Northrop Grumman Sees Capacity for More Contracts -- Update

By Doug Cameron

Northrop Grumman Corp. has the capacity to bid and deliver on other big upcoming Pentagon contract awards even after securing a huge deal to build a fleet of new bombers, Chief Executive Wes Bush said Wednesday.

Mr. Bush, speaking after Northrop reported a 9% rise in third-quarter profit, also said the world's fifth-largest defense contractor by sales doesn't plan to follow some rivals such as Lockheed Martin Corp. and carve out its services business. A recent restructuring is aimed at speeding product development and reducing costs rather than repositioning the company's portfolio, he added.

Northrop Grumman shares climbed sharply in the wake of the Pentagon's announcement late Wednesday that the company had defeated a team of Boeing Co. and Lockheed Martin to build as many as 100 long-range bombers. Analysts value the program at as much as $80 billion, which would make it likely the largest defense contract for at least the next 10 years.

"We have the resources in place [and] we are ready to get to work," Mr. Bush said on a conference call after Northrop reported its quarterly results, which beat market expectations. The Falls Church, Va., company also boosted its full-year sales and earnings guidance. Mr. Bush declined to comment further on the bomber award, citing its classified nature.

The losing companies are widely expected by analysts to protest the decision and could be briefed on why they lost the deal by the U.S. Air Force as early as Friday, triggering a 10-day window for them to lodge concerns with the Government Accountability Office.

Analysts estimated the bomber deal could add $1 billion or more to Northrop's annual revenue--which reached $24 billion last year--if it successfully navigates any protest. The planes would be produced at its classified facility in Palmdale, Calif.

"We do have significant capacity," said Mr. Bush. He cited the Navy's plans for a new drone and efforts by the Air Force to replace its fleet of aging trainers and surveillance planes as three programs Northrop could still pursue.

Northrop built a test drone for the Navy's carrier-based Uclass program, but lawmakers and military chiefs are still working on requirements for that project.

The company teamed up with the Gulfstream unit of General Dynamics Corp., L-3 Communications Holdings Inc. and others in pursuit of the contract for a new communications plane known as Jstars, for which it faces competition from Lockheed and Boeing. The same trio that fought out the bomber contest is also expected to bid on a contract to build hundreds of new trainer jets.

Mr. Bush also said he has no plans to step down, following the company's recent decision to revive the role of chief operating officer, which some analysts viewed as succession planning.

Defense stocks were broadly ahead of the wider market Wednesday in the wake of upbeat earnings, a potential Pentagon budget deal for 2016 and the bomber award, with only Boeing and Lockheed losing ground.

Northrop shares ended the day up 5.5% at $190.50 apiece.

The company opted to avoid setting a new benchmark for share buybacks after reaching its target of repurchasing a quarter of its outstanding stock over the past three years.

General Dynamics also beat expectations on Wednesday, reporting a 5% rise in third-quarter profit, with its stock gaining 1.6%. L-3, which reports Thursday, gained almost 10% after hiring former Lockheed COO Chris Kubasik to fill the same role. Booz Allen Hamilton Holding Corp., the largest defense services provider, gained 9.6% after forecast-beating quarterly profits.

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

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October 28, 2015 20:28 ET (00:28 GMT)

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