Bloomberg News

Lockheed Wins $334 Million F-35 Contract Before U.S. Cuts

March 01, 2013

Lockheed Martin Corp. (LMT:US) received a $333.7 million U.S. downpayment to buy initial parts, components and materials for an eighth batch of F-35 jets, as the Pentagon locked in the funds hours before automatic budget cuts begin.

Yesterday’s action exempts the funds from the across-the- board spending reductions known as sequestration that take effect today because Pentagon officials have said contracts with obligated dollars won’t be cut or terminated. The eighth contract calls for 35 jets, including four aircraft for the U.K. and two for Norway, according to a Pentagon statement.

The agreement by the Pentagon and Lockheed underscores their shared commitment to continued development of the costliest U.S. weapon system. The Department of Defense sheltered the F-35 funding from spending cuts even as officials warn they will have to impose furloughs on civilian workers and reduce troop training at the risk of combat readiness.

“The reality is that the procurement arm of the DoD is charged with getting good prices,” Howard Rubel, an analyst with Jefferies & Co. in New York, said in an e-mail. “The sequester works against it. Lower dollars under sequester does not mean more effective purchasing or lower unit costs.”

Rubel, who has a “hold” rating on Lockheed, said the company understands “that lower unit costs will broaden the plane’s appeal” as it’s marketed in the U.S. and abroad.

Supplier ‘Stability’

Lockheed, the world’s largest defense contractor, said in a statement yesterday that it “will continue to drive down costs” for the F-35.

“This award provides our supplier base the stability needed to properly execute on our future production commitments,” the Bethesda, Maryland-based company said. “We will continue to drive down costs for these future aircraft.”

Cost estimates for the F-35, known as the Joint Strike Fighter, have ballooned to $395.7 billion, a 70 percent increase since 2001. Pentagon officials have grown increasingly critical in pressing Lockheed to reduce costs.

The Pentagon’s top weapons buyer, Frank Kendall, faulted the company in November for being too “focused on short-term business goals” and not “focused more on execution of program and successful delivery of the product.”

Yesterday’s contract action is one of several such moves that the Pentagon has taken to shelter F-35 funding before automatic cuts were to be triggered. The previous actions came before a Jan. 1 deadline for sequestration that was averted by a last-minute deal to delay the cuts for two months.

Previous Moves

On Dec. 14, Lockheed received a Pentagon contract guaranteeing a final installment of about $127.7 million for the fifth production lot of F-35 fighters, bringing the total value to about $3.8 billion.

On Dec. 28, the Pentagon awarded the company a contract for the sixth installment of F-35s that can’t exceed $3.67 billion. The “undefinitized contract action” set a threshold target and obligates an unspecified amount to begin assembly of additional aircraft.

Last year, Lockheed received initial funding for a seventh production contract similar to yesterday’s award.

The F-35 fleet was cleared yesterday to resume flight operations, according to the Pentagon, ending a suspension ordered Feb. 22 after the discovery of a cracked engine blade in one of the stealth jets.

The affected engine had been subjected to “prolonged exposure to high levels of heat and other operational stresses” in testing, the Pentagon F-35 office said in a statement.

Inspections of other F-35 fighter jets didn’t find any other “cracks or signs of similar engine stress,” and no redesign will be needed for the engines built by United Technologies Corp. (UTX:US)’s Pratt & Whitney unit, according to the statement.

Pratt & Whitney, which makes the plane’s engine, had recommended that the Pentagon lift the suspension.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net


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Companies Mentioned

  • LMT
    (Lockheed Martin Corp)
    • $160.31 USD
    • 2.13
    • 1.33%
  • UTX
    (United Technologies Corp)
    • $114.13 USD
    • 0.62
    • 0.54%
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