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Lockheed’s Stevens Says Budget Impasse Unnerves Business

The head of Lockheed Martin Corp. (LMT) said the impasse on negotiations to avoid tax increases and spending cuts is rattling nerves in the business community.

“Any strategic planner would be nervous if they were a 40- year business and couldn’t look forward 19 days,” Chairman and Chief Executive Officer Robert Stevens said today at a Bloomberg Government breakfast in Washington, referring to the time left before about $600 billion in tax and budget changes start to take effect.

Stevens, 61, who will step down as CEO next month, said he was optimistic a deal may be reached in time to avert the so- called fiscal cliff because “people are talking,” an improvement from a month ago.

“Our sense echoes the sense across the business community” that “we’re really rooting for the people in the Congress and the administration” to “come together and find a resolution,” Stevens said in a separate interview with Bloomberg Television’s Peter Cook for “Capitol Gains” airing Dec. 16.

Stevens, who heads the world’s largest defense contractor, said the company still has several months before it would have to contemplate job cuts if automatic defense cuts of about $500 billion over a decade begin to take effect in January.

Layoffs “may not happen until April or after April” because contracts won’t need to be adjusted before then, he said in the interview with Bloomberg editors and reporters.

Lockheed Martin fell 1.1 percent to $88.96 at the close in New York trading and has climbed 10 percent this year.

F-35’s Prospects

Contractors don’t yet know the extent to which cuts will affect specific programs, such as Lockheed Martin’s F-35 fighter, the Pentagon’s costliest weapons system. The cuts would apply to funds not already obligated.

“It would mean fewer airplanes,” Stevens said in the television interview. “Fewer airplanes at this juncture in the program means less manufacturing efficiency.”

As soon as today, the Pentagon and the Bethesda, Maryland- based company may sign the final contract for the fifth production lot for 29 F-35s, valued at about $3.8 billion. While about 75 percent of those funds are already obligated, the contract would protect the entire batch of fighters from automatic cuts.

‘Worst’ Relations

The final contract took almost a year to negotiate. In September, Lieutenant General Christopher Bogdan, who is now director of the Pentagon’s F-35 program, said relations with the company had deteriorated to “the worst I’ve ever seen.”

“It should not take 10 or 11 or 12 months to negotiate a contract with someone we’ve been doing business with for 11 years,” Bogdan said at the time.

Marillyn Hewson, the chief operating officer who will become the company’s CEO next month, said “the reason why it took longer is that there was a real need to understand the cost, on both sides, from the government side, from Lockheed Martin’s side.”

The lessons learned should help speed the process in pending negotiations on the sixth lot of 36 F-35s, she said at the breakfast. Hewson, 58, said she hoped agreement would be reached on an initial “undefinitized” contract this month. Those jets also would be sheltered from the automatic cuts.

The Pentagon estimates the total cost for development and production of 2,443 F-35s will be $395.7 billion, a 70 percent increase since the initial contract with Lockheed was signed in 2001.

Canadian Review

Citing the fighter’s rising costs, Canada’s government said this week that it will weigh whether to buy less costly alternatives to the 65 F-35s it had planned to purchase.

Stevens said today he didn’t “look at it as a blow to the program.”

“We find across the array of our most sophisticated buyers that they routinely examine their acquisition decisions,” Stevens said in the television interview.

Pending defense-budget cuts are likely to increase pressures for defense companies to consolidate, Stevens said. The Pentagon opposes mergers among the biggest contractors.

“If you don’t have consolidation, you start to get some pretty weak performers” as defense spending declines, he said at the breakfast. “And we’re mostly worried about how that affects the periphery or the edge of our supply chain.”

While Lockheed Martin won’t hesitate “if we see acquisitions that look appealing,” Stevens said consolidation isn’t always the answer.

“Remember, anything you buy, you’ve got to integrate,” he said.

Lockheed Martin’s Chief Financial Officer Bruce Tanner said last month that buying more companies would be his “first preference” for using excess cash.

Stevens said today that Tanner’s comment was misinterpreted as a signal that Lockheed was about to make “huge” acquisitions.

To contact the reporters on this story: David Lerman in Washington at dlerman1@bloomberg.net; Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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