Lockheed Determined to Become Less Dependent on Pentagon Sales (UPDATED)

The nation's largest defense contractor Lockheed Martin Corp. currently generates about 80 percent of its $45 billion in annual revenues from sales to the U.S. government, predominantly the Defense Department. But with the Pentagon in a budget crunch that is expected to continue for the foreseeable future, the company is determined to reduce its heavy dependence on the U.S. defense business, said CEO Marillyn Hewson.

The company's strategy is to aggressively grow its international sales and make inroads into nontraditional markets such as renewable energy and commercial space, she said June 9 at a news conference in Arlington, Virginia.

“Since January, I have spent a lot of time traveling, meeting with international customers,” said Hewson. Just in the last six months she has been courting potential customers in the United Arab Emirates, Israel, Poland, Germany, Singapore and Japan, and has also reached out to countries' ambassadors in Washington, D.C.

The goal for the next 12 months is to raise the company's non-U.S. sales from 17 percent to 20 percent of total revenues, Hewson said. The F-35 joint strike fighter will make its international debut at the Royal International Air Tattoo and the Farnborough International Air Show in the United Kingdom next month. The F-35 is expected to become Lockheed's largest international money maker. 

But other programs are quickly adding up, Hewson said. She touted a recent agreement with the Royal New Zealand Navy to upgrade two frigates. Lockheed Martin Canada recent scored the first export sale of its combat management system. And Lockheed Martin UK is looking to export a turret system that is installed on armored vehicles. Israel is buying Lockheed's information technology services. 

Some of the most promising overseas opportunities are in missile defense, said Thomas J. Oles, vice president of strategy and business development at Lockheed Martin Missiles and Fire Control.

Already, 33 percent of this sector's sales are to foreign buyers, and the goal is to reach 40 percent by 2016, Oles said in an interview. Missiles and Fire Control accounts for $7.8 billion of Lockheed's overall revenues. The big sellers are the PAC-3 interceptor missiles and the terminal high altitude area defense (THAAD) theater air and missile defense system. The next big target is Poland's $10 billion “missile shield” program. 

Lockheed is offering to provide Poland the medium extended air defense (MEADS) system that it co-developed with Germany and Italy. Poland would be invited to become a partner in the program, Oles said. His sector is being counted upon to help Lockheed reach its 20 percent international share goal. “It's incumbent upon us to continue with our track record to help the corporation reach that 20 percent goal.”

Other avenues for growth are seen in adjacent markets, Hewson said.  The company is betting that a rapid increase in the world's population — particularly in areas where natural resources are scarce — will create opportunities for companies that can use technology to overcome those shortages. The current global population of 7 billion is projected to rise to nearly 10 billion by 2015.

“There will be pressure on resources” such as drinking water and electricity, she said. Lockheed is investing in molecular filtration technology that could turn all water into safe, drinking water, she said.  “We are optimistic about this.”

The developing world also has urgent needs for clean, affordable energy, said Hewson. Analysts estimate that by 2040 the world will consume 56 percent more energy than it did in 2010.

“There are increasing carbon emissions because countries have no access to modern fuels,” she said. “We're excited about clean renewable energy.” The company is betting on ocean thermal energy conversion — that creates energy from the difference in temperature between deep and shallow water. The company is building the world's world's largest ocean thermal energy conversion system in Southeast Asia..

Ocean wave energy is another opportunity, she said. Compared to wind and solar, energy from ocean waves is predictable and can generate more energy around the clock, said Hewson. Lockheed has teamed with an Australian company to explore tidal power, which leverages energy from the continuous, natural ebb and flow of ocean tides. “We recently signed a contract with Atlantis

Resources to support the world’s largest tidal stream project,” said Hewson. “This project is currently under development in Scotland with the potential to power nearly half of Scotland’s homes.”

Other areas where Lockheed is investing research dollars, said Hewson, include advanced lithium ion batteries and robotic vehicles that could be used in the agriculture, energy exploration and public safety industries. With the goal to make inroads into the commercial space launch sector, Lockheed recently acquired the company Astrotech.

As it seeks to diversify its business, however, Lockheed is keeping a keen eye on Capitol Hill as lawmakers hash out the military's appropriations bills for fiscal year 2015. What happens after 2015 is of most concern to defense contractors because, unless Congress acts to avert automatic cuts, the Pentagon's budget will be sliced by 10 percent across the board in 2016 and every subsequent year until 2021. 

“We are still very concerned about sequestration, as is our customer and members of Congress,” said Hewson. “We had a little bit of a reprieve in 2014 and 2015, but we still haven't dealt with 2016 and beyond. That is a concern for us.” Industry executives' message on Capitol Hill is that “sequestration does not line up with the national security strategy,” she said. “Anyone I speak to on Capitol Hill agrees with that. We think sequestration is not good public policy.”

Hewson declined to speculate on how the company might cope with further cuts to Pentagon spending. Lockheed, like other top defense contractors, has been focused on generating profits for shareholders. Since 2003, it has returned 100 percent of its cash flow to shareholders in the form of stock buybacks and dividends, she said. Whether that can continue is unclear. One way the company has boosted profits is by laying off workers. From a peak of 146,000 employees in 2008, Lockheed is down to 113,000. “Have we reached bottom? It's hard to predict,” she said. “I think we're in pretty good shape. Our focus is on growing the company.”

Investors so far appear to be pleased by Lockheed's diversification efforts. “The firm does business with 70 nations around the world. With a growing international backlog, it is well-positioned to achieve its goal of growing international sales over the next few years to over 20 percent of revenue,” said a note to investors by Valuentum Securities.  “That said, a focus on cash flow and earnings growth is paramount in assessing Lockheed's shares.”

CORRECTION: An earlier version of this post said Lockheed Missiles and Fire Control makes 40 percent of its sales to international customers. The sector expects to grow from about 33 percent international sales now to close to 40 percent by 2016.

Topics: Business Trends, Defense Contracting, Defense Department, DOD Budget, Procurement, Defense Department