Northrop Grumman Realigns Sectors -- Update

By Maria Armental

Northrop Grumman Corp. on Wednesday announced a restructuring plan that analysts said could lead to the U.S. defense contractor carving off its government services arm.

The world's sixth largest defense company by revenue also reshuffled its senior management ranks, reinstating the vacant chief operating officer position. The move wasn't meant to signal an immediate succession plan for Chief Executive Wes Bush, according to a person familiar with the situation.

Northrop has been one of the defense industry's star performers its stock price tripling since the start of 2013 when it launched an industry-leading share buyback program.

It has eschewed the industry's recent surge in deal activity, including the planned $9 billion purchase of helicopter maker Sikorsky Aircraft by Lockheed Martin Corp.

However, investors increasingly view Northrop's prospects as tied to the outcome of the upcoming award by the U.S. Air Force of a contract to build a new long-range bomber. Northrop is vying to take the lead in a program estimated by analysts to cost around $90 billion, against a team of Lockheed and Boeing Co.

The bomber deal could be awarded this month, after several delays, and though Mr. Bush had previously said the outcome won't transform the company, analysts said the restructuring plan positions it to meet some of the challenges facing the sector.

Northrop has a big role in the Lockheed-led F-35 fighter, unmanned aerial vehicles and satellite systems, and plans to shrink to three from four business units, combining parts of existing operations into a single mission systems platform. Enlarged aerospace and technical services units complete the lineup, which Northrop said would help it enhance innovation.

The company's decision to cite a push for innovation is notable as senior Pentagon officials have in recent months been highly critical of established defense contractors' abilities to meet the challenge of more sophisticated weapons systems being developed by China and Russia.

Mr. Bush, CEO since 2010, has been one of the most outspoken critics of elements of the push, arguing for companies to decide where to focus investment dollars and questioning whether the technology prowess of Silicon Valley would ever be directed at developing new missile defense systems or fighter jets.

The company said Gloria Flach would become chief operating officer, elevating the veteran executive from her role as head of the electronic systems sector.

Northrop didn't detail any further portfolio restructuring plans or the relative revenue makeup of the business units, with the changes due to take effect at the turn of the year.

However, analysts expect the Pentagon's push for more nontraditional players to enter the market and intense competition for services deals to trigger more changes. Lockheed plans to sell or spin off service-focused units with annual sales of $6 billion.

"Interesting that services is finally being bundled," said one veteran industry analyst of Northrop's move. "Is that a precursor to a spinoff or other strategic action?"

"These changes align more closely with the evolving missions of our customers in the global security markets we serve," said Mr. Bush in a statement.

Northrop is due to report third quarter earnings on Oct. 21.

"I am pleased that we have strong leadership in place and I look forward to working with them to continue to deliver top performance for our shareholders, customers and employees," he said.

Write to Doug Cameron at doug.cameron@wsj.com

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October 14, 2015 22:03 ET (02:03 GMT)

Northrop Grumman (NYSE:NOC)
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