DoD May Split Next F-35 Contract As No Agreement on Price, Profit

Pentagon Is Expected to Split Lockheed’s Next F-35 Order; Defense Department may first award deal for ninth batch of jets (excerpt)

(Source: Wall Street Journal; published Oct. 25, 2016)

The U.S. Defense Department said it may split a $14 billion order for the next two batches of F-35 combat jets after failing to reach agreement on a single deal with lead contractor Lockheed Martin Corp.

Lockheed has been in talks with the Pentagon for months about a combined deal for 160 jets covering two years of production, and the two sides had hoped to reach agreement in early 2016.

But negotiations over price and other issues have dragged on longer than expected as the Pentagon tries to cut the cost of the F-35A model used by the U.S. Air Force to around $80 million by the end of the decade.

The F-35 program office said it may now award a deal first on the smaller ninth batch of jets, which involves more than 63 planes, rather than combine it with a 10th batch.

Negotiating F-35 deals in bigger batches was intended to cut the Pentagon’s price and help Lockheed and its partners negotiate better deals with their suppliers, but the process is proving tougher than expected.

The F-35 accounts for about 20% of Lockheed’s revenue and is an important contributor to sales and earnings at others including Northrop Grumman Corp. and BAE Systems PLC, as well as dozens of smaller contractors.

Analysts are closely watching pricing on the next two batches of jets as the F-35 currently generates lower margins than Lockheed’s other planes.

The Pentagon paid Lockheed almost $1 billion in August to cover supplier costs on the ninth batch and is in talks about another payment to help fund the 10th, according to the program office.

Lockheed declined to comment on talks with the Pentagon but said in its updated guidance released with earnings Tuesday that its forecasts for 2016 and 2017 hinge on when it secures the next two F-35 deals. (end of excerpt)

Click for the full story, in the Wall Street Journal website.

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WASHINGTON --- A deal between Lockheed Martin and the Defense Department on the ninth and tenth lots of F-35s still appears to be elusive, as the organizations have not yet settled any one of the three “sticking points” mentioned by the company’s chief financial officer in a Tuesday earnings call.

F-35 manufacturer Lockheed had initially expected to cement a contract with the Pentagon for the ninth and tenth batches of low rate initial production (LRIP) F-35s early this year, but negotiations continue to stretch on as the parties continue to hammer out an agreement.

The three points of dispute between the company and the government are the same as any contractual negotiation: the cost of performing the contract, the terms and conditions associated with the deal, and the profit level for the contractor, said Bruce Tanner, Lockheed’s chief financial officer.

“I'd say we haven't really reached closure on any of those three,” he told investors in the third-quarter earnings call. “But we are making progress every day towards that closure. So we're still hopeful that we'll close soon."

Lockheed CEO Marillyn Hewson similarly characterized the negotiations as progressing, although neither she nor Tanner ventured a guess on when a final deal could be inked.

"This is a very large contract. It's the largest contract to date on the program, so there's a lot of data, there's a lot of work that has to happen in those types of negotiations,” she said. “Both parties want to get this contract right, so it takes time to do that, so I would say that we continue to make progress on it." (end of excerpt)

Click for the full story, on the Defense News website.

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