Lockheed Martin’s future will likely not be affected by the scandal that ousted the executive who was slated to take over the company’s reins next year, although it was bad timing, analysts said this week.
Because CEO Robert J. Stevens will remain as executive chairman next year and the company is retaining a veteran CFO, the Bethesda military and aerospace giant should be fine, Rob Stallard, an analyst at RBC Capital Markets, said in a report. Stevens had originally planned to remain as board chairman on Jan. 1 when Christopher E. Kubasik was scheduled to take over as CEO, but he is now expected to play a larger role in the company next year.
“With Bob Stevens staying on as executive chairman and Bruce Tanner still the experienced CFO, we doubt if Lockheed’s operations or financial results will be notably impacted by this change,” Stallard said.
With massive Pentagon cuts looming amid the so-called “fiscal cliff,” growing shareholder value requires Lockheed “to hit on all cylinders” during this critical period, Tim Brugger, an analyst with investment information company Motley Fool, said in a report. “Instead, Lockheed got thrown a wicked curveball in the bottom of the ninth,” he said.
Industry rival Boeing, with its recent announcement to cut 30 percent of management staff, is better prepared for the Pentagon cuts than Lockheed, Brugger said. Federal cuts could be massive if Congress does not avert sequestration budget reductions by Jan. 2, analysts say.
Lockheed’s board forced Kubasik to resign Nov. 9 after an investigation by an outside law firm confirmed that Kubasik had a “lengthy, close, personal relationship with a subordinate employee,” Stevens said during a conference call this week.
Kubasik, 51, of Potomac joined Lockheed in 1999 as controller and had been president and COO since January 2010. He was scheduled to succeed Stevens as CEO on Jan. 1.
Kubasik’s ouster came just after CIA Director David Petraeus resigned because of an extramarital affair. However, Lockheed officials did not characterize Kubasik’s “close, personal relationship” as an affair.
The company immediately named Marillyn A. Hewson, 58, as its next CEO, effective Jan. 1. She also became Lockheed’s president and COO, and will retain her previous position as executive vice president of the electronic systems division until Dec. 31.
While acknowledging that “no one expected us to be dealing with what we are dealing with now,” Stevens said Hewson is “ready now to become CEO,” and he didn’t see any apprehension from customers regarding her taking over as CEO in January. Hewson is quite familiar with Lockheed's operations and programs, including the F-35 Joint Strike Fighter program, Stevens said.
Some investors could have concerns about the near-term implications of the F-35 program with the sudden management change, said Michael S. Lewis, a senior analyst with Lazard Capital Markets covering military, aerospace and government technology services.
“Chris was a very strong advocate at Lockheed for progressing the [F-35] program,” he said. But Lewis added that he himself didn’t see any near-term implications of the CEO change on the F-35 program.
The F-35 is among Lockheed’s largest programs, and the company is negotiating with the Defense Department on the next batch of F-35 orders. The program has faced delays and cost overruns, and an Air Force official in September publicly criticized the relationship between the Pentagon and Lockheed as the “worst” he had seen.
Stevens and Hewson said they had worked hard to build a good relationship with the Pentagon. Hewson said she personally knew the Pentagon team working on the F-35.
“I've been engaged in the actual negotiations,” she said. “The program itself, I believe, is progressing very well.”
As far as changes to the transition plan, Stevens said, “There may be some distinctions about how we change the gearing in our transition plan” and “over how we assemble ourselves around priorities,” but he didn’t foresee any major course changes.
“There is absolutely no doubt about the future direction of this corporation,” Stevens said. “Every employee in this company will rally around and support Marillyn.”
“We will weather this, and we will excel in this environment,” Hewson added.
Hewson, who has worked for Lockheed for 29 years and was originally slated to become COO and president on Jan. 1, said her role with the company will change from focusing on operational activities to working on areas such as strategy, policy matters and employee talent development.
She said she plans to retain a work environment in which employees can think creatively.
“We need that innovation in technology and ideas every day,” she said. “People are here because they are really focused on doing something larger than themselves. ... It’s that passion that I have, and the people at Lockheed Martin have, that makes us such a great company.”
Kubasik will receive $3.5 million as a “separation payment,” according to a Lockheed filing with the Securities and Exchange Commission. He made $9.5 million in salary, bonuses, stock options and other compensation in 2011, up from $7.9 million in 2010, according to the company’s recent proxy statement.
Kubasik will not receive a bonus this year, the new filing said, but under federal law he will be eligible for medical and dental benefits for as long as 18 months. He agreed to release Lockheed from any legal claims related to the separation from the company, according to the filing.
Kubasik could not be reached for comment. He said in a statement that his departure “in no way reflects on the strength of Lockheed Martin. I remain confident in the future of the company. I regret that my conduct in this matter did not meet the standards to which I have always held myself.”
Employee blew whistle on Kubasik
A Lockheed employee raised an “allegation of improper conduct” about Kubasik’s alleged relationship with a subordinate employee in late October, Stevens said. In three days, an internal investigation by Lockheed’s legal and ethics departments determined that the allegations “were not frivolous,” he said.
The next day, Lockheed hired an independent outside law firm to conduct a more thorough investigation, which then substantiated the ethics violation, Stevens said.
“We have standards of ethics and integrity that we expect all to meet,” Stevens said. “While I am deeply disappointed and genuinely saddened by Chris’ conduct, I recognize that it was a personal failing having no impact on either our operational or our financial results, and our clear and swift response demonstrates our unyielding commitment to holding every employee accountable for their actions.”
The employee who blew the whistle was not involved in the relationship with Kubasik, and the subordinate involved no longer works for Lockheed, Stevens said. He applauded Lockheed’s ethics process that brought the matter to the board’s attention.
“For an employee of this company to come forward when they believed they had information about improper conduct, and when that improper conduct was about the highest levels of the company, and yet they came forward with confidence and real clarity without fear of reprisal. ... I think is rare in today's business climate,” Stevens said.
Investors apparently weren’t too concerned with either the scandal or the selection of Hewson as Stevens’ successor. Lockheed’s stock price changed little on Friday, Monday and Tuesday. The biggest change came Wednesday when the price dropped by 2.3 percent to $88.11.
Lockheed Martin is the largest company with headquarters in Maryland, with revenues last year of $46.5 billion. About 9,000 of its 120,000 total employees are in Maryland.
The business so far is doing better than last year. Revenues in the first nine months this year have risen by 2 percent to $35.1 billion from the same time in 2011, while net income in that period jumped by 10 percent to $2.2 billion.
Hewson ‘genuinely likeable’
Hewson is a “genuinely likeable person” who connects well with others on a personal level, Stevens said.
“People seem to like Marillyn more than they like me,” he said jokingly. He then added, “I’ve learned a lot from her in our ability to work together over the years.”
Hewson joined Lockheed in 1983 and previously was president of Lockheed Martin Systems Integration-Owego (N.Y.) and of Logistics Services. She has been executive vice president of the electronic systems segment since January 2010. She earned a bachelor's in business administration and a master's in economics from the University of Alabama, and attended the Columbia Business School and Harvard Business School executive development programs.
Hewson chairs the board of Lockheed subsidiary Sandia Corp. and is on the board of chemical giant DuPont. She is a member of the Association of the U.S. Army Council of Trustees and the University of Alabama's Culverhouse College of Commerce and Business Administration Board of Visitors.
Kubasik previously was CFO and executive vice president of the electronic systems division at Lockheed. He also was a partner at Ernst & Young and earned a bachelor’s in accounting from the University of Maryland, College Park.
Lockheed does not immediately plan to fill the COO role, which will become vacant in January, Stevens said.