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The global landscape is shifting faster every day. Change is constant – political, economic, technological, social, and cultural. What is clearer today is that the landscape is being re-shaped by a series of megatrends—overarching forces that, as the National Intelligence Council puts it, will affect how the world works in the decades ahead.
Four of these megatrends are especially relevant to our work and our conversation today:
Number One is the evolving global power dynamic and its impact on the global security environment;
Number Two is the rise of digital technology and the risk associated with the increasingly connected world;
Number Three is the increasing global population and the demands it puts on resources and the planet; and
Number Four is the worldwide economic uncertainty and how that influences the decisions and priorities of our customers.
Each of these megatrends is powerful alone. Collectively, they are transformative—creating the most complex global security environment we’ve ever seen.
So this morning, I’d like to talk to you about each of these four megatrends and discuss how Lockheed Martin is working to apply the breadth of our capability, the depth of our knowledge, and the power of our innovation to help our customers address these challenges.
When we look around the world, the first clear megatrend is a changing global power dynamic. Today there are more actors, with more power, in more places than ever before. While the United States remains the strongest nation by almost any measure—from military might to financial strength—we cannot afford to take that dominance for granted or assume that size and might will guarantee the country’s ability to influence the world, much less control it.
We were encouraged to see that the President’s FY16 Defense Budget Request reflects these concerns—and it supports the required expenditure to address these unprecedented challenges.
This is a world where developing nations, rogue nations, non-state groups, and even individuals, are more and more able to influence global events. Where vast sums of money can cross the world in a keystroke… Where a drought in Australia can lead to food crises from Haiti to Hong Kong… And where a virus in Africa can unleash panic in North America… And where a lone terrorist can board an airplane anywhere, and change the course of history everywhere. In such a world, strength, flexibility, and adaptability are at a premium. We must be innovative and agile to keep up with these evolving challenges and emerging threats.
At Lockheed Martin, we’re delivering revolutionary systems that meet this imperative. And the F-35 is a clear example. The F-35 is adaptable to any number of complex challenges. It’s also the stealthiest, smartest, and most advanced aircraft in history. This aircraft is the future. And over the last year, we’ve come significantly closer to making the future reality. In 2014, we met our production target of 36 aircraft – delivering a record number of F-35s in a single year. And this year we’ll deliver even more. The F-35C carrier variant completed its first phase of sea trials ahead of schedule, meeting 100 percent of the threshold requirements—and even conducting night operations in its first round of testing. And just last month, the Marine Corps received its first F-35C carrier variant, adding to its growing fleet of F-35Bs—the short take-off and vertical landing model—as the Marine Corps prepares for initial operational capability this year.
Another example of a platform tailored to a world of complex threats is the Littoral Combat Ship. We’ve seen our first two ships demonstrate the value of their unique design and flexibility in responding to crisis. The USS Freedom was called to deliver relief supplies to typhoon-ravaged areas of the Philippines. And the USS Fort Worth provided key support for the search and recovery effort in Southeast Asia after the tragic loss of AirAsia flight 8501.
We are incorporating lessons learned and operational feedback to improve future ships and increase efficiency, as we continue down the learning curve to make these ships even more affordable. And as we look forward to delivering two additional ships to the Navy later this year, we’re also looking forward to working with the Navy to adapt the Freedom-variant design into the new Frigate configuration – introducing new capabilities that will make the ship even more capable of meeting evolving security challenges. Several of the options we’ve proposed would allow the ship to conduct multiple missions simultaneously. And all of the options we offered increase the survivability and lethality of the current design.
The current global security environment has made Missile Defense an indispensable capability for many regions of the world. And we are ready to continue to deliver that capability to our customers. Today we offer the full range of integrated air and missile defense solutions – from boost and ascent, to midcourse and terminal phases.
For example, we’ve delivered more than 2,000 Patriot Advanced Capability-3 interceptors, or PAC-3s, since the program began. Today, PAC-3 is in the inventory of 6 nations and we are on contract with two more.
Our fully integrated THAAD system—or Terminal High Altitude Area Defense product—has performed flawlessly, with 100 percent mission success in flight tests. The U.S. Army’s first operational THAAD system has been in service in Guam for nearly two years.
We’ve continued to demonstrate the expanded capability of our Aegis Ballistic Missile Defense system. Today the U.S. Navy operates 27 Aegis-equipped warships, with plans to acquire seven new Aegis-equipped destroyers. In addition to the U.S., our systems are supporting the missile defense needs of several international customers in Europe, Asia and the Middle East.
