Sean Gallup, Getty Images
A Sikorsky CH53 helicopter

Lockheed Wants Pentagon to Help Pay Its Costs to Absorb Sikorsky

Jan. 24, 2018
Pentagon regulations provide for reimbursing restructuring costs if projected savings exceed $2 on every $1 spent.

Lockheed Martin Corp. is asking the Pentagon for $212 million toward restructuring costs for its $9 billion acquisition of Sikorsky Aircraft, saying the purchase will save taxpayers $8 in efficiencies for every $1 spent, as a defense agency questions whether the deal is eligible.

Defense Department agencies are auditing the claim, which would be applied to contracts with Lockheed’s Rotary and Mission Systems unit over the next five years. Lockheed, the biggest U.S. government contractor, acquired helicopter maker Sikorsky from United Technologies Corp. in 2015.

“It’s not a deal per se, but it is the first merger-related issue the new administration has to address,” said Byron Callan, a defense business analyst for Capital Alpha Partners LLC.

Pentagon regulations provide for reimbursing restructuring costs if projected savings exceed $2 on every $1 spent. But the Defense Contract Management Agency has said Lockheed’s “rationale for proposed savings does not appear to meet” the required “definition of external restructuring activities.”

Sikorsky “has not been able to demonstrate labor savings at the contract or program level” and “there are not many common suppliers/vendors between” Sikorsky and other parts of Lockheed’s Rotary and Mission Systems, the agency said in an October memo.

Permitted Costs

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.

Lockheed is working with the government on an agreement that recognizes “we are delivering savings in excess of the 2:1 required,” company spokesman William Phelps said in an email. “We continue to have productive meetings with the government.”

The $212 million doesn’t represent the total restructuring cost, he said.

“While we can’t get into specifics of individual actions, the savings include efforts such as combining our information technology infrastructure and consolidating our Human Resources and contracting policies and processes,” Phelps said. He declined to say whether the Lockheed request included severance pay for job cuts and early retirement incentives.

By Tony Capaccio

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Licensed content from Bloomberg, copyright 2016.

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