April 27 (Bloomberg) -- Robert Stevens turned out to be one of the biggest trophies in the acquisition binge that made Lockheed Martin Corp. the world’s biggest defense contractor.
Stevens, a former U.S. Marine who came to Lockheed when it bought his employer Loral Corp. in 1996, rose to chairman and chief executive officer of a company that completed more than 20 acquisitions in the 1990s, including the $10 billion merger of Lockheed Corp. and Martin Marietta Corp. in 1995.
“He took two mediocre entities that came together, Lockheed and Martin Marietta, and had the energy, courage and intestinal fortitude” to force change, Heidi Wood, managing director at Morgan Stanley in New York, said in an interview. Stevens reshaped a company where executives clung to Cold War-era ideas and still “wore horn-rimmed glasses and Brylcreem” in their hair, she said.
Lockheed Martin announced yesterday that Stevens, 60, will relinquish his CEO’s job in January. Chris Kubasik, 51, the president and chief operating officer will succeed Stevens, who intends to keep his chairman’s title through January 2014.
Stevens is turning over a company whose shares gained 71 percent since he was named CEO in 2004, compared with a 25 percent increase in the Standard & Poor’s 500 Index and a 22 percent rise in the Standard & Poor’s 500 Aerospace & Defense Index. He is also leaving his successor a project as big as any he tackled: managing a defense giant when the U.S. is preparing to cut defense spending by as much as $1 trillion over 10 years.
“Chris Kubasik’s challenge is to maintain operational focus, and that is his forte,” Wood said. Kubasik, an accountant by training, joined Lockheed in November 1999 after more than a decade at the accounting firm Ernst & Young LLP.
Among his priorities are seeking international customers for Lockheed’s F-35 jet, continuing work on the Littoral Combat Ship that has been plagued with flaws such as cracks, and winning the U.S. Air Force’s planned contest for a new long-range bomber, Kubasik said in an interview yesterday.
“Everything related to the F-35 is a growth area,” Kubasik said.
Under Stevens, Lockheed beat rival Boeing Co. to win the Pentagon’s F-35 Joint Strike Fighter competition in October 2001. Although the win gave Lockheed an advantage, the stealthy jet’s development and production have been marked by delays and cost overruns that threaten to curtail U.S. purchases.
The plane is Lockheed’s single largest program and the Pentagon’s most expensive, at an estimated cost of $382 billion.
Lockheed of Bethesda, Maryland, is offering the plane in a jet fighter contest in South Korea. The company also is developing new uses for older weapons because of “fewer and fewer major new starts” in the U.S., Kubasik said, citing the adaptation of helicopter-borne missiles for fixed-wing aircraft.
Paid $25.4 Million
When Stevens became the chief financial officer at Lockheed in 1999, it had $11.9 billion in debt and $455 million in cash. Moody’s Investors Service Inc. had lowered the company’s credit rating. Stevens helped reduce the debt by almost half to $6.5 billion at the end of 2011, and cash on the balance sheet rose sevenfold to $3.6 billion, according to data compiled by Bloomberg.
“I’d say that from the day Stevens emerged from relative obscurity to become the CFO, this organization has been run by him,” Wood said.
He has been rewarded for his efforts. His compensation last year was $25.4 million, including a salary of $1.8 million, a bonus of $4.73 million and awards and stock options with an estimated value of $18.8 million, according to the company’s U.S. regulatory filing.
Stevens also oversaw Lockheed’s entry into shipbuilding, when it won a contract to build a variant of the U.S. Navy’s Littoral Combat Ship. A team led by Austal Ltd. and including General Dynamics Corp. is building the other version.
Stevens’ tenure as CEO coincided with one of the most expansive eras for U.S. defense spending, which rose 72 percent, including war-related costs, from 2000 to 2009.
Now, as he prepares to depart, the U.S. faces a deficit crisis that led to a decision to cut $490 billion from planned defense spending over the next 10 years. An additional $500 billion in automatic budget cuts may begin in January if lawmakers and the president fail to agree on ways to reduce deficits.
To get the most for its money, the Pentagon is imposing tougher terms on defense contractors, including fixed-price contracts and penalizing suppliers for exceeding cost and schedule estimates.
The tight times for defense contractors will continue for some years to come, so making a transition now is better for the company, Stevens said.
“It would be great to go on forever, but I recognize future challenges will extend beyond” the company’s mandatory retirement age of 65 for executives, Stevens said yesterday on a conference call with reporters.
Kubasik, who previously served as Lockheed’s CFO before heading the Electronic Systems unit, is well-positioned to manage the company, Stevens said.
Kubasik must retain and win a “couple of big market sector-defining programs” that are critical to Lockheed, Byron Callan, a defense analyst at Capital Alpha Partners in Washington, said in an interview.
Lockheed needs to keep its work on the Navy’s Aegis Combat System radar program, which faces the threat of competition from Boeing and Raytheon Co., Callan said. Lockheed has held the Aegis contract for 40 years.
Winning the Air Force’s planned long-range bomber contract would provide a “hedge against cuts to the F-35 program,” Callan said.
Health, Information Technology
Kubasik and Marillyn Hewson, who will take over as president and chief operating officer, must decide what other market opportunities to pursue as defense budgets shrink, Callan said.
Kubasik said Lockheed sees supplying information-technology and systems-integration skills to the health-care and energy industries as promising businesses for Lockheed to expand. The company already gets about $1 billion in annual revenue from each of those businesses, he said.
Not all of Lockheed’s pursuits under Stevens bore fruit. In 2006, he bought Pacific Architects & Engineers to provide services to U.S. embassies as well as disaster relief around the world.
Lockheed sold the unit in 2011 because it didn’t fit its long-term strategy. Stevens has said he expected to use the unit to provide information-technology services to customers. Instead embassies wanted Lockheed to take on construction, maintenance and physical security of buildings.
Stevens at least “had the courage to take some concentrated bets,” Wood of Morgan Stanley said. “Not all of them panned out.”
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