Lockheed Martin [LMT] will increase profit margins on the F-35 Joint Strike Fighter while decreasing the per-aircraft price tag amid high profile pressure from President Donald Trump to contain costs on the Pentagon’s most expensive program, company executives said on Tuesday.
Marillyn Hewson, chairman, president and CEO of Lockheed, who had two meetings with Trump prior to his inauguration last Friday to discuss his concerns with the affordability of the F-35, said the talks haven’t been “about slashing our profit, it’s not about our margins.” She said that Trump “wants to make sure the American taxpayer is getting the lowest possible cost on the program. And we understand his concerns about affordability.”
Bruce Tanner, Lockheed Martin’s chief financial officer, said that the company expects the pricing for the forthcoming Lot 10 Low Rate Initial Production (LRIP) contract will support margins growing 90, not quite 100 basis points year over year” from the Lot 9 LRIP award in late 2016.
After LRIP 10, Tanner said the margin improvements “may not be as at high a rate” as seen between LRIP 9 and 10 but there will continue to be “sequential” improvement through full-rate production “as we’ve talked about in the past.”
Tanner said that Lockheed Martin for a number of years has consistently projected margin expansion on the F-35 each year until the program reaches full-rate production, “at which point it ought to look like other production programs at that sort of the same stage of their lifecycle. I don’t think we would deviate from that discussion at this point in time.”
Hewson said the finalized contract for LRIP 10 is expected “very soon.”
The LRIP 9 contract was unilaterally imposed by the Pentagon on Lockheed Martin late last year after protracted negotiations failed to result in a deal. The company has considered legal actions related to the deal. Hewson said on Tuesday that “basically we’re not under any pressure to do anything further at this point” on LRIP 9, adding the company will continue to look at its options on the contract.
Both officials discussed the F-35 during Lockheed Martin’s fourth-quarter earnings call with financial analysts. During the presentation, which included a web slide of the costs of the F-35A conventional take-off and landing variant of the fifth-generation fighter, Hewson said the unit cost of the aircraft will have come down more than 60 percent from the first LRIP 1 to LRIP 10.
The per-aircraft unit cost in LRIP 9 is about $100 million and the cost will dip below that amount with LRIP 10, Tanner said. The web slide says that with LRIP 13, which is expected in FY ’19, the per unit cost will dip to $85 million.
The expected value of LRIP 10 is a little more than $8 billion. In December Lockheed Martin received $1.2 billion toward the contract to pay for work already completed, a company spokesman told Defense Daily.
Full-rate production of the F-35 is scheduled to begin in fiscal 2019 with the LRIP 13 buy. At that point Lockheed Martin expects to sign a contract for more than 160 fighters, the spokesman said.
Hewson also said that the LRIP 11 contract is expected this year, too.
So far Lockheed Martin has delivered 200 F-35s to the U.S. government and international partners. The LRIP 10 contract is for 90 aircraft and brings total orders so far to 373 planes, Hewson said.
Lockheed Martin delivered 46 F-35s in 2016 and expects to deliver 66 aircraft this year, an increase of more than 40 percent, Hewson said.
Hewson also said she used the meeting with Trump to point out the “unparalleled” capabilities of the aircraft and to discuss ways the Defense Department can buy the aircraft differently in the future to help bring costs down.