Lockheed CFO No Agreement Yet On Price, Profit For F-35 Lots 9 And 10

26 October 2016

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."

During the second-quarter earnings call several months ago, Tanner repeatedly expressed frustration at the slow pace of negotiations, which had left Lockheed paying for some of its suppliers’ costs on its own dime. The Pentagon has twice added funding to an existing undefinitized contracting action (UCA) — a stopgap measure used by the government to issue funds before a final deal is reached. In August, Defense News broke the news that the Defense Department had awarded about $1 billion to reimburse Lockheed for LRIP 9 and 10 costs, and this month another $743 million was added to the LRIP 9 undefinitized contracting action.

Lockheed executives struck a more restrained tone in Tuesday’s earnings call, with neither Hewson nor Tanner discussing the need for additional UCA funds. However, a Lockheed news release detailing third-quarter results revealed that the company continues to pay for some LRIP 9 and 10 costs out of pocket.

“Throughout the negotiation process, the corporation has incurred costs in excess of funds obligated and has provided multiple notifications to its customer that current funding is insufficient to cover the production process,” the company stated.

“Despite not yet receiving funding sufficient to cover its costs, the corporation continued work in an effort to meet the customer’s desired aircraft delivery dates,” the news release continued. “Currently, the corporation has approximately $950 million of potential cash exposure and $2.3 billion in termination liability exposure related to the F-35 LRIP 9 and 10 contracts.”

A month ago at the Air Force Association conference, F-35 Joint Program Executive Officer Lt. Gen. Christopher Bogdan said he expected to finalize the LRIP 9 and 10 contract by the end of the year. The deal, which would cover about 150 jets, has an estimated value of $14 billion, Bogdan has said.


Source : defensenews.com