Lockheed Martin Puts Patriotism Ahead of Profits

Having won one contract, it's voluntarily dropping a demand that it be awarded another contract -- 3 times as large.

Jan 12, 2014 at 10:15AM

Here at the Fool, we're committed to keeping you informed about the latest and greatest Pentagon defense contracts being handed out to America's defense contractors. When the Department of Defense awarded Lockheed Martin (NYSE:LMT) a $574.5 million contract to build Aegis Weapon System MK 7 equipment sets last week, you heard about it right here.

Aegis-equipped guided missile destroyer USS Hopper (DDG 70), firing off a boomstick. Source: Wikimedia Commons

But just to be safe, Lockheed Martin wanted to make sure you heard about this contract -- and so this week, the defense contractor put out a press release of its own providing additional details on one of the biggest contracts it's landed in recent weeks.

Lockheed Martin's magnificent seven
Elaborating on the Aegis win Tuesday, Lockheed explained that it has been hired to outfit seven new U.S. Navy Arleigh Burke class (DDG 51) destroyers with Aegis air defense gear. Specifically, the destroyers to be equipped will be "DDGs" -- guided missile destroyers -- Nos. 117 through 123.

Press reports about these vessels have clarified that they will be built by America's two major military shipbuilders, Huntington Ingalls (NYSE:HII) and General Dynamics (NYSE:GD), with the breakdown of newbuilds probably going like so:

  • USS Paul Ignatius (DDG 117) -- built by Huntington Ingalls.
  • USS Daniel Inouye (DDG 118) -- built by General Dynamics' Bath Iron Works subsidiary.
  • the as-yet-unnamed DDG 119 -- Ingalls.
  • DDG 120 -- probably also Ingalls.
  • DDG 121 -- probably General D.
  • DDG 122 -- probably Ingalls.
  • DDG 123 -- probably General D.

Thus, the Navy will be adhering to its usual practice of splitting destroyer production more or less evenly between the two big shipbuilders, with the caveat being that, because Huntington Ingalls gave the Navy the best bid price for building DDG 51s the last time around, it will get at least five of the next nine contracts. General Dynamics will get four contracts and may (or may not) get a fifth.

From Lockheed Martin's perspective, of course, the most important part of these ships isn't the vessels themselves, but the Aegis air defense weapons systems they carry -- and, in particular, Lockheed's own AN/SPY-1 radar system, which Lockheed calls "the central component" of Aegis, and "the most widely fielded naval phased array radar in the world."


Lockheed's AN/SPY-1 radar antenna. Source: Wikimedia Commons.

A win and a loss
Tragically (for Lockheed), the company won't be building many more SPY-1 radar systems after these seven destroyers are outfitted. The reason: Back in October, the Navy gave Lockheed Martin rival Raytheon (NYSE:RTN) a $1.6 billion contract to build the next-generation Air and Missile Defense S-Band Radar, or AMDR-S, for its fleet. Going forward, AMDR-S -- not SPY-1 -- will form the backbone of Aegis.

Lockheed Martin, needless to say, was not pleased by this development. Arguing that "the merits of our offering were not properly considered during the evaluation process," Lockheed even filed an official protest with the U.S. Government Accountability Office, hoping for a second chance to win the AMDR-S contract.

Lockheed bows out -- gracefully
GAO was supposed to decide on Lockheed Martin's protest this month. But then ... a miracle happened. Out of the blue, Lockheed Martin announced Friday that it was dropping its challenge. "While we believe that we put forward an industry-leading solution, after receiving additional information we have determined it's in the best interest of the Navy and Lockheed Martin to withdraw our protest," the company said.

Giving up a $1.6 billion contract to serve "the best interest of the Navy"? That's practically unheard of -- especially in an environment like this one, where most contractors fight like starving dogs over the picked-clean bones of the defense budget.

But Lockheed Martin's choice to accept the Navy's decision without a fight toes a new line at the Pentagon. Four years ago, frustrated after seeing a series of high-profile contracts -- for everything from aircraft to MRAPs to Army translators -- delayed by losing bidders challenging the awards, then-Pentagon acquisition chief Ashton Carter implored contractors to quit filing "frivolous" challenges. He warned that overuse of protests was impeding the movement of equipment to troops in the field -- and that companies were putting profits ahead of patriotism.

Not everyone heeded Carter's warning. Notably, in 2013, bankrupt planemaker Beechcraft held up a shipment of fighter planes desperately needed for the Afghanistan war by more than a year, filing a series of bid protests (before finally losing the contract). That's why it's especially gratifying today, to see a leading defense contractor like Lockheed Martin setting a better example, taking the high road, and accepting defeat graciously.

We can only hope that in the future, more companies follow Lockheed's lead.

Heads, you win ... tails, you don't lose
Lockheed won Contract A, but Raytheon took Contract B. Huntington is building Destroyer No. 1, but General Dynamics gets to build Destroyer No. 2. So what?

As long as they take turns like that, all these companies should serve their shareholders admirably... forever! As world-famous investor Warren Buffett tells us, there's no need to go searching for long shots. Pick your best ideas, bet on them big, and ride them to riches -- let other folks worry about the bobbles in the market. That's why our own CEO, nearly as-legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover three companies we love the most.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics, Lockheed Martin, and Raytheon. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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