F-35 Fails to Meet Goals Costing Lockheed $32 Million

Lockheed Loses $31.5 Million in F-35 Fighter Payments
Lockheed completed sea trials of the F-35B, accomplishing 72 short takeoffs and 72 vertical landings. Source: U.S. Marines

Lockheed Martin Corp. lost $31.5 million of a possible $52.5 million in U.S. payments last year because its F-35 fighter failed to meet three milestones, according to Pentagon data.

Lockheed, the world’s largest defense contractor, had an opportunity to earn as much as $10.5 million for each of five performance goals set for the fighter. It successfully completed two, Joseph DellaVedova, the Pentagon’s spokesman for the F-35 program, said in an e-mail.

The forfeited $31.5 million marked the second consecutive year of reduced fees after Defense Secretary Robert Gates tightened payment criteria for the F-35, the Pentagon’s most costly weapons program, in February 2010.

The annual performance payments are Bethesda, Maryland-based Lockheed’s only fees on the $27.4 billion development contract that goes through 2016. Lockheed is paid separately for delivery of aircraft under the initial four production contracts.

The reduced fees marred a year when the Pentagon’s test office reported the three versions of the F-35 matched or exceeded the program’s restructured plan for tests designed to evaluate flying qualities. The jet met most test goals in 2010 after falling behind in 2009.

The Pentagon’s top weapons buying group, the Defense Acquisition Board, met yesterday to review a revised cost estimate and schedule for what’s now a $382 billion project. The results will be adopted in an official Pentagon decision memo, spokeswoman Cheryl Irwin said in an e-mail.

Matters to Shareholders

Falling short on the milestones “matters to Lockheed Martin shareholders,” Byron Callan, director of defense analysis for Capital Alpha Partners LLC, in Washington, said in an e-mail. “Clearly, if incentives aren’t being earned, it means the program isn’t exceeding expectations. Being on track might be OK, but being on firmer ground would be even better in this budget environment.”

Higher fees to Lockheed Martin would confirm “what investors have been hearing -- that the program is making progress and test milestones are being knocked down,” he said.

Lockheed rose 46 cents to $87.61 at 9:57 a.m. in New York trading after increasing 6.5 percent in the 12 months through yesterday.

Citing improved performance, Defense Secretary Leon Panetta last month ended a two-year “probation” that Gates had imposed on the Marine Corps version of the plane, the F-35B designed for short takeoffs and vertical landings. It is the most complex model.

‘Significant Progress’

“We successfully met the criteria for two milestones and made significant progress on the other three,” although the F-35 contract doesn’t allow for partial credit, Michael Rein, a Lockheed Martin spokesman, said in an e-mail.

“While we’re disappointed that we did not meet our customers’ expectations on all of the specific elements of the award fee milestones, we believe the F-35 program made outstanding progress in flight test, training and production in 2011,” Rein said.

For 2010, Lockheed earned $7 million of a possible $35 million based on performance, forfeiting the remaining $28 million because it failed to meet the required milestones.

Money Withheld

Gates had withheld from the F-35’s development program $614 million, Lockheed’s remaining unearned fees, as he extended that phase and delayed purchases of 122 aircraft.

He also directed the Pentagon’s F-35 program office to tighten criteria for earning the withheld money. The $35 million and $52.5 million in potential fees were part of a pool that is now down to $526.5 million.

Robert Stevens, Lockheed’s chairman and chief executive officer, said in a July 29 interview, that the company was “on track” to meet the five milestones. “Our heads are down,” he said. “We are focused.”

Of the five milestones, Lockheed and subcontractors Northrop Grumman Corp. and BAE Systems Plc successfully met all criteria for ground testing used to verify structural integrity at hundreds of airframe locations. Lockheed also completed sea trials of the F-35B, accomplishing 72 short takeoffs and 72 vertical landings on the USS Wasp.

Lockheed didn’t accomplish all the requirements for two software releases or of aircraft carrier “suitability” tests of launching and landings conducted on the ground in Lakehurst, New Jersey.

The fee was withheld because Lockheed needs to redesign a faulty tail-hook assembly that failed in some of the ground tests to fully hook onto the arresting cable used during landings. The flaw was discovered early enough to keep on track for testing at sea in 2014, according to DellaVedova.

Lockheed was informed of the fee decision on Jan. 30, four days after reporting fourth-quarter earnings, DellaVedova said.

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