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Lockheed’s tug of war with DoD

By Philip Ewing Thursday, October 27th, 2011 4:21 pm
Posted in Policy

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.

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	Dfens October 27th, 2011 at 4:41 pm Never stop paying them more to fail, because they love to laugh at you — all the way to the bank. Record profits, baby!
	@E_L_P October 27th, 2011 at 5:44 pm A short history of F-35 LRIP 5 52 14-Sep-09 Solicitation 42 06-Jul-10 Contract Award 34 31-Dec-10 SAR/PSFD 30 24-Oct-11 Contract Neg. And in 2003 it was 120 aircraft… That is a lot of production cuts.
	DoDEngineer October 27th, 2011 at 6:30 pm “Chief Executive Robert Stevens told reporters after the earnings release on Wednesday that Lockheed would be reluctant to accept “unbounded liabilities for unpredictable or unknown events.” This is what kills me about defense contractors. They are just completely oblivious to the fact that the laws of the free market are broken by having the government imagine a system they want and then picking a contractor to build it. The contractor says “sure, we can do that”…“but we’re not sure if we can do that, so ughh, cost +”. And then squirms when the government wonders why they aren’t the expert they claimed they were when they bid the contract. By the same token, we as a society need to understand that it’s exceedingly difficult,virtually impossible, to assign a proper value on cutting edge technology. Seems like the way this should work is the government decides an absolute limit on what it wants to spend on some new materiel and if it gets no bid in the industry then it isn’t paying enough. The free market manages to figure resource allocation fairly well, why not let it?
	seesthrubs October 27th, 2011 at 9:43 pm DoD helped create this monopoly (or near enough to) so lump it.
	Byron Skinner October 27th, 2011 at 11:08 pm Good Evening Folks, First off the defense market is not a free market. No matter who gets a contract the big five make sure the other four get a nice chunk of it. Boeing is just as dependent on L/M’s contracts as L/M is. What you are seeing is the result of how the government pays and the loooog tails of government contracts. In the real work a contract is placed, deposit and payment schedule determined, contract performed and final 10% paid. It over. On a defense contract the payments drag on and on, some of the contracts still in active in the industry are over twenty years old. The reason of course is the industry make unique products and also sell after delivery service which often is just added to the original contract. The problem is on the front of the contract which often starts with a long R&D period before production and the cash flow is rather light but the company has to tool up and hire a labor force. Front end expenses if you like. At the end of the contract the capital and labor expenses have been actualized and the tax write offs start showing up in the books and so does the profits. In short much of the so called profits at the end are not real. The true picture of the health of L/M is what they are signing up now and what’s coming down the pipeline. Doesn’t look good. Take the F-35 most of the production and set up cost have been paid and ran through the books, the production is where the profits are. If there is any cut in the numbers of F-35 bought it very likely could put what is not L/M out of business. The result will be the business units of L/M will be spun off. Those that are profitable will be bought up by the surviving four major contractors. The speculative and not yet profitable business will be bought up at a discount by the secondary contractors hoping to find a gem and hit the big time. Everything else along with jobs will just disappear. Re General Dynamics in 1991. ALLONS, Byron Skinner
	pp_muscimol October 28th, 2011 at 12:47 am You can make good profits when you deliver good products and with F22 grounded several times because of … oxygen…??!!!…I hope they don’t participate in next trip to the moon!!! .…. and with a fragile skin and an F35 that is far more expensive, and delivered much later .…and during an economical crisis I don’t think LM is being patriotic by presenting those numbers!!! .… they would be patriotic in current times if they would trade those numbers for an increase in jobs offers to help the global US economy. .… like now, they show how good they are in sucking the contributors “tit” …
	pfcem October 28th, 2011 at 12:52 am Once again you have everything wrong. THE problem is that the government has stopped paying LM for the LRIP 5 costs that have been incurring. The program is FAR from failing & LM’s current/recent proficts are hardly record.
	itfunk October 28th, 2011 at 1:13 am Because as any contractor will tell you capitalism simply doesn’t work, they need a soviet style planned economy with cradle to grave funding.
	itfunk October 28th, 2011 at 1:14 am Not even the Soviets were stupid enough to reinforce failure like the Lockheed trolls want.
