begun preliminary correspondence with our 29,000 suppliers worldwide to make sure they are aware of the potential impact sequestration could have on them. We won't be financing or carrying liabilities for our suppliers.
We're also trying to figure out how it will actually be implemented and what it does to our programs. If we're 10% smaller, [we] assume [we]'ll have 10% fewer employees and 10% less square footage. We have locations in just about every state, and every one of them will not be here in a year if sequestration kicks in. We will have to shut down some facilities in their entirety.
Is the sequestration process the craziest thing you've ever heard of in your time in the industry?
The impact on national security, the industry, our company, employees and suppliers is unprecedented. It's creating a lot of uncertainty. We're already seeing an impact in recruiting on [college] campuses. For several years, we've hired more undergraduate engineers than any company in the U.S.—about 5% come to Lockheed Martin. That trend is not continuing. I have a daughter who just graduated with an engineering degree. Had she asked me, I probably would have advised her against going to a defense contractor that could arguably be laying off 10-15% of its workforce within 2-3 months of her start date. The students know what's going on and are looking out for their careers.
Is it fair to say that small technology companies would get mauled the most if sequestration kicks in?
I worry about the defense industrial base. People sometimes see it as five or 10 big companies, but it's really tens of thousands. My concern is that a lot of good companies, some of them single-source suppliers of key technologies down the food chain, may just lose interest in doing business with theor the federal government and just focus on commercial and international [sales]. And then we as a country won't have those capabilities.
What are the prospects for more Terminal High-Altitude Area Defense () missile defense sales?
There's a lot. One of our significant accomplishments last year was working with the [Pentagon's Missile Defense Agency] to get the United Arab Emirates as the first international customer. Missile defense is clearly on lots of countries' [agendas], and the capabilities of Thaad are going to be in high demand. I fully expect there will be several other countries in the year to come that will visibly express interest in the system.
Is's commercialization push good or bad for the Lockheed Martin- United Launch Alliance? Obviously, does not use the Atlas rocket.
ULA has had 62 consecutive launches without a failure. To the best of my calculation, those launches placed more than $30 billion worth of assets in the correct orbits. Space launch is a complicated area, andis going to have to decide how best to allocate its limited resources. I think ULA is working and its track record is perfect.
Christopher E. Kubasik
Title: Vice chairman, president and chief operating officer, Lockheed Martin
Education: Bachelor's degree in accounting from the University of Maryland
Career: Kubasik spent the first 17 years of his career at accounting giant Ernst & Young, where he became a partner. He joined Lockheed Martin in 1999 and was named chief financial officer in 2001. In 2007, he was tapped to lead the company's Electronic Systems business. In 2010, Kubasik was named president and chief operating officer. In April, he was promoted to CEO, effective Jan. 1, 2013.