Lockheed looks at $1 billion savings

Cost-cutting projection nearly doubles

Defense industry

August 20, 1999|By BLOOMBERG NEWS

Lockheed Martin Corp., the world's No. 1 defense contractor, said yesterday that a cost-cutting initiative begun last year will generate $1 billion in savings in 1999, almost double the amount originally projected.

When it began the so-called LM 21 project in June 1998, Bethesda-based Lockheed anticipated saving about $520 million this year. Lockheed, whose earnings are slumping because of delayed plane deliveries and failed rocket launches, said the savings will help it achieve the profit estimate for this year given to investors two months ago.

The success of LM 21 -- an abbreviation of "Lockheed Martin in the 21st century" -- would help restore Lockheed's credibility with investors. The most jarring blow came June 9, when Lockheed stunned investors by halving profit estimates for 1999. Now Lockheed is betting that the project will result in even more savings than the $2.6 billion targeted by 2002.

"If you can do $1 billion already, why would $2.6 billion be the right number for three years from now?" said Jack Hugus, who runs the LM 21 program at Lockheed.

Lockheed isn't ready to say how much more money it expects to save from LM 21 beyond the $2.6 billion, and the company doesn't retain all the savings. Some of it goes back to customers, although the company wouldn't say how much.

Analysts said the savings should help Lockheed's stock price.

"I've talked to enough people in the middle of the company who are involved in this that I'm convinced [the savings are] real," said Cliff Ransom, a portfolio manager with State Street Research Corp., which owns 69,500 Lockheed shares. "I don't know how long it will take for us to see it at Lockheed, but my suspicion is it would be a major boost for shareholders over the next two to three years."

Lockheed Martin shares have dropped 21 percent the past 12 months while the Standard & Poor's 500 index has gained 21 percent. Lockheed declined 25 cents to $37.3125 yesterday.

Ransom said he'd be pleased if about $200 million of the projected $1 billion in savings actually flows to Lockheed's bottom line in 1999, with the rest of it going to customers or other cuts that don't directly boost earnings.

"The savings potential is there and credible," said Credit Suisse First Boston analyst Pierre Chao, who has a "strong buy" rating on Lockheed. "But I don't think much of the financial impact of LM 21 is in the financial forecasts, just because people want to be conservative and it is also hard to directly measure the specific impact."

Lockheed has identified 200 of the best practices being used throughout the company's four main businesses to improve efficiency and save money. The goal is to share those practices among all parts of the business -- manufacturing, program management, procurement, engineering, accounting and personnel.

The $1 billion targeted for 1999 consists of about 1,000 separate cost initiatives, such as saving $600,000 by consolidating its office supply purchases with Staples Inc. into a master contract.

The largest chunk of the $1 billion is about $75 million derived from simplifying relationships with subcontractors that perform development work with Lockheed. This includes setting up standard manufacturing processes and compatible accounting systems.

The savings are larger than first expected because Lockheed was conservative in its original estimate, Hugus said. The company also has greater confidence in the auditing procedures being used to verify the savings claims, he said.

The LM 21 savings are separate from $2.6 billion in savings Lockheed is generating from its merger with Martin Marietta Corp. in 1995, Hugus said.

In a separate development yesterday, the U.S. Defense Department said Lockheed's new missile-defense system will be allowed to proceed to its next stage of development earlier than planned because it scored two successive intercepts of surrogate enemy ballistic missiles,

"This decision will save millions of dollars and potentially accelerate the ultimate fielding of the system, which is currently scheduled for 2007," a Pentagon statement said.

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