	William C. October 28th, 2011 at 1:16 am “Fragile skin?” Compared to what? An A-10?
	itfunk October 28th, 2011 at 1:17 am When you are making $24million a quarter “looking into it” why would you ever want to the problem to go away. In the real economy Lockheed would be paying penalties for non-performance and failure to deliver, not being given further handouts with no guarantees.
	William C. October 28th, 2011 at 1:18 am When your idea of success is “CANCEL EVERYTHING!” I don’t think you’re in any position to claim the F-35 or any program is failing.
	William C. October 28th, 2011 at 1:21 am Got any quotes? Or why not tell us your wonderful idea to fix defense procurement? You sure have a lot of criticism Oblat, so how about some ideas?
	itfunk October 28th, 2011 at 1:24 am The other Lockheed troll chimes in
	William C. October 28th, 2011 at 1:26 am Shouldn’t you be off rooting for the Chinese? Or protesting on Wall Street expecting the government to pay your debts? So what happened Oblat, why’d you need to change your name?
	itfunk October 28th, 2011 at 1:29 am The alternate reality that pcfem lives in… With ten operational aircraft rolling off the Fort Worth assembly line each month, the F-35 program is well on the way to fulfilling its potential as the most important defense program of the 21st century. The fifth low-rate initial production batch of 44 F-35As, 44 F-35Bs (12 of those for the UK) and 32 F-35Cs is due to be completed in early 2012, at which point almost 300 aircraft will have been delivered. The F-35A flyaway cost is headed towards the goal of $47 million in current dollars. The USAF declared initial operational capability with the F-35A this summer, following about a year behind the Marine Corps. Although operational test and evaluation of the Block 3 software configuration is still underway, and due to continue until mid-2012, the Block 2 configuration adds new weapons to the AMRAAM and JDAM — qualified back in 2009 — and covers close air support and interdiction missions. And what everyone else sees… Last week, Air Force secretary Michael Donley — the boss of the biggest JSF customer — declined to say when the USAF could expect to declare IOC, saying that the service was still discussing capabilities and timelines with the JSF program office. Cant even tell when it will be IOC but it’s “exceeding all expectations” LOL
	itfunk October 28th, 2011 at 1:32 am In general I find that the contractors attract people who are just in it for themselves, they wave the flag but they aren’t patriotic, it’s just flag waving to justify them screwing America. I’ve seen the disdain they hold for ordinary Americas so many times.
	William C. October 28th, 2011 at 1:38 am Actually Oblat, I just hold self-righteous, military-hating losers like yourself in contempt. You pretend to care about country one moment then claim the soldiers shouldn’t even be allowed home the next. You’ll say anything to justify gutting our military and our defense industry in the process. What happened? You never got that job you wanted with Lockheed?
	William C. October 28th, 2011 at 1:40 am Actually, I just hold self-righteous, military-hating losers like yourself in contempt. You pretend to care about country one moment then claim the soldiers shouldn’t even be allowed home the next. You’ll say anything to justify gutting our military and our defense industry in the process. What happened? You never got that job you wanted with Lockheed?
	William C. October 28th, 2011 at 1:42 am Shouldn’t you be off rooting for the Chinese or protesting on Wall Street about how the government should pay all of your debts? It’s quite amusing that you had to change your name O-blat, In fact just typing O-blat normally requires comment approval. I guess the admins got tired of your trolling too.
	Guest October 28th, 2011 at 8:11 am Lockheed has been screwing the government, the government is starting to push back. Lockheed could damage the Air Force, Navy and Marines, by being so far over cost, so delayed in delivering what they had promised.
