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Lockheed's tug of war with DoD


The corporate earnings report train keeps a-rollin' along: We told you on Wednesday about General Dynamics, and then later that day came the biggest of the big dogs -- the New York Yankees of the defense game: Lockheed Martin.

Here was the sports-story lede, and it paints a similar picture:

Lockheed Martin Corporation today reported third quarter 2011 net sales of $12.1 billion, compared to $11.3 billion in 2010. Earnings from continuing operations during the third quarter of 2011 were $665 million, or $1.99 per diluted share, compared to $557 million, or $1.53 per diluted share, in 2010.  Cash from operations during the third quarter of 2011 was $511 million, compared to $513 million during 2010.

Third quarter 2011 results included a special charge of $39 million, which reduced earnings by $25 million, or $0.07 per diluted share, related to planned workforce reductions at Information Systems & Global Solutions (IS&GS) and Corporate Headquarters. The third quarter of 2010 included a special charge of $178 million related to the Voluntary Executive Separation Program (VESP), which decreased earnings by $116 million, or $0.32 per diluted share. Consistent with prior periods, third quarter 2011 results also included a FAS/CAS pension expense adjustment of $231 million, which reduced earnings by $143 million, or $0.43 per diluted share, compared to a FAS/CAS pension expense adjustment of $111 million, which reduced earnings by $69 million, or $0.19 per diluted share, in 2010.

Not only are Lockheed's announcements fascinating in their own right -- again describing solid performance amid the nonstop doom-and-gloomism of what's supposed to be Austerity Washington -- combined with other events this week, they highlight the unique ties between the Pentagon and its biggest vendor. All of the following things happened within days of each other:

• Air Force commanders re-grounded and then re-cleared Lockheed-built F-22 Raptors, which continue to struggle with their onboard oxygen generation systems.

• The Air Force issued Lockheed a $24 million contract to try to get to the bottom of what's causing these oxygen problems.

• Lockheed CEO Bob Stevens blasted DoD's push to make the company pay for changes to new production F-35 Lightning IIs that result from tests of earlier aircraft: "I think the problem for industry everywhere would be ... to have a requirement or a responsibility to be accountable for things that aren't known, that you can't predict, that no one can reasonably at this time look forward and either schedule or define or articulate in some way," Stevens said, per Reuters' Andrea Shalal-Esa.

• The Lockheed-built littoral combat ship USS Fort Worth completed its builders trials up on the Great Lakes.

• Workers laid the keel for Lockheed's next littoral combat ship, the USS Milwaukee.

• The Navy issued Lockheed a $64.5 million contract for work on its Trident ballistic missile life-extension program.

These are just a few things -- who knows just how many total milestones or decision points or interactions took place between DoD and its biggest vendor just this past week. But even though, as we keep seeing, many Washington decision-makers like to view the government's relationship with its vendors as just basic capitalism, the free market in action, you can get some sense about how backward that is. Could the government just walk away from Lockheed and give all its work to Joe's Defense Contracting and Pizza Parlor, up on H Street? Could Lockheed decide, that's it, we're sick of dealing with the feds? No to both -- they're stuck with each other.

Here's an example from Lockheed's earnings statement:

We received customer authorization and initial funding in July 2010 to begin work on low-rate initial production (LRIP) 5. In January 2011, we notified our customer that additional funding would be required to continue the advanced procurement.  Despite not yet receiving such funding, we and our industry team have continued work in an effort to meet our customer’s desired aircraft delivery dates for the LRIP 5 aircraft.  As a result, as of Sept. 25, 2011, we have approximately $750 million in potential termination liability exposure.  Without additional funding or contract coverage, we estimate that our exposure by the end of 2011 will be approximately $1.2 billion.  We are in the process of negotiating with our customer to obtain additional funding and finalize contract negotiations.
Will DoD and lawmakers continue to complain about it? Oh yeah. Will Lockheed eventually ink the deals it wants here? Seems like a pretty good chance. Show Full Article

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