May 31, 2012 / 5:43 PM / 6 years ago

Lockheed resists Pentagon pressure on overhead costs

WASHINGTON (Reuters) - Lockheed Martin Corp, the biggest U.S. weapons maker, pushed back on Thursday against the Pentagon’s war on overhead, telling investors that the government’s demands for ever more data were actually adding to costs at some facilities.

Lockheed Chief Executive Bob Stevens said his company had already taken action to drive down costs, but the government’s “should cost” initiative meant the company needed more people to generate thousands of pages of additional paperwork.

“What won’t work in my mind is an ever increasing set of demands by the government for more and more and more information and responsiveness, and an increasing expectation that the facilities that are available to meet those increasing demands ought to be reduced and reduced and reduced,” Stevens told an investor conference hosted by Sanford C. Bernstein.

“That isn’t going to be a practical solution here.”

Stevens’ remarks came as negotiations between Lockheed and the Pentagon for a fifth batch of 32 F-35 Joint Strike Fighters dragged on for more than five months.

Lockheed is developing and building the next-generation F-35 fighter for the United States and eight development partners - Britain, Italy, Turkey, Denmark, Norway, Canada, Australia and the Netherlands - plus two other countries, Israel and Japan.

The Pentagon projects it will spend $396 billion to develop and buy 2,443 of the new radar-evading, supersonic warplanes, with projected operating and maintenance costs likely to drive the program’s total lifetime cost to $1.51 trillion.

Stevens said Lockheed’s cost-cutting efforts were evident in its proposal for that contract, which came in lower than the fourth batch of planes, despite the Pentagon’s decision to scale back projected order quantities that had eroded the discounts it was able to negotiate with suppliers.

“When it gets flatter, it gets harder to take cost out of the program,” Stevens said, adding that the company’s affordability focus had still let it offer the government some savings.

He gave no details on the scope of the offered cost break.

TWO SIDES ‘PRETTY FAR APART’ ON F-35 CONTRACT

One source familiar with the program said the Pentagon was pushing Lockheed to agree to a 16 percent reduction from the fourth production contract, but the company had balked.

“The two sides are still pretty far apart,” said the source, who was not authorized to speak on the record.

Stevens said the Pentagon’s focus on what weapons programs “should cost” - as opposed to estimates focused on what they “would cost” - had resulted in increasing requests for more certified cost and pricing data.

Lockheed submitted 6,000 pages of data with its initial F-35 proposal, but had been required to generate an additional 7,000 pages of data for the negotiations in recent months, he said.

Stevens said more than 3,300 union workers remained on strike at the Fort Worth, Texas, plant where Lockheed builds the F-35. Production was continuing, but Lockheed might have to readjust its plan to produce 29 of the planes this year due to the strike, he said.

Lockheed’s CEO reiterated his concern about an additional $500 billion in defense spending cuts due to take effect in January, on top of the $487 billion in cuts already being implemented over the next decade.

He said Lockheed might have to notify all its employees as early as September or October about impending layoffs, if U.S. lawmakers were unable to reverse the additional automatic cuts required under federal budget “sequestration.”

He said the cuts would cause “enormous turbulence” and a “huge cascading bow wave” in the industry and among suppliers, triggering contract changes and pricing adjustments.

Stevens said Lockheed was focused on maintaining and expanding its profit margins, largely through cost-cutting measures and higher international sales, even as defense spending declined. He said Lockheed was fairly insulated against big changes resulting from troop reductions.

But the uncertainty and abruptness of sequestration still posed risks, he said.

Editing by Jan Paschal

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