	Thinking_ExUSAF October 28th, 2011 at 8:35 am It all comes down to an issue of risk. On one hand, we ask the contractors to assume all of the risk for pulling our rabbit out of their hat, and they try to come up with some cost, above what it should cost, as an “insurance policy”. Then we give the contract to the lowest bidder. The system SHOULD work, but only if all of the risks are known and the contractors are honest in laying out their “insurance policy”, AND the government is honest in assessing the proposals. If you have a contractor that can spin a pretty tale (and not be caught by a knowledgable and honest assessor), or if you have an assessor/PM who is more interested in posturing towards “lowest cost at all cost” (knowing that the result will not hit the fan until his reassignment!), or if you just plain have some unknown risks surface.… the sytem doenst work all that well. You cant control what you dont know, so the pop-up risks are just there, but… how do we address the things that we CAN see! :-)
	Dfens October 28th, 2011 at 9:03 am Who is it that really “hates the military”, William, someone who advocates we go back to a procurement system that made our military the greatest in the world up through the Cold War, or one who, like you, advocates for the current status quo? A status quo that see the age of our weapons increasing rapidly, our readiness decreasing, and all while we are spending at the same levels we were at the peak of the Cold War, and that’s without counting all the spending we are doing on the War on Terror. You come across as a sincere person, so how do you justify advocating for such a destructive status quo? To be fair, it’s not just you. I talk to the people I work with all day long on this very subject of how we get paid more to fail. They all know it is true, but hate to be faced with the reality of it. For the most part they just shrug their shoulders and say, “this is the way it is, I might as well make money off it.” I don’t get it, though. It doesn’t have to be this way. This is not right. This procurement approach is killing our defense and making immoral and amoral people who are willing to trade their principles for money, rich. It’s not right. It’s not American. It is insane!
	Dfens October 28th, 2011 at 9:12 am In this case it is about a defense industry that passes all of the risk along to the US taxpayer and shoulders none of it themselves. No one is accountable for wasting our money. If a program fails because a contractor said they could do what they could not do, we end up holding an empty bag and no one is punished. In fact, everyone involved makes money and the taxpayer and the 15% of our armed services that actually fight end up with nothing but empty pockets and enemies at the wire. That’s not right. Capitalism is about risk and reward, not reward with the little guy shouldering all the risk.
	Dfens October 28th, 2011 at 9:22 am The last I checked, the protestors were against the government paying all the debts of businesses that should have been allowed to fail under the principles of capitalism that you hate. So who is really helping the Chinese? Is it someone who advocates for our obviously broken federal government to be reformed, or those who apologize for its every failing?
	Dfens October 28th, 2011 at 9:43 am They needed that money to finance the dragging out of the development effort. After all, when you get paid a profit to work on a paper airplane, why ever stop? It only gets tougher when the airplane actually has to fly. Sometimes the oxygen system doesn’t work. But, of course, then you get a big contract to fix it.
	Thinking_ExUSAF October 28th, 2011 at 10:50 am Totally agree with your concept of accountability, but.… that accountability goes beyond just whipping a contractor. Someone had to BUY that sales pitch! Someone had to SEE the risk developing! Otherwise, why do we have the entire acqusition bureaucracy! IF a “pet rock” of some O-6 turns into a money-spending program without the technical support for the concept… IF a contractor claims a capability that he knows is not in hand or provides flagrantly and intentionally wrong cost and schedule estimates…. IF a source selection authority or PM buys off on a lame sales pitch…. IF a congressman tries to exert undue influence.… . .whereever the arrow lands.… make that person, PERSONALLY responsible and at least in the case of the congressman, expose his attempted manipulation to public view (as did NOT happen with Murtha!). The procurement system might look like gridlock on the Beltway until the “careerists” politicians, and “profiteers” are purged out of the system, but.… … Hows that for day-dreaming about some kind of hard nosed accountability! :-)
	Cocidius October 28th, 2011 at 12:53 pm William C: Using the word “success” and F-35 in the same sentence is truly hilarious. The F-35 failed YEARS ago and thanks to people like you they’re still selling the just so flawed (JSF) snake oil. BTW — William, what color are those JSF pom-poms you’re waving these days? Perhaps green as in the massive money that Lockmart is still getting to produce non-functional F-35’s with no warfighting ability?
	Chaostician October 28th, 2011 at 1:04 pm The industry doesn’t force the US govt to sign the contracts that it does that create such risk for the taxpayer. Plus it is illogical to assume a contractor would assume the risk for the creative development from vauge, poorly written, constantly changing SOWs the Govt asks the contractor to do. Some people are held accountable when programs fail. Often it is the worker bees who lose their jobs. I think another important thing to keep in mind is that the contractor’s performance could be just fine, but program failures are what cause the programs to fail. The contractor should be held accountable for performance criteria of the contract. Usually the govt forgets requirements or changes them (a lot of times without even modifying the SOW) and when the program fails, the contractor is the scapegoat.
