Lockheed Martin (NYSE:LMT) is no stranger to cost overruns, and extensive delays -- just look at its F-35 for more than one example. However, Lockheed's latest debacle has nothing to do with the F-35. It doesn't even concern a plane. Lockheed's latest contract catastrophe concerns the $32 billion Littoral Combat Ship, or LCS. Here's what you need to know.
Originally, the LCS was designed to defeat threats like submarines, swarms of small boats, and mines, as well as provide dominance in the coastal water battlespace. Unfortunately, according to a report by the Pentagon's independent Director of Operational Test and Evaluation, the "LCS is not expected to be survivable in high-intensity combat because its design requirements do not require the inclusion of survivability features necessary to conduct sustained combat operations in a major conflict as expected for the Navy's other surface combatants."
In other words, the LCS can provide dominance on the battlespace -- as long as it's not really challenged. Yes, you read that right: The LCS is a "combat" ship that can't survive a hostile combat situation. In addition to this blow, the LCS has faced numerous delays and major cost increases, and in its first foreign tour to Singapore, the LCS Freedom suffered a barrage of problems, including a power outage that shut down its engine. Perhaps, then, it's no wonder that acting Deputy Defense Secretary Christine Fox advised the Navy to scale back its LCS purchase from 52 to 32.
Of course, Fox is only the acting deputy defense secretary, and President Obama's formal nomination to the post is Robert Work -- who just so happens to like the LCS program.
What to watch
The current budget environment will force cuts, even to "essential" programs. And when a program is this plagued with problems, its chances of being on the chopping block go up. But that doesn't guarantee that the LCS program is doomed. The fact is, the Navy needs ships, and the LCS is supposed to help in that regard. Consequently, the LCS could escape Congress' budget wrath. However, if the LCS does get cut, that would undoubtedly be an unpleasant blow to Lockheed, as well as General Dynamics' (NYSE:GD) partner, Austal, which is also building a variant of the LCS. Consequently, this is something to keep your eye on.