As we continue to work on the next generation of missile defense technology, we are focusing on effective, mobile, affordable, and adaptable systems. The tri-national Medium Extended Air Defense System—or MEADS program—fits that mold. Each MEADS element is lightweight and truck-mounted, with rotating radars and advanced launchers to provide 360-degree coverage capability to the warfighter. It’s no wonder that MEADS is a candidate for the national defense system of a number of European countries, including Germany and Italy.
That interest illustrates the growing international demand for our products in countries around the world, and why we’ve been so successful in our efforts to expand our reach outside of the United States. In fact, our global reach has never been broader. In 2014, we met our goal of achieving 20 percent of total sales outside of the United States. More than 25 percent of our backlog is from international orders. And we expect those numbers to continue to rise.
To meet that increasing demand, we have taken a number of steps to better support our international customers and facilitate our global business growth. For example, last year, we hired hundreds of local country nationals in our global operations. We opened new offices in Canada, the United Kingdom, Israel, Qatar and the U.A.E. And we’ve begun exporting technologies and products from our international operations. Examples include the opportunities to export our innovative ground vehicle turret upgrade capabilities, from the United Kingdom to Kuwait and Qatar – and the selection of the Lockheed Martin Canada company for the New Zealand naval frigate upgrade program. As we continue to grow our business internationally, we will pursue opportunities to expand our presence in growth markets so we can provide the close partnership our customers are looking for.
In part, the changing power dynamic has been driven by the rise of digital technology—a second megatrend, which has created huge opportunities and also unprecedented risk. In this era of big data, we can build tools that look beyond the world we see – using data to anticipate more accurately than ever what’s over the horizon. Sophisticated analytics are helping us to predict everything from stock market trends to the next disease outbreak. Worldwide demand for smart phones is estimated to increase by six times over the next six years. Mobile data traffic will grow by more than 11 times in five years. And much of that demand is coming from developing nations, which are simply skipping a generation of technology and fueling their economies with smart phones and digital solutions.
The exponential rise in digital demand has created extraordinary demand for capacity and the satellite systems that enable it. All of these advancements come with new challenges and threats. Societies’ increasing dependence on digital networks has made us more vulnerable to digital disruption. It seems that every week we hear of a new data breach or a new cyber threat. Hackers have struck organizations as varied as large retail stores, film studios, and health insurance companies. Last year, it was estimated that hackers had accessed personal information from almost half of all American adults. And they also pose an equal threat to our national security.
In the words of a recent Pentagon report, and I quote, “Cyber adversaries have become as serious a threat to U.S. military forces as the air, land, sea, and undersea threats represented in operational testing for decades.”
At Lockheed Martin, we are well positioned to help our customers address this issue, because we’ve been addressing it for quite some time. We were in the cyber business before anyone called it the cyber business. We had to be. Given our line of work we’re often a target ourselves of advanced persistent threats. We faced 50 such coordinated, sophisticated campaigns in 2014 alone—and that number is sure to keep growing. So we’ve made significant investments to protect ourselves, our information, our warfighters, and our shareholders.
And we’ve used what we’ve learned about thwarting, anticipating, and averting these intrusions to help our customers secure sensitive information, protect business interests, and stay ahead of the threats that technological advances bring with them. We are the cyber security provider for more than 200 customers around the world, supporting critical infrastructure for the energy, oil and gas, chemical, financial services, and pharmaceutical industries. One of the greatest strengths Lockheed Martin brings to our cyber customers is our multi-layered intelligence-driven approach to defend against these threats. We have more than 12 years of intelligence about the threats – where they may be based, how they operate, and what tools and techniques they use. This deep pool of intelligence allows us to predict, identify, and respond to threats for our customers.
To meet the growing demand for digital communication, we’ve made significant advancements in commercial space, accelerating the pace of satellite manufacturing and the affordability of commercial communications systems. Our A2100 is a great example. It is the backbone of global satellite communications – carrying internet, TV, and secure communications around the world. To meet the demand for flexible and trusted commercial satellites, we invested in the A2100, reducing the number of its parts and streamlining its production so our customers can get it into orbit more quickly and at a fraction of the cost. We’re well on our way to achieving 35 percent lower costs and 25 percent faster delivery. It’s the definition of a win-win.
We are also working to advance digital technology for the Federal Aviation Administration’s NextGen modernization program. We’ve teamed with the FAA on the En Route Automation Modernization project—or ERAM. ERAM will upgrade the National Airspace System’s 40 year old digital infrastructure. It is on track for nationwide operation by the spring of 2015 at all 20 FAA air traffic control centers. The Obama Administration’s proposed 2016 Fiscal Year Budget Request also includes additional funding for the program, a good indication that the Administration wants to see the program accelerated over the next two to three years.
So, from cyber security to commercial space, from the oil and gas industries to the Federal Aviation Administration, Lockheed Martin has the technology, the capability, and the experience to secure an increasingly connected world.