	Weaponhead October 28th, 2011 at 2:36 pm No sympathy. 10 years of ‘unknowns’? SDD costs more than doubling. No prayer of ever meeting production prices claimed (“about the same as an F-16″). When the program started the contractor arrogantly said this would be easy after the F-22 and that all the lessons from the F-22 would prevent having problems on the F-35 development. The program is on the path to cripple US military strength by sucking up the resources for other badly neeeded capabilities. This is not a case of 10, 25 or even 55% cost growth. This is either a case of massive fraud or massive incompetence and it’s about time that the DoD forced some accountability on the contractor. The more you look at it, the more it looks like Bernie Madoff ran the F-35 program fo rthe last 10 years.
	David October 28th, 2011 at 3:32 pm “The Air Force issued Lockheed a $24 million contract to try to get to the bottom of what’s causing these oxygen problems.” So let me get this straight: they sold us these jets at crazy high prices, jets turn out to be defective with at least one death potentially attributed to it and the DoD has to PAY them to fix the defect that they created? That’s almost like my kids throwing a party that trashes my house and then I pay them to fix it back up. This is pure, unadulterated BULL**** in my book. Now I get to go into my weekend all pissed off. Super.
	OldRetSWO October 28th, 2011 at 4:41 pm To continue your excellent post. And sometimes, Congress decides to cut funding from one year to balance a budget problem and moves tasks into the next year. Sounds pretty cut and dried but the reality is that this causes the program to stretch out which in turn costs money since they now added a year of exectution to t he contract. All of the very complex interlocking schedules need to be redone which also costs money. Four or five years later, the program misses the originally planned IOC date and the crtitics (like some on here) cry that the contractor is corrupt, the contractor sucks, etc
	DensityDuck October 28th, 2011 at 5:28 pm Current F-35 cost and schedule estimates are completely in line with the ones originally developed, which were “too expensive” and “too long to build”. The only way LM was able to meet the DoD’s desired cost and schedule was to remove all conservatism from the estimates and cut out a number of important tests. After contract award, the DoD insisted that those tests be put back in, and the price “increased”.
	David October 28th, 2011 at 5:41 pm “The Air Force issued Lockheed a $24 million contract to try to get to the bottom of what’s causing these oxygen problems.” So let me get this straight: they sold us these jets at crazy high prices, jets turn out to be defective with at least one death potentially attributed to it and the DoD has to PAY them to fix the defect that they created? When an automaker gets word of some faulty item/component on a car they’ve sold you (esp if it’s a safety issue), there’s a big recall and they repair your vehicle at their cost. Can’t help but wonder why that’s not the case here.
	GenWashington October 29th, 2011 at 11:41 am This is BS, let Lockheed pay for their mistakes, they already get special treatment and typically get all the contracts anyways through so called “BIDS” haha what a joke. They probably still allowing the Chinese to continue to access their systems as well, ever wonder why the Chinese have a stealth plane…you boys are just fine.
	Cocidius October 29th, 2011 at 11:54 am William: Nice to see you following the typical JSF cheerleader behavior. Calling people “haters” and painting them as enemies of the military to avoid talking at the REAL problems with Lockmart making record profits while selling our nation defective products (the F-22 and the F-35). The term self-righteous cuts both ways, have you bothered to take a look in the mirror lately?
	itfunk October 29th, 2011 at 12:40 pm Its called the spiraling cost model of development, you never actually get a working system and the contractor just keeps on sending you bills.
	itfunk October 29th, 2011 at 12:41 pm Oh really so IOC was last year and we have hundreds of F-35 flying already.
