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Marine Log

April 12, 2007

Navy terminates Littoral Combat Ship 3

Secretary of the Navy Donald C. Winter announced today that the Department of the Navy is terminating construction of the third Littoral Combat Ship (LCS 3) for convenience under the Termination clause of the contract because the Navy and Lockheed Martin could not reach agreement on the terms of a modified contract.

The Navy issued a stop-work order on construction on LCS 3 in January following a series of cost overruns on LCS 1 and projection of cost increases on LCS 3, which are being built by Lockheed Martin under a cost-plus contract. The Navy announced in March that it would consider lifting the stop-work order on LCS 3 if the Navy and Lockheed Martin could agree on the terms for a fixed price incentive agreement by mid-April. The Navy worked closely with Lockheed Martin to try to restructure the agreement for LCS-3 to more equitably balance cost and risk, but could not come to terms and conditions that were acceptable to both parties.

The Navy says it remains committed to completing construction on LCS 1 under the current contract with Lockheed Martin.

LCS 2 and 4 are under contract with General Dynamics, and the Navy will monitor their cost performance closely.

The Navy intends to continue with the plan to assess costs and capabilities of LCS 1 and LCS 2 and transition to a single seaframe configuration in fiscal year 10 after an operational assessment and considering all relevant factors.

General Dynamics' ships will continue on a cost-plus basis as long as its costs remain defined and manageable. If the cost performance becomes unacceptable, then General Dynamics will be subject to similar restructuring requirements.

"LCS continues to be a critical warfighting requirement for our Navy to maintain dominance in the littorals and strategic choke points around the world," said Winter. "While this is a difficult decision, we recognize that active oversight and strict cost controls in the early years are necessary to ensuring we can deliver these ships to the fleet over the long term."

LOCKHEED MARTIN "DISAPPOINTED"

Lockheed Martin Corporation [NYSE: LMT] expressed "disappointment" at the decision.

"As a team of men and women who hold ourselves accountable for our actions, we are greatly disappointed by the cost growth experienced on the first LCS and by our inability to reach a satisfactory conclusion with our Navy customer on a path forward for the second ship," said Lockheed Martin Chairman, President and Chief Executive Officer Bob Stevens. "We committed to a course of action that was intended to break the long-standing cycle of first-in-class ship cost growth and, while achieving several important program objectives, did not meet that goal. Although we successfully maintained the ship's schedule and improved on its design, cost growth also occurred. Our team is understandably frustrated that, having invested nearly three years of dedicated effort and significant corporate resources to bring LCS 1 to within 20 percent of completion, we will not have the opportunity to apply lessons learned to a second ship, see this program through to conclusion and deliver a superior capability..."

Stevens said a Lockheed Martin team worked diligently over the past month to develop a proposal that responded to the Navy's request to restructure the contact for the second LCS ship. "We believe that our proposal was fully consistent with the Secretary's stated desire to bring the benefits of increased competition to shipbuilding while holding the Navy's industrial partners accountable for cost performance within their control," he stated.

Lockheed Martin's LCS team--including naval architect Gibbs & Cox and shipbuilders Bollinger Shipyards and Marinette Marine--was one of two industry groups competitively selected in May 2004 to each design and build two ships for evaluation by the Navy.

The Lockheed Martin team was cleared to commence detailed design and construction of the first ship in December 2004; the keel for LCS 1, FREEDOM, was laid in June 2005 at Marinette Marine in Wisconsin, where the ship was christened and launched in September 2006. In June 2006, the Navy awarded the Lockheed Martin team a cost plus incentive fee (CPIF) contract to commence work on its second ship, LCS 3, at Bollinger Shipyards in Louisiana.

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