PARIS --- The Pentagon has recently authorized an additional payment to reimburse Lockheed Martin for costs incurred on the 10th batch of F-35s, Aviation Week reported Sept 7 quoting top acquisition official Franck Kendall. (see below—Ed.)
Kendall also said the department is still negotiating deals for the ninth and 10th batches of Lockheed’s F-35, valued at about $16 billion total for more than 140 aircraft, Aviation Week added.
Increasing Irregularities in F-35 Program
A first “informal” payment of $1 billion for Lot 9 was made earlier this summer, and a second cash advance coming so soon may raise eyebrows, especially as the first one was confirmed to AvWeek by e-mail from the F-35 Joint Program Office, but has still not been officially announced. JPO did not reply to our e-mail requests asking for confirmation and clarification.
Originally, the Lot 9 contract was due to be signed in 2014 (and the Lot 10 contract in 2015), and in the interim the Pentagon has already made very substantial regular advance payments to Lockheed for procurement of long-lead items for both of these low-rate initial production Lots.
The issue of informal payments to Lockheed is complicated by the fact that US acquisition regulations do not allow low-rate production (LRIP) contracts in advance of the so-called Milestone C decision, whose goal is “to determine if a program has met all its Exit Criteria of the EMD Phase, to proceed into Production and Deployment (PD) Phase.”
Most recently, the KC-46A tanker had to wait for its Milestone C decision before the first low-rate initial production contract was awarded in August. The Milestone C obligation was clearly spelled out in the USAF announcement, which said: “The KC-46A..…received Milestone C approval….signaling the aircraft is ready to enter into production.”
Inexplicably, this is not an issue for the F-35 program, which is now on its 13th annual LRIP contract, and still without a Milestone C decision.
Milestone C is also a requirement for Initial Operational Capability (IOC) but the F-35 was again able to escape such bothersome red tape, allowing the Marine Corps to declare IOC of its F-35B variant in July 2015 and the US Air Force last month for its F-35A.
Lockheed says it is in a financial bind because it must pay F-35 suppliers out of its own pocket to avoid any gaps in production -- and the Pentagon has forked out a hefty amount of cash, without a contract – but now Lockheed wants more, just a month later.
Solution: Stop Payments to Stop Cash Outflow
But surely avoiding production gaps should be a worry for the customer, not the contractor, and Lockheed could solve its cash-flow problems by simply stopping payments when it runs out of F-35 money.
To all effects and purposes, Lockheed and the Pentagon are in fact implementing the Lot 9 contract, while saying it is still unsigned because they can’t agree on a price.
For the Pentagon, repeatedly paying out billions of dollars without a contract could well constitute yet another F-35 acquisition irregularity, while such an informal arrangement also creates huge financial liabilities, as Lockheed warned its shareholders in July:
“As of June 26, 2016, the Corporation has approximately $900 million of potential cash exposure and $3.0 billion in termination liability exposure related to the F-35 LRIP 9 and 10 contracts,” and each F-35 it delivers without a contract adds to this liability.
But as Lockheed continues to pay out money to suppliers, it must profit from this strange situation in one way or another -- if it didn’t it, would stop.
Big Advantage: No Accountability
Continuing work without a contract comes with a big advantage, however: a lack of accountability. As these unofficial cash payments to Lockheed are not made public, no-one knows how much the company is paid, nor when, nor for what, and this makes accountability impossible.
No contract means no benchmark, so JPO and Lockheed can run the program as they like, change technical requirements as they like without telling anyone (they’ve done it before), rack up delays and postponements, and do whatever else they agree, all comfortably without supervision or control.
Given past controversies about the F-35 program’s issues on cost, schedule and performance, freedom from adult supervision and oversight must seem like a dream, especially as both Lockheed and the Pentagon are able to shrug off criticism and revelations by the Director of Operational Test & Evaluation with a lame “that’s nothing new” without anyone objecting.
Another advantage of the “no-accountability deal” is that it allows Lockheed to keep churning out as many F-35s as it can, even though they all will later require costly fixes and upgrades, knowing at some point there will be too many F-35s around to kill the program.
The con is on?
Finally, the claim by Lockheed’s CEO and CFO that the company is being bled dry by these supplier payments is false, and turns this absurd process into something that could be described by critics as a confidence trick. Why?
Because in reality Lockheed has plenty of cash, and just in the second quarter it “generated cash from operations” of $1.5 billion and posted net earnings of $1 billion.
But even that, as we reported Aug. 16, is not the end of the story.
At the very time it was crying out for F-35 cash relief, Lockheed said it “returned $1 billion to its stockholders [by] repurchasing 2.1 million shares for $501 million [and] “paying cash dividends of $501 million,” according to its July 27 Q2 earnings release.
In other words, the Pentagon’s $ 1 billion cash advance didn’t go to F-35 suppliers, but to Lockheed stockholders.
This is one more reason why the cozy “cash without contract” arrangement described above looks more and more like a confidence trick played on taxpayers by Lockheed and the F-35 Joint Program Office.