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* Lockheed, US negotiating contract for 5th batch of planes
* Company says current exposure totals $400 mln to date
By Andrea Shalal-Esa
WASHINGTON, Oct 25 (Reuters) - U.S. weapons maker Lockheed Martin Corp said on Thursday it faced a potential termination liability of $1.1 billion on the F-35 fighter program unless it received additional funding for production of a sixth batch of airplanes by year end.
Lockheed disclosed the potential exposure in a filing with the U.S. Securities and Exchange Commission a day after company officials cited "great progress" on the fighter jet program.
Chief Financial Officer Bruce told analysts on Wednesday that Lockheed expected to finalize a contract with the U.S. government for a fifth batch of fighter jets in the fourth quarter, which would help free up additional funding for planes in a sixth order.
He told reporters that failure to reach a deal on the fifth batch of planes by the end of the year would have little impact on Lockheed's 2012 results because it had already received funding for about 75 percent of the work on those planes.
Company officials did not mention the potential liability exposure on the sixth batch of planes during media or analyst calls on Wednesday.
The potential liability stems from the fact that Lockheed and its suppliers have begun using their own funds to work on a sixth batch of F-35 fighter jets so they will be able to meet the Pentagon's schedule for deliveries of the planes.
Lockheed received some initial "long-lead" funding for advanced procurement of materials for the planes that take a long time to order 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 difference and sign a contract for the fifth batch of planes after nearly a year of negotiations.
In September, the Air Force general who is moving up to head the F-35 program later this year said the delay was a sign of how tense relations had become. He said ties between Lockheed and the U.S. government were "the worst" he had ever seen in his years working on big acquisition programs.
Last year around this time, Lockheed used its quarterly earnings call to air its concerns over the Pentagon's demand at the time that Lockheed pay for some of the design changes needed on the fighter jet. It also cited possible liability costs.
This year, the tone was different. Outgoing Chief Executive Bob Stevens, who is due to retire at the end of the year, told analysts the company would do everything it needed to "have very high quality relations" with the government.
SEC guidelines require publicly traded companies to disclose potential liabilities and risks to shareholders, including possible exposure to termination costs.
In its SEC filing on Thursday, Lockheed said it had about $400 million in potential liability exposure as of Sept. 30, but the total would rise to $1.1 billion by the end of the year, including about $250 million in cash exposure.
No comment was immediately available from the Pentagon's F-35 program office.
In the filing, Lockheed said it had revised downward its estimated profit on the F-35 development program by $85 million to date because it had made only "minimal progress" in getting the Pentagon to tie $530 million in incentive fees to specific developmental milestones.
It said $13 million of the remaining fee had been tied to specific milestones in 2012, even though the program had seen significant flight test activity this year.
Even when incentive fees were linked to milestones, "the U.S. government fee determinations have been less than our self-assessment of the significant progress accomplished during the evaluation periods," Lockheed said.