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Defense Contractor Engineering Change

The Navy is getting more interested in anti-submarine warfare as it experiments with basing troops on clusters of ships in places where there are no land bases. The proliferation of diesel-powered submarines in foreign navies threatens that strategy. The unit is also selling more equipment to foreign navies.

In addition, the company inherited some businesses through acquisitions that have civilian uses, such as train-control systems, or that led it into new areas of technology, such as radiation and biotoxin detectors.

Bill Herman inserts a server into a cabinet destined for the USS Pittsburgh. Lockheed Martin buys the servers instead of making them, as it did in the past, a process that is easier, more efficient and less expensive. (Margaret Thomas -- The Washington Post)

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Lockheed Martin Corp.
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As the defense industry has become a technology business, simply making tanks and planes isn't enough. There is a lot of profit in the computerized innards of ships and planes, which is where businesses such as Underseas Systems and its parent division, Electronic Systems, come in. These businesses are becoming almost as important as major projects such as the new generation of jet fighters Lockheed Martin is developing, the F/A-22 Raptor and F-35 Joint Strike Fighter.

The jets are high visibility projects but also high risk, which is why it's important to diversify. Electronic Systems, with $6.6 billion in sales through the third quarter, is the second-largest division of Lockheed Martin, behind Aeronautics with $8.8 billion. And although Electronic Systems hasn't grown as fast as Aeronautics, it boasts fatter operating profit margins.

Aeronautics has been growing fast because it has had more orders for F-16 jet fighters recently, said William Hamilton, a stock analyst at New Jersey brokerage Pershing LLC. "But deliveries are plateauing," he said, "so you'll eventually see growth level off there."

Nevertheless, financial analysts said, airplanes will remain Lockheed Martin's largest business. Electronics, though, will keep the fatter profit margins, in part because there are such heavy startup costs in developing sophisticated fighter jets for the military.

So Lockheed Martin is committed to electronics. It recently paid an undisclosed sum for Sippican Holdings Inc., a Massachusetts company that makes submarine communications systems and other equipment, adding 400 people to the 1,800 who work for Underseas Systems across the country.

"There was a time when there was not so much emphasis on what we do -- the post Cold War period, when the threat from the Soviet Union diminished," said O'Neill, the unit's president. "Now we're operating in a more opportunity-rich business environment."

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