December 10, 2014 / 12:00 PM / 3 years ago

Under pressure, Lockheed opens up about secret weapons unit

PALMDALE, Calif., Dec 10 (Reuters) - Lockheed Martin Corp , the Pentagon’s No. 1 weapons supplier, has rarely felt the need to blow its horn about its secrecy-shrouded crown jewel - until now.

“Skunk Works,” Lockheed’s business for developing weapons outside the company’s main chain of command, is starting to lift the veil in a sign of fierce pressure to win new orders and protect its brand as military budgets shrink.

The pride of Lockheed, Skunk Works has been celebrated since it developed the first jet fighter in 143 days during World War Two to battle the Nazis. But its logo was kept off buildings and employees were barred from saying where they worked.

Now, the company has published a glossy brochure with a 10-point “Skunk Works 2015” agenda focused on keeping costs down, working closely with government, and building prototypes. Its officials are meeting in small groups with all 3,300 employees, or “Skunks” as they are known, to underscore the importance of staying competitive.

Over the past year Skunk Works has invited a few journalists to its most secure facilities, including Palmdale, a site in the high desert 60 miles (100 km) from Los Angeles, where new products range from next-generation unmanned systems to a hypersonic aircraft twice as fast as its Blackbird SR-71 spy plane that could fly across country in just over an hour.

Most of the 100 buildings and 3 million square feet of floor space at the site are off-limits, and photography and audio recordings are strictly forbidden, but a tour last month offered a glimpse of some projects.

In one building, Lockheed is using the world’s largest gantry machine and 3-D printing to build aircraft. Across campus, Lockheed has a giant airship that could deliver cargo to remote areas, and a compact nuclear fusion reactor that could revolutionize power generation.

PRESSURES MOUNT

The decision to go public with Skunk Works, albeit modestly, reflects the unprecedented pressures Lockheed faces from tight budgets, nimble smaller competitors and shareholders who prefer dividends and share buybacks to long-term projects.

Challenging Skunk Works are such newcomers as Space Exploration Technologies Corp, or SpaceX, which operate more like commercial firms than legacy weapons makers. Their costs are lower due to a younger staff - the average age of SpaceX’s engineers is 27, while Lockheed expects half its employees to retire in the next five years - and their ability to leverage commercial orders.

Defense consultant Jim McAleese said Skunk Works needed to win orders and cut costs given lower profits in the aeronautics division, where margins fell by about 10 percent last quarter. Aeronautics sales fell 6 percent to $14.1 billion last year.

Skunk Works has survived over the years because it is not only an advanced research arm, but also makes money by managing a few signature programs, including the F-22 stealth fighter and other classified programs, general manager Rob Weiss told Reuters. He gave no numbers.

Bucking an industry trend, Lockheed is boosting internal R&D spending by 5 percent this year after a 13 percent increase to $697 million in 2013, its highest percentage of sales ever, CEO Marillyn Hewson told analysts in October. She said the rate would rise again in 2015.

The Skunk Works outlook could dim if Lockheed loses out on the few big programs up for grabs: a new bomber, a carrier-based drone, and a new Air Force training jet, analysts say.

Skunk Works officials say they also need to be more open to strategic partnerships, such as those it has with GenCorp unit Aerojet Rocketdyne and Boeing Co, and new business models, such as fee-for-service deals.

Pentagon officials often say they see Lockheed’s Skunk Works and Boeing Co’s Phantom Works as models for rapid development of weapons and ensuring U.S. military superiority.

Deputy Vice President Steve Justice, who has 30 years with Skunk Works, said its historical focus on speed and affordability was more relevant than ever given the tough budget climate. The proof, he said, came in recent requests from the Navy and others that want to set up similar groups. (Reporting by Andrea Shalal; Editing by Howard Goller)

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