Lockheed 1Q Results Raise Questions On F-35 Finances
(Source: Defense-Aerospace.com; published April 21, 2015)
Extract from Lockheed Martin’s press release on its first-quarter results.
PARIS --- Lockheed Martin’s net sales from F-35 production contracts increased by $175 million year-on-year during the first quarter of 2015, the company announced April 21, “due to increased volume and sushttp://lockheedmartin.com/us/news/press-releases/2015/april/0421hq-earnings.htmltainment activities. Net sales for F-35 development contracts were comparable.”

During a conference call, Lockheed CEO Marillyn Hewson told analysts the company is continuing to bring down F-35 costs, and later said that Lockheed delivered eight F-35s in the quarter, the same as last year, the Ft. Worth Star-Telegram reported.

This raises the question of how, if the same number of F-35s should cost less, sales increased by $175 million year-to-year. The difference implies an increase of $21.8 million per aircraft, which appears to contradict Hewson’s claim of falling costs.

Another possible explanation is that the difference is due to additional remedial work on faulty aircraft Lockheed has already delivered, but this would signal a sharp increase in these fixes (work volume or cost) that has not been recognized by the program or by Lockheed.

Another question is how “net sales for development contracts” could be comparable in value to the year-earlier period given efforts Lockheed says it is making to fix development faults and, especially, to catch up its delay in delivering software.

This would suggest either that Lockheed is not putting added efforts into development, or that someone else is paying for it.

In reality, the software situation is so serious that Lockheed “could lose as much as $40 million because it’s late delivering fully functioning software for the first F-35 fighters due to be declared combat-ready,” Bloomberg reported April 9, citing the Pentagon.

Operating margin exceeds 14%

The first quarter results also raise questions regarding operating profits for the F-35 program.

Lockheed said that it had booked “a higher operating profit of approximately $25 million for F-35 production contracts, due to increased volume and risk retirements.”

Such an increase in operating profit on the program is unexpected, given the program’s faults and delays. Also unexpected is that the company has been able to “retire” some risk, given the recent congressional testimony by the Pentagon’s director of Operational Testing and Evaluation and by the Government Accountability Office, of the program’s growing financial and technical risks.

It also is worth noting that an operating profit of $25 million on sales of $175 million means that, despite the program’s well-publicized faults, Lockheed’s operating margin exceeds 14%.

Finally, it is difficult to reconcile Lockheed’s growing F-35 sales and profits with the fact that Joint Program Office chief Lt Gen Christopher Bogdan has moved all of Lockheed’s F-35 contracts from “cost plus” to “fixed cost” basis.

Again, the figures suggest that either the F-35 contracts are still run on a “cost plus” basis (in which the Pentagon reimburses the contractor for all its costs, and also adds a pre-agreed profit margin), or that Lockheed has found a way to make additional profits from a program that is late, over budget and not meeting contractual targets.

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