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Lockheed confident about F-35 contract before year-end

An assembly line worker works on Lockheed Martin's production plant for the F-35 fighter aircraft in Fort Worth, Texas August 31, 2009. REUT
An assembly line worker works on Lockheed Martin's production plant for the F-35 fighter aircraft in Fort Worth, Texas August 31, 2009. REUT

By Andrea Shalal-Esa

NEW YORK (Reuters) - Lockheed Martin Corp President Marillyn Hewson said on Thursday that talks with the Pentagon about a fifth batch of F-35 fighter jets were going well and an agreement was likely before the end of the year.

"Those negotiations are progressing well," Hewson told an investor conference hosted by Credit Suisse, her first major presentation to Wall Street investors since being named Lockheed president and chief operating officer earlier this month.

"I do feel confident that we're going to get to closure on Lot 5 this year," she said.

Hewson said Lockheed was also making progress in discussions with the Defense Department to secure additional funding for work on the sixth batch of F-35 jets.

Lockheed Chief Financial Officer Bruce Tanner said the two sides had "closed a lot of our differences" during recent talks, adding that Hewson had played a key role in negotiations with the Pentagon on the contract.

Details of the expected agreement were not immediately available, but sources familiar with the negotiations said they expected it to include a reduction in the cost for each F-35 fighter jet from the fourth production contract, although the number of jets to be ordered will not increase.

The Pentagon's chief weapons buyer, Frank Kendall, told Reuters on Wednesday that the two sides were "getting close" to an agreement on the fifth production contract.

He said he had "a very positive meeting" on Tuesday with Hewson about a range of issues, including the $396 billion F-35 program, the Pentagon's largest weapons program.

Hewson will become Lockheed's CEO in January, succeeding Christopher Kubasik, who was forced out after admitting to having an affair with a subordinate.

Lockheed, the Pentagon's largest contractor, and its suppliers are already building the fifth batch of F-35 planes under a preliminary contract, but the two sides have been struggling since last December to finalize the terms of the deal.

Hewson's increased engagement in the F-35 negotiations has helped defuse tensions that had mounted between the company and the Pentagon over the past year, said Loren Thompson, a defense consultant with Virginia-based Lexington Institute who has close ties to Lockheed.

In September, Air Force Major General Christopher Bogdan, who is moving up to head the F-35 program next week, said ties between Lockheed and the U.S. government were "the worst" he had ever seen in his years working on big acquisition programs.

Hewson told analysts earlier this month that the F-35 program would be one of her top priorities in her new job. "We won't miss a beat on F-35," she said at the time.

Agreement on the terms of the fifth F-35 contract would free up additional funding for early work on a sixth set of planes, which the company has been funding on its own for some time.

Lockheed warned investors last month that it faced a potential termination liability of $1.1 billion on that sixth batch of planes, unless it received additional funding by year-end.

Lockheed received some initial "long-lead" funding for advanced procurement of materials for the planes, but that money ran out a while ago.

The Pentagon has refused to release any more money for the sixth batch of planes until the two sides resolve their differences and sign a contract for the fifth batch.

(Reporting By Andrea Shalal-Esa; Editing by Gerald E. McCormick and John Wallace)

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