Lockheed Martin faces setbacks
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Top U.S. defence contractor Lockheed Martin faces setbacks, but Wall Street seems unfazed
April 21, 2007 - 14:54
WASHINGTON (AP) - Lockheed Martin is taking hits right and left - criticism of its newly designed presidential helicopter, the unusual Navy cancellation of a multimillion-dollar combat ship and losing its shared oversight role on a Coast Guard project worth billions.
Wall Street so far has shrugged at the missteps of the biggest U.S. defence contractor, since its bottom line won't be hurt in the near term. But Lockheed executives are worried, experts say, and not just about the negative headlines. The Democrat-led Congress is scrutinizing defence spending more closely and each time Lockheed stumbles it gives rivals an opportunity to horn in on its business.
"These are significant setbacks for Lockheed that occur against a backdrop of remarkable success over the last five years," said Loren Thompson, a defence analyst at the Lexington Institute in Arlington, Va. "The real question is if that trend is going to continue.
The company has had recent stumbles:
-The Coast Guard this week said it was taking over management of a troubled US$24 billion modernization program dubbed Deepwater that had been run by a joint venture of Lockheed Martin Corp. and Northrop Grumman Corp. since its 2002 inception.
-The U.S. Navy last week cancelled a shipbuilding contract with Lockheed after negotiations to control costs on the second of two Littoral Combat Ships failed.
-The Government Accountability Office last month criticized Lockheed's work on a new fleet of Marine One helicopters for exceeding program costs and for being about 600 kilograms overweight.
Despite these events, Lockheed's stock price has been relatively steady and Wall Street analysts have barely raised an eyebrow. In fact, many analysts praised Lockheed's financial discipline for walking away from the combat ship deal after weeks of fruitless negotiations. Analysts said the cancelled Navy deal would have little effect on the bottom line of the Bethesda, Md.-based company, which reported a 6.5 per cent jump in 2006 sales to US$39.6 billion.
Since the beginning of the month, Lockheed's stock has dipped about one per cent, while some of its rivals, including General Dynamics Corp., Boeing Co. and others, have seen modest gains.
But government and technology industry experts said Lockheed is concerned about the high-profile problems on government deals. Although continued contract wins in a variety of areas suggest Lockheed's reputation remains solid, any problems that arise bring unwanted attention from the media and lawmakers.
"If you're going to build a new technology, you're going to have to accept some failures," said James Lewis, director of the technology and public policy program at the Center for Strategic and International Studies, a Washington think tank.
And the company is not shy about branching out. While being known for making fighter jets and missiles, it also is expanding into government information technology and shipbuilding.
Lockheed Martin used to be considered an aerospace firm, but Lewis said a company executive recently corrected him by saying, "we're an IT company now." That official also told Lewis that the shipbuilding problems were a "huge headache."
But with hundreds of contracts in place serving dozens of customers worldwide, Lockheed spokesman Craig Quigley said "rarely are these programs easy." He described Lockheed as a "high-end engineering company" faced with difficult challenges that attempts to effectively apply its systems integration and program management expertise.
With 140,000 employees, many of whom are engineers, Quigley scoffed at the notion that Lockheed had spread itself too thin and said the company "moves skill sets around ... to address the challenges we're faced with."
The Navy combat ship deal was Lockheed's first and only one working as a prime shipbuilding vendor for the government and was bigger than the rest of its shipbuilding contracts combined, Quigley said, adding that company is pursuing other opportunities internationally.
Still, Lockheed CEO Bob Stevens said last week the company was "greatly disappointed by the cost growth" on the first Navy combat ship and frustrated that "we will not have the opportunity to apply lessons learned to a second ship."
"The first time you try a new military technology there are teething problems," Lewis said, adding that he did not expect the Navy and Coast Guard issues to have any long-term effect on Lockheed.
"Neither of these stories is good news for Lockheed, but it's not as though the company was fired," said Thompson, who does some government budget and acquisition consulting for Lockheed, but not for specific programs. "My impression is that they're departures from the norm rather than a new trend."
But senior U.S. Navy officials have recently stressed a need to revamp their acquisition strategy as various key ship programs continue to exceed initial contract estimates. The service has floated the idea of moving toward fixed-priced contracts for most ship programs, rather than cost-plus contracts where vendors can raise their price tags and reap extra revenue.
The most harshest criticism of Lockheed's work is expected Wednesday afternoon at a House Transportation and Infrastructure Committee hearing that will focus on the results of an investigation conducted by its oversight staff on the Deepwater patrol boat conversion.
The Coast Guard this week permanently decommissioned the eight cutters that had been removed from service late last year because of hull problems. Michael DeKort, a former Lockheed Martin employee who detailed electronics safety and security issues in the cutters beginning in 2003, and later chronicled his complaints in a YouTube video, is scheduled to testify about the company's alleged negligence and legislators already have called on the U.S. Justice Department to investigate.
Shares of Lockheed added 35 cents to $96.31 in Wednesday trading on the New York Stock Exchange.
Posted by Joe Anybody
at 12:02 PM PDT
Updated: Wednesday, 25 April 2007 6:54 PM PDT