While this connectivity makes the world a smaller place in some ways, our third megatrend reminds us that the number of people we support on our planet is growing. Population growth, resource scarcity, and climate change are reinforcing each other. There are more than seven billion people on Earth today – and that number goes up every second. That means more mouths to feed, more homes and schools to build, more energy that needs to be generated, more demands upon our land and water, more people who need income to provide for their families and improve their standard of living.
And as we consume more than ever, climate change is accelerating as well. In fact, we know that 2014 was the hottest year in human history. These pressures combine to create real threats to security and stability around the world. A recent report from the Director of National Intelligence concludes that the “Competition for scarce resources, such as food, water, or energy, will likely increase tensions within and between states and could lead to more localized or regional conflicts, or exacerbate government instability.” No wonder the Department of Defense calls climate change a “threat multiplier.” How we meet the world’s growing resource needs will determine our future in a very big way.
For more than five decades, Lockheed Martin has been helping our customers monitor and analyze our changing climate and resulting weather patterns with advanced environmental satellite systems. We have produced more than 40 satellites for the U.S. Air Force’s Defense Meteorological Satellite Program. Just last year, we launched the newest satellite in that constellation—DMSP-19. The satellite is equipped with a sophisticated sensor suite that can measure precipitation, surface temperature, and soil moisture—while collecting global meteorological, oceanographic and solar-geophysical information in all weather conditions.
We are currently building the Geostationary Operational Environmental Satellite R-Series, known as GOES-R, for the U.S. National Oceanic and Atmospheric Administration, or NOAA. GOES-R will improve U.S. weather forecasting, with earlier indications of storm intensification, improved tornado warning lead times, and enhanced hurricane direction and landfall projections. The first of four GOES-R satellites is currently being built at our Space Systems Denver facility and is scheduled to launch in early 2016.
We’ve also made significant advancements in the energy sector, as we look for viable, affordable ways to generate clean and abundant power to meet growing global demand. We are increasing the commercial viability of new energy technologies like tidal power generation and ocean thermal energy conversion—or OTEC.
In fact, this year we will begin detailed design, pre-construction and permitting for the largest OTEC power plant, off the coast of southern China. This 10 megawatt plant—being designed by Lockheed Martin and built by our partners at Reignwood Group—will provide 100 percent of the power needed for a green resort. It will also demonstrate this unique technology which could lead to several new installations ranging in size from 10 to 100 megawatts in the very near term.
At the same time, we are working with a broad range of utility customers to seamlessly integrate power, IT, and communications networks as new sources of energy generation come on line. Our efforts are producing real results. Our energy efficiency programs are already saving electric and gas utility customers over a million megawatt-hours of electricity and more than ten million therms of gas. That’s enough energy to power nearly 100,000 homes.
One of the biggest challenges of renewable energy is to store power for use when it is needed. That’s why we purchased the assets of Sun Catalytix last year and formed Lockheed Martin Advanced Energy Storage. The acquisition brought promising technology in affordable, durable, safe, and scalable energy storage technology. Lockheed Martin now has capability in every segment of the energy market—from generation and management to storage and security.
In addition to resource pressure and climate change, population growth brings demands for more innovative ways to keep people healthy. One promising healthcare technology is genomics. Last year, we began a genomics partnership with Illumina, the global leader in gene sequencing. And earlier this year, we announced a strategic alliance with Illumina to collaborate on scalable and affordable genomics solutions to provide personalized health care for national populations. This ushers in the potential for a fundamental transformation of health care. By aggregating genomic data across large populations, public health and wellness officials in countries around the world can more effectively address their nation’s unique health concerns and at the same time, reduce health care costs and improve their quality of life.
As the population grows, we also need to ensure a safe, productive, and efficient food supply. This is another area where Lockheed Martin’s space technology is breaking new ground. Our satellites are assisting farmers with precision mapping to maximize crop growth while reducing waste of vital and costly fuel, seed, and supplies. The agriculture industry uses GPS technology to guide tractors across millions of acres to within inches of their desired locations when planting, watering, fertilizing, and harvesting crops. This precision helps save water and fuel, minimizes the use of chemicals, and maximizes crop output.
From the depths of space, to the depths of the ocean; from seeds on the farm, to our own DNA; we are delivering the innovations that will help address population growth and reshape the future.
And all these challenges are complicated further by the fourth megatrend: the backdrop of economic uncertainty clouding strategic decision-making in a highly interconnected world. Economic globalization has reinforced our interdependence, which means that all of us are affected by the fragility of the current recovery. Growth is slowing in the BRIC nations, even China, as Europe and Japan risk falling back into recession. And in too many places, young people see no jobs or opportunity ahead. At 27.2 percent, youth unemployment in the Middle East and North Africa is more than twice the global average. Fortunately, the U.S. economy seems to be coming back. Still, uncertainty lingers and the budget pressures and threat of sequestration are significant risks to our security and readiness.
