Northrop Grumman Outlook Strengthens with LRS-B Win

by Richard Pettibone, Aerospace & Defense Companies Analyst, Forecast International.

Northrop Grumman secured its position as a military aircraft producer when the U.S. Air Force selected it to produce the next-generation Long Range Strike-Bomber.

At a time when sales have been slowly sliding, the program win breathes new life into the country’s fifth largest defense contractor. Prior to this, the company was ably managing the slowdown in defense spending. The firm embarked on a strategy that entailed increasing program performance, aggressively pursuing new business, reducing cost structures, and aligning its portfolio to match customer spending priorities.

As part of this effort, the company streamlined its operations from four business sectors to three, essentially focused on the aerospace, systems, and services markets. Under the plan, two new sectors will be created by merging elements of the company’s current Electronic Systems, Information Systems and Technical Services sectors.  The new Mission Systems sector is composed of the company’s Electronic Systems sector and the businesses from the current Information Systems sector focused on military and intelligence capabilities. A new Technology Services sector will be formed via a combination of the services portfolio in the Information Systems sector and the current operations of the Technical Services unit.

Along with this change, the company appears to be preparing for a seamless succession of CEOs. Gloria Flach has taken over the COO duties, and this is speculated as being a stepping stone to the CEO’s chair when Wes Bush retires. Such a move would eliminate any transitional difficulties for the company going forward.

With a restructuring underway and a major contract effort set to begin, Northrop Grumman will maintain a position as a combat aircraft producer.  The LRS-B award will boost the firm’s aviation cachet and likely keep its Palmdale facility – where the B-2 was made and serviced – active.  The award makes Northrop Grumman the second largest combat aircraft manufacturer after Lockheed Martin with the F-35.  Boeing’s military aircraft operations diminish with the loss somewhat, as the only current program in its stable is the KC-46 tanker.

A protest of the award is pretty much a given, as it is the only major aircraft procurement for the foreseeable future. And it is valued at over $80 billion – Lockheed Martin has protested for less.  For example, Lockheed Martin is currently protesting the $6.7 billion Joint Light Tactical Vehicle (JLTV) award to Oshkosh. With budgets tight and austerity the new normal, defense firms are going to fight hard for the few big programs that remain.

Edit – As expected, Boeing and Lockheed Martin filed a formal protest on November 9 asking the U.S. Government Accountability Office (GAO) to review the U.S. Air Force’s decision to award the LRS-B to Northrop Grumman.  According to a statement issued by Boeing, the two partners have concluded that the selection process for the LRS-B contract was “fundamentally flawed.” Boeing said that the cost evaluation performed by the U.S. government did not properly reward the team’s proposals “to break the upward-spiraling historical cost curves of defense acquisitions, or properly evaluate the relative or comparative risk of the competitors’ ability to perform, as required by the solicitation.” The GAO has 100 days to rule on the merits of the protest, which would mean that a decision is required by mid-February 2016.

Speaking of which, the T-X trainer program is also coming down to its selection. Over the past year, competitors have shuffled and changed plans, and Northrop Grumman was no exception. In early 2015, Northrop Grumman shocked many observers when it announced it was scrapping plans to offer the Hawk in favor of a brand-new design.  The company changed its strategy so that it could better take advantage of the expected USAF design requirements for the program.  The T-X program will be a fierce competition given the variety of options on offer.

Northrop Grumman has a tough road ahead. Assuming it can hold on to the LRS-B, the difficult work will have just begun. The company will have to ramp up its infrastructure quickly to produce and manage what is sure to be a very complex program.  This is not to say the company cannot do it, as the B-2 program can well attest.  Yet, in these days of budget austerity, will the firm be able to absorb the financial impact of the LRS-B’s formative years and keep a competitive price offering?

Congress is already dealing with the huge cost of the F-35 program.  While a new-generation bomber is needed to replace aging B-1, B-2 and B-52 aircraft, it remains to be seen how much cost creep congressional members will withstand.  Pentagon officials say they are prepared for this and have assigned an acquisition team to protect the project from the kinds of requirement creep that became other programs’ death knell.

Northrop Grumman has always been a consistent and conservative player in the U.S. defense landscape.  With the downturn showing its teeth, Northrop Grumman’s management has carefully planned for the new environment and, so far, is continuing to hit its marks.

The Defense & Aerospace Companies series focuses on worldwide aerospace and defense prime contractors and subcontractors. Concise reports provide data on individual corporations regarding recent mergers, restructurings, and joint ventures, along with a Strategic Outlook that examines the company’s strengths, weaknesses, and opportunities. Also included in each report are financial and industrial segment data, snapshot coverage of major programs, and recent U.S. Department of Defense contract awards.

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