Pentagon to Reimburse Lockheed Part of Costs for Buying Sikorsky

The Pentagon has decided to pay Lockheed Martin Corp. only part of the $212 million the company initially requested that it be reimbursed for expenses incurred during its 2015 acquisition of Sikorsky Aircraft.

Pentagon Undersecretary for Acquisition and Sustainment Ellen Lord decided in a previously undisclosed March 29 action “to reimburse a portion of the cost elements in the original proposal,” spokeswoman Jessica Maxwell said in a statement Thursday. Maxwell declined to disclose how much the Defense Department planned to pay the No. 1 defense contractor.

“Lockheed’s future quarterly financial statement filing may contain some insights,” Maxwell said. Bethesda, Maryland-based Lockheed reports its second quarter earnings July 21 so analysts may ask about the decision then.

The Pentagon’s acquisition regulations permit reimbursement of allowable restructuring costs, which include “severance pay for employees, early retirement incentive payments for employees, employee retraining costs, relocation expense for retained employees, and relocation and rearrangement of plant and equipment.” But the allowable costs don’t include “routine or ongoing repositionings and redeployments” of workers or facilities.

The regulations provide for reimbursing restructuring costs if projected savings are found to exceed $2 for every $1 spent. Lockheed -- which bought the aircraft manufacturer for $9 billion -- initially told the Pentagon the acquisition would save taxpayers $8 in efficiencies for every $1 spent.

The Defense Department’s analysis didn’t support the initial $8-to-$1 savings estimate, according to Maxwell, who said the final agreement was based on savings exceeding the $2 to $1 threshold, Maxwell said. The department’s “due diligence determined that only a portion of the original proposed costs qualified under the applicable guidelines,” she said.

“We are pleased that the agreement recognizes the significant cost savings the government realized after Lockheed Martin’s acquisition of Sikorsky,” Bethesda-based Lockheed said in a statement.

Although the $212 million was the initial estimate, Lockheed’s actual costs were lower so the Pentagon’s final decision wasn’t based on the earlier figure, according to a person familiar with issue.

“I don’t know why the full $8-to-$1 ratio was not achieved,” said Byron Callan, an aerospace analyst with Capital Alpha LLC. “It could have been due to a tight labor market, supply chain issues” or other assumptions that didn’t materialize, he said.

©2020 Bloomberg L.P.

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