Northrop Grumman Overrun Reported
Northrop Grumman Corp. faces a 24%, or $140-million, overrun on its contract to produce the third batch of two top surveillance aircraft, according to internal U.S. Air Force documents.
Los Angeles-based Northrop is producing the two Joint STARS aircraft under a $655.9-million contract that runs through January 2001. The fixed-priced contract requires the company to absorb overruns; the company estimates it will cost $796.7 million to complete the job, Air Force documents show.
The Joint STARS aircraft program has lost money since 1997 and no profit is projected through 2000 because of manufacturing problems. Restoring this program to profitability is crucial to Northrop keeping its promise to increase its operating margin to 9% or higher by 2001 from about 6.5% today, Northrop Chairman Kent Kresa told analysts Wednesday in announcing third-quarter earnings.
“The [Air Force] program manager’s office and Northrop acknowledge that it will exhaust all of its profit and realize a substantial internal loss in the Lot III contract,” the third batch of planes, according to a Pentagon program review document prepared last month.
The overrun figure “is not particularly surprising because it’s been clear for some time that the company has been struggling with this program,” said Joseph Nadol, a defense analyst for Donaldson, Lufkin & Jenrette Securities Corp.
On Thursday, Northrop stock rose 13 cents to close at $55 on the New York Stock Exchange.
Any Joint STARS overrun has been factored into Northrop’s earnings-per-share estimate of about $7.30 for 2000, “so I don’t think they will make any additional adjustments,” Nadol said. Even with the Joint STARS problems, Northrop management has been saying in recent weeks that the company is comfortable with $7.30--the upper range of analysts’ consensus estimates, Nadol said.
In the third quarter, Northrop reported a $262-million operating margin, up 10% from $238 million in the year-ago period, and $2.1 billion in sales.
Company spokesman John Vosilla and the Air Force declined to comment on the Joint STARS figures.