	Cocidius October 29th, 2011 at 3:13 pm David nicely outlined the issues perfectly. Lockmart has been making serious money while selling defective aircraft at exorbitant prices. The F-22 accident in Alaska killed an innocent pilot while several others have had close calls due to the issues relating to the O2 generation system. Meanwhile the other shoe to drop is a new 10 month DOTE recommended delay for pilot training on the F-35 due to “safety” concerns, sound familiar? It’s time to get to the bottom of things over at Lockmart. A criminal investigation should be initiated by the Justice Department to determine if the continuing issues with both stealth fighters is a purposeful corporate strategy to maintain high profits high during the current recession. http://blogs.star-telegram.com/sky_talk/2011/10/d…
	BradM October 29th, 2011 at 4:41 pm Everytime we lose an F-22 due to the oxygen system problem LM says “So sorry our faulty oxygen system caused the loss of this plane and pilot. We can’t replace the pilot but, since it’s our fault, we will replace the plane at no cost to you. So the Air Force will always have 187 F-22s in it’s inventory.” isn’t that correct?
	mike j October 29th, 2011 at 5:14 pm While I know that LockMart has documented the process of building a Raptor, once that line shuts down, it’s over.
	mike j October 29th, 2011 at 5:22 pm If that is in fact how it went, a investigation into possible fraud, malfeasance, and misfeasance on the parts of the government and the contractors should be launched immediately. But I’d like to see some source articles first, because frankly I don’t trust anything you say.
	Dfens October 30th, 2011 at 1:01 pm There is certainly blame to go around when it comes to the failings of our current procurement system, but as I’ve said before, I’m not about blame. I want to fix the problem. Sure, the military officers in charge could choose better, but the problem with trying to fix the problem there is the military officers are buying a “pig in a poke”. There is no objective way to figure out which contractor is telling the truth and which is lying, which will drag things out longer and which will drag them out the least. You’d need a 100% accurate crystal ball for such things, and those don’t exist. Congress is complicit too. They love that contractor money. Probably we should write rules that prohibit any company that takes government money from lobbying, but even if we do that, the military’s program office bureaucracy will continue to act as their biggest lobby in the federal government. We need to cut this off at the source. No more taxpayer money to contractors for development!
	Dfens October 30th, 2011 at 1:19 pm Everyone in the industry knows how this game is played. It doesn’t matter how bad of a job we do, because the only down side to doing a bad job is that we get a follow on contract to fix what we dorked up in the first place. If you’re a person who is tries to do a good job, you will find working in the defense industry very frustrating, because the people who don’t give a damn always win. Just a couple of years ago I was involved in a situation where someone did a crappy job and it lead directly to the loss of an airplane. Not only was I not rewarded for trying to do the right thing, but I was threatened with firing if I went public with the information about what had happened. I was fortunate that I was able to correct the problem — at the US taxpayer’s expense. I would not have been able to do that if I had not put a plan in place to fix the problem much earlier, making the company (falsely) look proactive in dealing with the problem.
	Dfens October 30th, 2011 at 1:22 pm They don’t do that because they don’t want Lockheed to cover up the mistakes, which is exactly what would happen. So instead they pay them a profit to fix what they screwed up. It’s never “on purpose” but then again it’s not like Lockheed doesn’t know that the only down side to screwing up is making more money.
	Dfens October 30th, 2011 at 11:11 pm Lockheed would have to care about how they are perceived by their customer to do a gesture like that. Instead they thumb their nose at the DoD and say, “so if you don’t buy your next airplane from us, who will you go to?” Of the big contractors I’ve worked for, Lockheed definitely has the the worst customer service attitude. It could be summed up in two words, “f you!”
	STemplar October 30th, 2011 at 11:16 pm The tooling was preserved, or rather is supposed to be.
	mike j October 30th, 2011 at 11:41 pm Yes, but. I know what you’re saying, but they wouldn’t restart production just for a couple replacement airframes. It will take a substantial order to see more F-22s produced. With the way the F-35 is going, there IS some chance of more F-22s at some point ( did I qualify that enough? ).
	STemplar October 31st, 2011 at 1:49 am The thinking was the possibility of that or of a SLEP down the road for the F22.
	Thinking_ExUSAF October 31st, 2011 at 8:37 am I think that the USAF MAY have learned its lesson when it ordered that Lockheed actually destroy the tooling for the SR-71! I dont know that such an order has been given for any other aircraft, at least not in recent time.
	RCDC November 22nd, 2011 at 3:37 pm How about this: Make each F-22 production different in design. That can compete with J-12 and Pak-FA 50 or better.

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