July 23, 2013 / 12:12 PM / 5 years ago

UPDATE 3-Lockheed hopes for next Pentagon deal on F-35 jets soon

* Deal would include 71 jets for US, allies
    * Pentagon sees progress in negotiations
    * Lockheed says deal would add $4.5-$5 billion to order book

    By Andrea Shalal-Esa
    WASHINGTON, July 23 (Reuters) - Lockheed Martin Co 
is making "good progress" in negotiations with the Pentagon
about the next two batches of F-35 fighter jets and hopes to
reach agreement soon, Chief Executive Marillyn Hewson said on
    Lockheed is building three models of the F-35 for the U.S.
military and eight international partner countries: Britain,
Australia, Canada, Norway, Turkey, Italy, Denmark and the
Netherlands. Israel and Japan have also ordered the jet.
    After protracted and difficult discussions on the previous
order of F-35 jets, Pentagon officials had hoped to reach
agreement with Lockheed around mid-year on the sixth and seventh
orders, valued at multiple billions of dollars.
    Air Force Lieutentant General Christopher Bogdan told
company officials he wanted to reach agreement on the contracts
by the end of July, according to industry sources. It may take
some time afterward to finalize and sign the agreements.
    The total number of jets involved is 71, with 36 planes to
be purchased in the sixth production lot, and 35 in the seventh,
said Joe DellaVedova, spokesman for the Pentagon's F-35 office.
He said that number includes 60 F-35s for the U.S. military, and
11 for Australia, Italy, Turkey and Britain.
    "We've been very open and transparent with our data and I
think the negotiations are going well," Hewson told reporters
after the company reported higher-than-expected second-quarter
    "We've making good progress and we hope that we'll be able
to close in the near term," she said, also citing strong
Pentagon and international support for the F-35 program, despite
U.S. budget cuts. 
    She told analysts the program racked up some big
accomplishments in the second quarter, including completion of
high-angle attack testing, and forecasts by the military
services for when they will start using the new jets. 
    "You can feel the momentum accelerating throughout the
program," she said, adding that Lockheed delivered 12 jets in
the second quarter and expected to deliver 36 in the full year.
    Chief Financial Officer Bruce Tanner told analysts the F-35
program accounted for about 15 percent of Lockheed's revenues,
and that percentage would grow in coming years.
    He said the two F-35 production deals would add $4.5 billion
to $5 billion to the company's order books when they were
completed, a move he said he expected in the third quarter. That
amount comes on top of long-lead funding Lockheed has already
received for the jets.
    DellaVedova declined to predict when an agreement could be
reached but said the two sides were making progress. The F-35 is
the Pentagon's biggest weapons program, and officials have been
pushing for lower prices to ensure the program's future given
mounting budget pressures and mandatory budget cuts that could
cut the Pentagon's budget by $500 billion over the next decade.
    Tanner told analysts that Lockheed adjusted downward its
second-quarter results by $85 million to reflect lower expected
incentive fees on the remainder of the F-35 development
contract. It made a similar adjustment last year.
    Tanner said the adjustment was "a little tougher maybe than
what we were thinking" but the company was earning higher single
digit margins on the F-35 production contracts, and should get
into double digit profits when the program gets to full
productions in coming years.
    The Pentagon reached agreement with Lockheed on the fifth
batch of F-35s last December, agreeing to buy 32 of the advanced
warplanes for $3.8 billion. 
    The U.S. government is negotiating separately with United
Technologies Corp unit Pratt & Whitney to buy engines
for the sixth batch of jets. Pratt's CEO Dave Hess told Reuters
in June he expected a deal within the next 30 days. 
    A Pratt & Whitney spokesman had no immediate comment.
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