UPDATE 1-Lockheed, Pentagon in talks on delayed fighter deal

* Senior Lockheed executives involved in discussions

* Lockheed sees fair settlement “soon”

* Analyst sees pressure to conclude deal in next 30 days
(Adds Pentagon comment, updates shares)

By Andrea Shalal-Esa

WASHINGTON, Aug 23 (BestGrowthStock) – Senior Lockheed Martin Corp
(LMT.N: ) executives and Pentagon officials met on Monday to
continue protracted negotiations about a fourth batch of 32
F-35 fighter jets that company executives had expected to wrap
up over a month ago, according to sources following the talks.

The talks, held in Washington, are critical to the
Pentagon’s drive to rein in costs on the world’s largest
weapons program, now projected to cost over $380 billion over
the next decades.

Failure to reach a deal before the end of summer could
raise questions about the Defense Department’s management of
the program and could further pressure Lockheed’s stock, which
has already dropped more than 16 percent since March, analysts
say.

Lockheed’s F-35 program manager, Tom Burbage, had predicted
at the Farnborough Airshow outside London in July that an
agreement would be reached “any day now.” The company had
initially expected to reach a deal by the end of May.

Lockheed spokesman Joe LaMarca said negotiations were still
under way, but the company expected to reach a settlement
soon.

The contract has taken longer to negotiate, in part,
because it is structured as a fixed-price deal rather than the
cost-plus contracts usually signed for development aircraft,
Burbage told reporters in July [ID:nLDE66I160].

“The program has agreed to transition to a fixed-price
contract two years ahead of the acquisition plan to dispel many
of the escalating cost assertions that have been prevalent
recently,” LaMarca said.

“This is the first of many fixed-price contracts and it is
critical for both parties to get a full understanding of the
terms and conditions as it will be the benchmark for all future
contracts. We anticipate a fair settlement soon,” he said.

The Pentagon office overseeing the program is reviewing the
overall development plan for the fighter. It includes a
technical baseline review aimed at ensuring the rest of the
development program stays on budget, an effort that is due to
wrap up in November, said Pentagon spokeswoman Cheryl Irwin.

Irwin said the current contract discussions were not
dependent on the technical baseline review, and were
“proceeding upon a basis of examining sound data in support of
program affordability.”

Sources following the discussions said most significant
issues had been addressed, and a contract deal could be in
sight before the Sept. 6 Labor Day holiday, which marks the
unofficial end of summer in the United States.

DELAY COULD PRESSURE STOCK

Lockheed’s share price, already under pressure, could drop
further if the company is unable to reach an accord with the
Pentagon within the next 30 days, said Virginia-based defense
consultant Jim McAleese.

Lockheed shares fell 72 cents, or 1 percent, to close at
$72.48 on the New York Stock Exchange, far below a year high of
$87.16 in March.

The involvement of senior Lockheed executives in the
negotiations meant either that the two sides had narrowed their
differences to one or two key issues that the previous
negotiating team did not have the authority to decide, or that
previous negotiations had proven unsuccessful in breaking the
stalemate, McAleese said.

In either event, both sides were under mounting pressure to
reach a deal by the end of September, when the government’s
2010 fiscal year ends, and before Lockheed reports
third-quarter earnings in late October, he said.

“If this issue is not resolved soon, this could have the
potential to create a crisis in confidence about both the
Defense Department’s ability to achieve an affordable unit
price for the fighter as well as Lockheed’s valuation,” he
said.

LaMarca declined comment, saying: “We’re negotiating in
good faith. It would be inappropriate and premature for me to
speculate or comment on anything until the negotiations are
complete.”

Richard Aboulafia, senior analyst with the Virginia-based
Teal Group, said the negotiations were clearly taking longer
than expected, but that was understandable given the shift to
fixed-price contract terms.

“You’ve got to make sure that your costs are in line with
the price before you commit to a fixed-price contract,”
Aboulafia said, noting that under fixed-price terms the company
would be responsible for any increase in costs beyond the
agreed price.

That meant that if costs rose beyond what Lockheed
negotiated with the government now, it would have “negative
margins” on its biggest program, he said.
(Reporting by Andrea Shalal-Esa; Editing by Gary Hill)

UPDATE 1-Lockheed, Pentagon in talks on delayed fighter deal