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July 24, 2012

Pentagon tightens grading standards, cuts into Lockheed profits

A decade or so into the development of the F-35 Joint Strike Fighter the Department of Defense is apparently taking a little harder line in what it expects from Lockheed Martin.

Lockheed officials told Wall Street analysts Tuesday that they now expect to make about $500 million less profit on the F-35 program over the next five years because the Pentagon brass have tightened the standards for what they consider acceptable progress.

Bruce Tanner, Lockheed's chief financial officer, said the company was "disappointed" with the government's grading standards for making award fees, essentially bonuses, when certain goals were met in the development program and with the award fees that would be available to win. The award fees are pure profit, a reward on top of the thin cost-plus development contract margins.

Tanner said Lockheed’s and the Fort Worth-based Aeronautics division’s operating profits for the second quarter of 2012 would have been higher, but the company was not awarded $85 million in  fees, that it had expected to be paid.

Both Tanner and Lockheed Chief Executive Bob Stevens carefully played down what clearly is an ongoing point of contention between Lockheed and the government over the award fees. The Lockheed executives said they believed the F-35 program was making good progress meeting Pentagon goals.

Asked specifically by one analyst why Lockheed wasn’t meeting the government’s grading scale, Stevens artfully answered that the F-35 is “a complex and demanding program, a one-of-a-kind program.

“We’re held to very high standards and we expect to be held to high standards,” Stevens said.

Lockheed now expects it's profit margin on the F-35 development program to be slightly less than 4 percent, a revision downward from slightly more than 4 percent. Total development costs for the F-35 are now estimated to exceed $55 billion, up from $35 billion when the program was launched in 2002.

- Bob Cox


 

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Comments

Gildersleeve

Major reason for cost overruns is the government regulations. Most are stupid and almost impossible to track. Next would be the ADU machines. These automatic dispensing machines are costing the company billions of lost dollars in nonproductive manufacturing time. You have to hunt and hunt for what you need. I am austonded in how may supervisors defent this undefendable process. Next would be the way we inspect vendor parts. We put them on the plane and see if they fit. Unreal. I may write a book someday. I would title it "how to screw up a really good thing".

Mark

Gildersleeve I don't like you but I agree with you about the ADU's. When they went to them I knew it would never work. First the concept of the tools we need was dreamed up by engineers and floor management. They have no idea what really is needed by the mechanics to work in tight places. Second the kits are always missing tools or full of broken and dull drills for just one example.

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