Lockheed Martin Corp. officials say their 2000 earnings projections depend significantly on the pending sale of F-16 fighter aircraft to the United Arab Emirates. An article in yesterday's Washington Business section incorrectly identified the type of aircraft. (Published 11/09/1999)
As the nation's largest defense contractor, Lockheed Martin Corp. knows plenty about building gun sights.
Now, however, it's Lockheed Martin that's caught in the cross hairs.
A cascade of mistakes, misjudgments and misfortune over the past year has buried the company's stock, wiping out $14 billion of shareholder value and infuriating major shareholders.
Ten days ago, a contrite Lockheed Martin Chairman Vance D. Coffman acknowledged that worse news lay ahead. Next year's profit is expected to be just $1 a share, he announced -- far below the $2.15 the company had forecast in June. Lockheed Martin president and chief executive Peter B. Teets took the hit and resigned.
The questions confronting the Bethesda-based defense and aerospace giant have become fundamental:
Can Coffman survive the anger of major investors?
And can Lockheed Martin recover without wrenching changes to its operations, personnel and culture? There is a growing expectation on Wall Street that major downsizing and restructuring will be required to stabilize a $25 billion company with shrinking cash flow and $11 billion in debt.
Wall Street appears divided on whether the 55-year-old Coffman will stay or go. A highly respected Stanford University engineer, Coffman rose through Lockheed's top-secret defense work to its top management before becoming Lockheed Martin's president in 1996. However, critics say Coffman's background in business, finance and politics hasn't been deep enough to avoid damaging miscues on all three fronts.
"There are irate phone calls going around" among Lockheed Martin's major institutional investors, said Martin Knoblowitz, a director of Standard & Poor's Corp., the financial rating service.
"These people aren't happy being underwater [with their Lockheed Martin investments] and made to look foolish," added Knoblowitz, whose firm last week pushed Lockheed Martin's debt rating down to the lowest investment grade level, a step above junk-bond status.
Coffman gets a vote of confidence from some on Wall Street like Knoblowitz and Pierre Chao of Credit Suisse First Boston.
"The hopping up and down on Wall Street and the screaming for managerial blood is often a knee-jerk reaction to bad news. It doesn't mean it's the right answer," Chao said.
Others are not so generous.
An official of one of Lockheed Martin's largest shareholders wants to see the company's board replace Teets with a top executive from outside the company who could move Coffman aside next year as chief executive. "That's the one thing that could get the stock turned around in three to six months," said this person, who declined to be identified.
Coffman's fate won't be clear, analysts say, until a president is chosen to replace Teets, and perhaps not even then.
In what some analysts see as a signal of future changes, Lockheed Martin's board divided the responsibility for picking a new president between Coffman and one of the board's most influential outside directors, General Electric Co. Vice Chairman Eugene Murphy. Some key investors hope Murphy will insist on an outsider in the president's post, breaking from the past practice of alternating top assignments between veterans of the Lockheed and Martin Marietta companies that merged in 1995.
But while that decision is being made, Coffman has begun a counteroffensive, aimed both at Wall Street and the Defense Department, where Lockheed's performance on some key contracts has been sharply criticized.
Under the new Lockheed strategy, according to Coffman, the company will concentrate on rebuilding its performance and reputation with the Pentagon and other federal customers while it clamps down with new controls over cash flow.
And secondly, it has begun sizing up some major non-defense businesses to see which could be downsized, spun off or shared with new investment partners.
Some analysts believe that the list of spinoff candidates has gotten much larger after the company's latest setbacks.
Heading the list is the company's global telecommunications business. It includes a 49 percent interest in Bethesda-based Comsat Corp., a satellite communications firm that is the U.S. link to the global satellite network Intelsat.
In perhaps the most controversial step of his tenure so far, Coffman sought to acquire all of Comsat, to extend Lockheed Martin's tech know-how from the government to the commercial arena.
In his critics' view, the challenge of winning political and regulatory approval for the Comsat deal tied up so much of top management's time that problems with space-related businesses and some Pentagon contracts were allowed to mushroom. "If we could go back in time and make that go away, investors would be all smiles," said one investment group official.
Now, assuming Congress finally approves the merger's completion, that business may be sold or shared with new partners, if they can be found.
Robert Stevens, Lockheed's chief financial officer, said in an interview that other Lockheed divisions outside the defense core, such as commercial information technology services and state and local contracting, will be similarly scrutinized to see if they would do better as separate businesses or partnerships.
"It's very clear to us that those markets have different appetites for capital and require different skills and expertise" than do Lockheed's basic defense businesses, he said.
"We're looking in the short term at strategic opportunities . . . to unlock value" in these non-core businesses, Stevens said. Lockheed intends to see whether these businesses could produce better value for shareholders if they were run by managements that understand their markets "better than the management team in Lockheed Martin."
"That doesn't mean that there's a fire sale here," he added. "We know these businesses are valuable."
