Northrop Grumman CEO believes diversification will pay as Pentagon moves to information-based operations

Sugar Northrop W167


Sugar: bullish about the company's
aerospace offerings

Northrop Grumman is well positioned to meet the US Department of Defense’s growing need to conduct information-based operations using transformational hardware, and Washington’s new Quadrennial Defense Review (QDR) will validate its strategy of recent years, believes Ronald Sugar, the company’s president, chief executive and chairman.

“I think we are going to see a continued emphasis on transformation, intelligence, precision strike and information as future enablers for warfare,” Sugar told Flight International before the release of last week’s QDR document. “Because of the way we are positioned we are pretty well convinced that it’s going to validate our portfolio.”

More than 80% of Northrop’s business comes from its dealings with the US government, primarily through its status as number three supplier to the DoD. The company ended 2005 with sales totalling $30.7 billion and a payroll of around 125,000 employees in 25 countries. Its 30,000 or so projects are divided between four business categories, but no one programme is worth more than 3% of its annual revenues, says Sugar.

“Several years ago we embarked on a series of acquisitions that made us major players in information technology, integration, systems engineering and other related technologies. As builders of manned aircraft, we felt we had no choice.” Last year’s business before deductions was divided into roughly $11 billion for information and services, $9 billion for aerospace, $7 billion for electronics and $5 billion for ships.

Also encompassing spaceflight, the aerospace sector has enjoyed significant growth over the past two years. Sugar believes this situation will remain “reasonably stable” in 2006 before undergoing a longer-term period of renewed expansion. Notable successes include Northrop’s largest single defence contract: a 10-year programme worth up to $1.9 billion to replace the solid-rocket motors that power the US Air Force’s Minuteman III intercontinental ballistic missiles (ICBM). The company last week received the latest, $225 million instalment of the deal, which will extend the nuclear weapon’s availability until at least 2020.

Aerospace content

Sugar says Northrop’s electronics sector also contains significant aerospace-related content, such as fire-control radars for Lockheed Martin’s F-22A Raptor and F-35 Joint Strike Fighter (JSF), the MP-RTIP sensor in development for the USAF’s Northrop E-8C JSTARS surveillance aircraft and airborne electronic-warfare systems.

One of the largest aerospace deals now being contested is to provide NASA’s Crew Exploration Vehicle (CEV) – a manned replacement for the USA’s Space Shuttle. A Northrop/Boeing team and a consortium led by Lockheed will submit responses late next month to a request for proposals for the CEV programme, with a contractor selection due in August. While he is bullish about the quality of his team’s offering, Sugar cautions: “The issue will be, for the next several years, how much of the NASA budget will be dedicated to this, given the enormous cost of maintaining the existing Shuttle? How do you get to the future while you still have to fund the present?”

Sugar believes the USAF’s newly issued call for a conventionally-armed Prompt Global Strike capability (Flight International, 7-13 February) “is right in the centre of what we do really well”. Highlighting Northrop’s experience in designing the air force’s B-2 Spirit stealth bomber and RQ-4 Global Hawk high-altitude, long-endurance unmanned air vehicle and upgrading its ICBM fleet, he says: “We are certainly in this game. The need for a long-range strike system long-term is clear and undeniable. Whether it will be manned or unmanned I don’t know, but technology makes it increasingly likely that an unmanned system could be an answer.”

Another key target for Northrop – and a test of its growing industrial partnerships with European firms – is the USAF’s ongoing need to replace its oldest Boeing KC-135 tankers; the subject of an analysis of alternatives recently completed by Rand. “I believe that there is an urgent need to move on to get these tankers in process, because there is a long process before they can be delivered to the fleet”, says Sugar. Citing increased air force interest in a tanker-transport solution, he says the Airbus A330-based KC-30 on offer in conjunction with EADS North America represents a “very competitive” approach.

Tanker offer

“This is going to be well watched – it’s going to be probably the most heavily scrutinised procurement in history, probably more so than the JSF,” he believes. “We are excited about having a fair and open competition and we want one in which the warfighter and the taxpayer will get the best deal.” Sugar expects the programme to begin with a block purchase of either one or two aircraft types to enable the designs to pass through development and initial engineering before approving later, larger purchases.

Northrop is also continuing to monitor the US Army’s stalled Aerial Common Sensor requirement, following its recent cancellation of a deal with prime contractor Lockheed. Northrop will continue to support the army’s Beech RC-12 Guardrail fleet for the next few years, after which a relaunched programme could offer a follow-on opportunity.

Sugar believes US defence spending – expected to total almost $440 billion for fiscal year 2007 – is likely to continue to undergo single digit growth for the foreseeable future, but cautions that trying to predict a long-term trend over the period of the QDR is dangerous. “Whenever we’ve seen five-year projections in the past the out-year projections have always been wrong, because circumstances change.” However, he adds that “although affordability is an issue, the threats and the challenges in the world are not diminishing”.

Current US export controls – some of which date back to the Cold War period – pose a threat to possible exports of Northrop equipment such as the Global Hawk and are also discouraging co-operation on the JSF project, believes Sugar. The Northrop president intends to use his chairmanship of the US Aerospace Industries Association to address some of the current obstacles and to avert the imposition of additional “Buy America” restrictions, which he believes will damage future trade. “The days of totally vertically integrated national aerospace companies is long past. This is a global supply base and to be competitive we need to rely on global access,” he says.

Referring to a dispute over the transfer of technologies related to the JSF project – in which Northrop is a senior partner – he says: “I think it’s in everybody’s interests to find a way to resolve this. The real question is: ‘Will the programme continue?’ and the answer is: ‘Yes it will’. My hope and my belief is that the alliance of international partners will continue.”

Export challenge

A resolution is also required to Missile Technology Control Regime regulations to enable Northrop to export its Global Hawk to potential users Australia and Japan and develop a proposed Eurohawk variant with EADS for Germany and NATO. “There is a view on the part of our government that it would be good for our close allies to have this kind of capability. If modifications have to be made to the regime, relative to missile characteristics, then I think that will be worked government-to-government,” Sugar says. Describing the pace of NATO’s wider Alliance Ground Surveillance programme as slow, he notes: “We certainly hope to see the opportunity to actually build something for our European allies sooner rather than later.”

Speaking at Northrop’s new London office on 1 February, Sugar said the UK’s Defence Industrial Strategy White Paper of December 2005 “validates our thoughts that this is a good place to do business”. The company has 500 employees at seven locations in the UK, including 20 supporting the Royal Air Force’s Boeing E-3D Sentry airborne early warning aircraft under a major support contract secured last year. “We never had the appropriate senior leadership or the corporate wide view that we now have [in the UK]”, he says.

Northrop is targeting predominantly organic growth for its UK and US operations, although Sugar notes: “When we have an opportunity to acquire something and it makes sense, we’ll go for it.” A former chairman of major Northrop acquisitions Litton Industries and TRW, Sugar has headed the company during its expansion since September 2001. He describes the balance sheet as “very solid” and notes that its strong cash generation – $2.6 billion last year – has enabled it to launch share repurchases totalling $2.5 billion. Its current credit rating, meanwhile is the highest in its history.

“We want to provide a balanced deployment of cash to our shareholders between share buy-backs, dividend increases, reinvestment in our core business and, if appropriate, acquisitions. We are constantly interested in pruning our portfolio to make it as valuable as possible.” The company hopes to achieve sales of $31 billion in 2006.


Source: Flight International