Defense Budget Doesn’t Alarm Northrop
As one of the nation’s largest so-called pure-play defense companies, Northrop Grumman Corp. has been buoyed by the biggest military buildup in decades.
Once known chiefly for building the B-2 stealth bomber, Northrop has broad interests in virtually every aspect of the military. It’s the nation’s largest builder of military ships, for instance, including nuclear-powered aircraft carriers and submarines. Also on its agenda are unmanned aircraft and spy satellites. About 90% of its revenue comes from the federal government.
So when the White House said last month that it wanted to curtail defense spending, investors wondered if the boom was over for Northrop. Chairman and Chief Executive Ronald D. Sugar recently sat down at the company’s headquarters in Century City to talk about the prospects.
Question: How does the defense budget look?
Answer: There is some good news in it. It appears that defense spending will continue to increase, albeit at a slower rate, and the near-term effects on our ship business are not going to be traumatic.
Q: How can that be when the White House wants to cut purchases of your aircraft carriers and destroyers?
A: Keep in mind two things. Shipbuilding business represents about 20% of [Northrop’s $30 billion in annual revenue]. And no single program generates more than 3% of the revenues. Secondly, the changes in spending are largely in the [latter part of this decade].
Q: What about plans to curtail submarine building?
A: One submarine per year is the current plan. The question has been when we would go to two a year. I don’t think there is any discussion about stopping production of submarines. I think we’ll continue [production at] one per year for the next several years.
Q: The Cold War is long over. Why do we need submarines?
A: Our potential adversaries are increasing their number of submarines. While we don’t see too many nuclear submarines we see very capable diesel submarines that can remain submerged for a month at a time. They run very quietly. They can operate in their waters very effectively, whereas we have to be in the blue waters and go everywhere.
Q: What was the “good news” in the budget?
A: We liked the increased emphasis on ISR [intelligence, surveillance and reconnaissance] and space systems, and restrictive programs we can’t talk about. In ISR we’re well positioned. If you can think about [the] emphasis on intelligence and intelligence gathering, we have opportunities in that role.
Q: Is that a good thing for Southern California?
A: We’ll probably hire 3,000 people with a net gain of about a thousand new jobs this year. They’ll be in Redondo Beach, El Segundo and Palmdale.
Q: Space is getting a lot of focus in the budget. What’s the impact on Northrop?
A: Congress will have to make the decision on the programs, but the budget has a strong plan to move out quickly on space-based radar [systems]. That [research] is done in Redondo Beach. And we’re developing the sensors for SIBRS-High [infrared detection satellites] and there has been very significant progress on that last year. We’re moving right along on that program. That’s done in Azusa.
Q: The next big aircraft competition is likely to pit Northrop and Boeing to build unmanned combat vehicles, but Boeing seems already to be ahead with test flights of its X-45A plane.
A: Yes, they are ahead in terms of their prototype X-45, but ... keep in mind while they were receiving funding on the X-45 program, we were actually in production of [the] Global Hawk [unmanned spy plane]. We have a lot of experience with unmanned aircraft. It’s going to be a long marathon.
Q: Will there be any plans to build more B-2 stealth bombers?
A: I think that’s unlikely. So what we’ll look at is continuing to update and modernize them. Over time, there will be a longer-range issue of what’s going to be the nation’s long-range strike requirement. Ideas there go everywhere from refueling short leg planes to unmanned B-2s to suborbital hypersonic vehicles.
Q: Europe’s largest defense contractor wants to partner with a U.S. firm to bid on a competition to build aerial refueling tankers for the Air Force. Is Northrop interested?
A: If it is determined that there is going to be a tanker program, it will probably be a very significant one, and that would be something that we would obviously want to have a hard look at.
Q: Sounds like you’re confident defense spending won’t wane anytime soon?
A: You tell me what the threat will be in 2010 and I’ll tell you if there will be a crunch. If peace breaks out then we’ll downsize and right-size the industry appropriately. If you tell me the world is going to continue to be dangerous, then I’d say there is a good chance we’ll have a defense budget with a lot of work to do. Wars and threats won’t disappear; they’ll just take different forms.
