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Lockheed Martin Corp. (LMT - Analyst Report) – the largest defense contractor in the world – won two major contracts, worth $7.8 billion, from the U.S. Department of defense (DoD) for 71 more F-35 fighter jets. Both these agreements mark a significant milestone reflecting cost reduction efforts for this very expensive fighter jet.

The defense department inked agreements for the sixth and seventh lots of the U.S. military’s most exclusive weapons acquisition program – the F-35 Joint Strike Fighter. However, the deal does not include the engines as the government buys it from Pratt & Whitney, a unit of United Technologies Corp (UTX - Analyst Report).

The contract calls for the company to deliver 36 low-rate, initial-production (“LRIP”) lot 6 planes in the second quarter of 2014. Lockheed netted $4.4 billion for the production of Lot 6 with an average aircraft unit cost of approximately 2.5% lower than the LRIP 5 aircraft.

Under the LRIP lot 6 program, Lockheed is to deliver 23 Air Force version of F-35As at $103 million a piece; 6 Marine Corps variant of F-35Bs at $109 million per jet; and 7 Navy version of the plane at $120 million a plane.

Under the LRIP 7 contract, valued at $3.4 billion, Lockheed will deliver 35 aircraft, with an average aircraft unit cost of approximately 6% lower than the LRIP 5 aircraft. The deal calls for 24 F-35As for $98 million per jet, 7 F-35Bs for $104 million a jet and 4 F-35Cs for $116 million a jet.

Lockheed will start delivering LRIP 6 warplanes in the second quarter of 2014, marking the first delivery of international F-35 jets for Italy and Australia. Delivery of the airplanes under batch 7 will begin in the second quarter of 2015 and this will mark the first delivery to Norway.

As per the final agreement on the sixth and seventh batches of F-35 Joint Strike Fighters, Lockheed will pay for all cost overruns. Again, the defense major will book 80% of savings if expenses are less than anticipated and the government will get 20%.

Sequestration and spending cuts were expected to adversely impact the performance of the defense behemoths that explicitly provide products and services to U.S. government defense establishments. However, the defense players, like Lockheed, Northrop Grumman Corp. (NOC - Analyst Report) or Raytheon Company (RTN - Analyst Report) seem to be doing well despite the cuts in defense budgets and big-ticket programs.

Lockheed has, in fact, clinched a major share of DoD contracts awarded on Sep 27, 2013. Of the total $10.92 billion worth of DoD contracts, Lockheed sealed more than $4 billion in all.

Lockheed, Northrop and Raytheon presently hold a short-term Zacks Rank #2 (Buy).

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