Pentagon May Cut Production For Lockheed's F-35 -Reports

The Pentagon is proposing delays and production cuts for the F-35 Joint Strike Fighter through 2015, in a setback for Lockheed Martin Corp. (LMT), on concerns that the military contractor has fallen behind schedule on development and testing, according to media reports Thursday.

The Defense Department will release its official budget request for fiscal 2011 on Feb. 1, and a representative said there have been no final decisions and no official statement on the reported cuts.

Lockheed Martin, Bethesda, Md., said the total number of planes would be the same, though some would be pushed out into later production.

"Should these changes become reality, they may have implications for fiscal 2011 and beyond production quantities, but not necessarily the program budget," company spokesman Christian Geisel wrote in an email.

More than $2.8 billion was to be set aside in the next fiscal budget to purchase the stealthy jet fighter, but that would instead be used to continue its development, reports said.

The rollback would be a short-term blow to Lockheed, which is looking to ramp up its production rate for the F-35 to one a day within the next five to six years. Higher production rates help lower the individual cost for each plane, and the company is relying heavily on automated and assembly-line manufacturing to reach its target.

Just last year, Defense Secretary Robert Gates said he wanted to accelerate the program's ramp-up to squeeze out even more costs. At the time, Gates sought to purchase 513 F-35s through 2015, and ultimately have a fleet of 2,443.

According to Thursday's reports, the Pentagon is considering a cut of 10 planes from its planned F-35 purchases for 2011, and a total reduction of 122 through 2015.

In a note, equity-research firm Broadpoint AmTech lowered its rating on Lockheed Martin to neutral from buy, citing the reported delays.

"A pending adjustment to the JSF program was well telegraphed; however, the extent of the actual production delays exceeds expectations," Broadpoint AmTech said.

The firm cut its price target for Lockheed stock to $73 from $86.

Shares of Lockheed traded recently at $74.49, off nearly 3%. For the year, the stock is down about 9%.

The United States is not the F-35's only customer, but it is by far the largest. The United Kingdom, Italy, the Netherlands, Canada, Norway, Denmark, Australia and Turkey also are members of the program.

Sales of the F-35 are expected to exceed $16 billion by 2016, or about 25% of Lockheed's total revenue, according to data provided by Bernstein Research.

The fly-away cost for the jet is about $83 million, according to the military, though Lockheed expects that to drop to $80 million by 2014.