Stevens did not spell out where these moves may lead, but some analysts predict it will be well beyond Lockheed's current plans, announced in September, to sell off units with $1.8 billion in annual sales and 9,000 employees -- including the Manassas-based electronics group.
"They must make additional divestitures in non-core areas like information technology. The sale of $1.8 billion in assets is grossly inadequate" given the size of the company's debt and its reduced cash flow, said James A. McAleese, a McLean lawyer specializing in defense industry issues. "I believe he [Stevens] is signaling to prospective buyers to make offers."
The right pieces would clearly be attractive to defense industry investors such as the District-based Carlyle Group, analysts say.
Major investors do not appear to be calling for a full-scale dismemberment of the company along the lines of the self-engineered breakup of General Dynamics Corp., the Falls Church-based defense contractor that downsized severely in the early 1990s in response to the plunge in military spending following the end of the Cold War. Its consolidation around a smaller portfolio of businesses has rewarded GD shareholders handsomely.
"I'm not aware of any strong voices today from any major institutional investors placing pressure in that direction," said Tassos Philippakos, senior vice president of Moody's Investor Service.
The fate of Lockheed's broad array of businesses may hinge on a third key question: Has the company's free fall bottomed out?
"This is a painful process for all of us," Coffman told analysts during an Oct. 29 telephone conference call. "You are wondering if there are more surprises to come."
To reach its new earnings target of $1 a share, Lockheed has to cash in on a long-delayed sale of C-130J cargo transports to the United Arab Emirates, seek other customers for the aircraft, and hope that a steep slide in its space launch and services business is halted. Lockheed officials expect the UAE orders before the end of this year.
There's much less optimism about a pickup in orders for satellite launches, where the supply of launching services now runs far ahead of global demand.
Lockheed also must see to it that failures of its booster rockets -- major contributors to its current malaise -- don't continue.
"There's a certain amount of luck involved," said CSFB's Chao. "If there's a launch failure, that would obviously have an impact."
Once again, the financial analysts' outlook is divided.
"After several surprises, it may be reasonable to expect that the company may be close to the bottom," Philippakos said.
But Standard & Poor's analyst Robert Friedman isn't as hopeful.
"I think the company is in a bind because the whole is not greater than the sum of the parts, even at $19 a share," he opined. (Lockheed shares closed at $17.37 1/2 on the New York Stock Exchange on Friday, down 62 1/2 cents for the day.)
"As long as they're involved in the defense business and satellite services, those are just not very good businesses. Defense markets are slow-growing at best and shrinking in some areas." And the competition in satellite services makes it hard to profit there, Friedman said.
Coffman's strategy of re-centering Lockheed Martin on its core defense contracts strikes many analysts as an overdue move.
But as he has acknowledged, the company has major fence-mending ahead with its largest customer.
One view of that relationship comes from notes of a meeting in September between senior Lockheed executives, headed by former executive vice president James Blackwell, and Air Force Deputy Assistant Secretary Darleen Druyen.
The notes taken by Lockheed officials found their way to an Internet bulletin board. Although neither Lockheed nor the Air Force have commented on the incident, sources close to the company say the notes accurately reflect Druyen's comments.
They quote her as giving an "excellent" grade to Lockheed's management of the F-22 jet fighter program and an "outstanding" mark to its work on the F-117 Stealth Fighter. But Druyen is quoted as blistering Lockheed for "arrogance" in handling its space division contracts.
Druyen also chastised Lockheed's proposal for a new line of spy satellites -- a potential $5 billion contract that Lockheed had just lost to a Boeing Co. team despite having controlled that field for decades.
It "was a crappy design. No innovation," according to the notes.
Notwithstanding Druyen's criticism, the Pentagon now appears worried about the health of its primary weapons supplier.
So worried, in fact, that Deputy Defense Secretary John Hamre last week took the surprising step of lecturing Wall Street about its severe treatment of Lockheed and other defense companies recently.
"The stock market has pummeled our top defense contractors in the past few weeks. . . . I'm startled and frankly disappointed that [investors] have taken such a short-sighted view of the importance of defense to the country," he said.
While some Wall Street analysts found Hamre's comments detached from reality, defense analyst Loren Thompson said the defense official's unusual remarks reflect the Pentagon's concern about the plight of the defense industry -- and notably Lockheed Martin.
Lockheed's self-made problems are compounded by constant changes in Pentagon orders for weapons systems, Thompson said. "How can you tell investors what you're going to do when your biggest customer constantly changes its mind?"
A Look at . . .
Third-quarter sales, in millions
43% Systems Integration
22% Space systems
19% Aeronautical systems
9% Technology services
7% Other units
SOURCE: Company reports, Bloomberg News
Business: The largest U.S. defense supplier and a major NASA contractor. The company also provides information technology and space services to commercial clients.
Founded: 1995, through a merger of Lockheed and Martin Marietta
Chairman, chief executive: Vance Coffman
Ticker symbol: LMT on NYSE
Local employees: 9,500
Web address: www.lockheedmartin.com
SOURCE: Company reports