As I said earlier, we were encouraged to see that the President’s Budget Proposal aligned with actual defense requirements, rather than arbitrary sequestration limits. However, we all know that this is far from a guarantee. As long as sequestration is on the table, this country is undermining itself. Lockheed Martin, together with industry, will do everything we can to make the case to Congress. We need to ensure more flexibility and predictability in the budgeting and trade processes, so that government leaders, the Department of Defense, and industry partners can plan, invest, and execute with confidence.
That’s why we support the Administration’s efforts to facilitate open trade between international partners, securing more business, and therefore more jobs, for U.S. companies that export their products abroad. We hope that Congress passes the Trade Promotion Authority bill and completes ongoing regional free trade negotiations.
We’ve taken a number of steps to manage the economic uncertainty our customers are facing. And as we do, we know we have to hold ourselves accountable, too. That’s why, across our operations, we’re focused on cost and affordability. Among other measures, we’ve identified $1.17 billion in supply chain and affordability savings. And since 2008, we have reduced our corporate footprint by 7.5 million square feet. At a time of tight budgets, in the U.S. and around the world, we have to make sure every dollar our customer spends goes farther and spends smarter. That’s why we continue to focus on delivering military systems that are effective and affordable through every phase of the product life cycle. We know that seventy percent of weapons system cost is in sustainment. And the best way to manage sustainment costs is to build it into the systems’ design.
Lockheed Martin has been on the leading edge of life cycle integration for decades. The F-35 is a perfect example. We designed the F-35’s sustainment system simultaneous with the aircraft. This enabled Lockheed Martin and the Department of Defense to evaluate sustainment processes throughout the development and demonstration phase of the program. We fielded our Autonomic Logistics Information System – or ALIS – to support development testing—something never done before—and establish depot partnerships prior to Initial Operational Capability. We are currently demonstrating the F-35’s global sustainment system by supporting 120 U.S. and allied aircraft today. And that number is growing every month.
Last summer, we embraced the Department of Defense’s “Blueprint for Affordability.” The goal is to reduce the cost of an F-35A fifth generation fighter to the equivalent of today’s fourth generation fighter. And we’re confident we’ll get there by the end of the decade. The F-35 program is just one example of our focus on affordability across the lifecycle of our major programs. We’re applying that same focus across all of our programs. Just last week, Lockheed Martin was named as a Tier One contractor by every branch of the U.S. Military Services for our on-time and on-budget contract performance. Our business areas were named nine times on the Tier One list—more than any other company.
While we remain focused on helping our customers address these four megatrends shaping our world today, as a technology leader we know that our future depends on our continued investment in innovation and scientific discovery. We increased our independent research and development investment for the third consecutive year in 2014—to more than $750 million—and we will increase it again this year. This is in addition to the significant investments we have made in cooperative research and development activities with customers, universities, and industry partners. We continue to make these critical investments—even in challenging times—so that we can remain on the leading edge of innovation and scientific discovery.
We know that the important work we do in advancing scientific discovery today leads to technologies and innovations for the future that no one could have imagined. That’s why we are so proud to support NASA on their journey to Mars. We took a huge leap forward in December with the successful first test flight of the Orion deep-space capsule, the next-generation spacecraft designed to transport humans to Mars and then bring them safely home.
On March 5, we’ll provide NASA with a final report on the flight test. The test data we’ve reviewed so far looks great. The critical separation events and the deployment of 11 parachutes were successful. The flight software performance was very good. And the thermal and pressure environments inside the crew module remained within the range suitable for human spaceflight. The heat shield performed as expected and the landing was within 1.5 nautical miles of the target. This first flight test has demonstrated that Orion is the most reliable, safe, and affordable means to return humans to the moon and to someday reach Mars and beyond.
Those are just a few of the ways that Lockheed Martin is Engineering a Better Tomorrow by helping to address the megatrends that are shaping our world, and investing in innovation for the future, and delivering real value to our customers, shareholders and employees.
Today, you’ll hear from experts and leaders from across our Corporation who will give you further insight into the work we are doing today and the technologies we’re developing for tomorrow. As we look ahead, we are focused on how we can help shape the future and continue to grow the business for the long-term by delivering value to our customers, our shareholders, and our employees.
All these achievements are a tribute to the hard work and dedication of the 112,000 men and women of Lockheed Martin. Together, we are engineering a better tomorrow for our customer and the world. Whatever challenges are on the horizon – whatever changes are ahead – the men and women of Lockheed Martin stand ready to help our customers address them.
Thank you very much for your time and attention today, and I look forward to your questions.
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