March 23, 2009 / 7:57 PM / 10 years ago

U.S. Navy said due to award Lockheed ship deal

WASHINGTON (Reuters) - The U.S. Navy is poised to award Lockheed Martin Corp (LMT.N) a contract for a second Littoral Combat Ship after wrapping up tough negotiations with the No. 1 U.S. defense contractor, three sources familiar with the discussions told Reuters on Monday.

The future USS Freedom (LCS 1), the first ship in the U.S. Navy's new Littoral Combat Ship (LCS) class, undergoes builder's trials on Lake Michigan near Marinette, Wisconsin in this picture taken July 28, 2008. Lockheed delivered its first LCS ship, USS Freedom, based on a monohull design, last October, and it went into service in November. REUTERS/U.S. Navy/Lockheed-Martin/Handout

The Navy is expected to announce the deal this week, possibly as early as Monday, but it does not plan to disclose a final price, since it is still in negotiations with General Dynamics Corp (GD.N) about the second ship it is to build.

Navy acquisition chief Sean Stackley is due to visit the Alabama shipyard where General Dynamics is building its first ship on Tuesday, according to two of the sources.

The three sources requested anonymity because they are not authorized to speak on pending contracts.

The Navy earlier this month released some funding to Lockheed for the second LCS ship, citing progress in the talks. The money allowed the company to stave off layoffs at the Wisconsin shipyard where its subcontractor is building the Lockheed version of the Navy’s new fast, nimble warship.

The ships are designed to counter threats in contested waters and have a maximum speed of more than 40 knots, compared with the 30-plus knots for the Navy’s larger surface ships.

The Navy’s contract with Lockheed will be on fixed-price terms, with an incentive fee. The fiscal 2009 contract will include options for one, two or three additional ships in fiscal 2010, Navy officials have said.

Navy officials hope to award two 2010 ships to one company and one to the other, but are reserving the ability to opt for just one model, depending on how the program moves along.

Lockheed delivered its first LCS ship, USS Freedom, based on a monohull design, last October, and it went into service in November. This spring the ship is due to begin a second round of tests of its performance on the open ocean, as well as of its gun.

General Dynamics has seen some delays on its first LCS ship, which is based on a trimarin design, and is now projecting delivery this summer, which would allow the ship to go into service around September.

One source informed about the negotiations said the price of the fiscal 2009 Lockheed ship would be below $500 million after both Lockheed and the Navy made significant adjustments.

That would put the program on a path toward meeting a $460 million congressional cost cap that takes effect from fiscal 2010, said Virginia-based defense consultant Jim McAleese. It would also assuage concerns raised by U.S. lawmakers, including Rep. Gene Taylor, who heads the seapower subcommittee of the House Armed Services Committee.

“If the Navy can make award of the next two LCS contracts, at an average price of less than $500 million each, this would not only be critical to addressing Chairman Taylor’s ‘affordability’ concerns,” said McAleese.

“This would clearly demonstrate a credible ‘learning curve’ down to the $460 million per hull cap set by Congress for LCS production orders,” he said. That, in turn, was critical to accelerating production to at least four LCS orders per year during the 2010-2015 defense plan.

The Navy and Lockheed declined to comment on the expected contract announcement.

Lockheed’s shares rose 68 cents, or 1 percent, to $68.46 in late New York Stock Exchange trading, and General Dynamics was up $1.50, or 4 percent, to $39.16 as the broad market added more than 5 percent, led by banking stocks.

Reporting by Andrea Shalal-Esa; Editing by Lisa Von Ahn, Gary Hill

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