netrashetty
Netra Shetty
Northrop Grumman Corporation (NYSE: NOC) is an American aerospace and defense technology company formed by the 1994 purchase of Grumman by Northrop. The company was the fourth-largest defense contractor in the world as of 2010,[4] and the largest builder of naval vessels. Northrop Grumman employs over 122,000 people worldwide.[5] Its 2007 annual revenue is reported at US$32 billion.[2] Northrop Grumman ranks #61 on the 2010 Fortune 500 list of U.S. industrial companies.[6] It is headquartered in the Century City area of Los Angeles, California.
In January 2010, Northrop Grumman announced plans to move its headquarters to the Washington, D.C. area by 2011,[7] then in April 2010 narrowed the location to Northern Virginia[8] and finally in July 2010 announced its new location would be in Falls Church, Virginia
Northrop Grumman Corporation (NYSE:NOC) is the world’s third largest defense contractor; it manufactures aircraft carriers, submarines, space craft systems, mission-critical computer systems, and wireless communications infrastructure; about 90% of its revenue comes from the U.S. Department of Defense (DoD). The company is currently based out of Los Angeles, CA, but is scheduled to move to Falls Church, VA.[1]
With its success based primarily on American military spending, the country's political climate is the primary driver of Northrop Grumman's growth. Historically, defense spending has been inversely correlated with non-defense spending, as both compete for limited dollars in the budget. The imminent retirement of 78 million of America's citizens and their future demands for Medicaid and Social Security payment does not bode well for the defense industry as a whole.
Since NOC is one of the government's most important defense contractors, the company receives some benefits that civilian industrial manufacturers don't; for example, the company has contracts with the government to mitigate the risks associated with steel prices, so despite higher input costs, NOC's margins are not harshly affected. Northrop Grumman's main competitors include Raytheon Company, Boeing Company, and Lockheed Martin.
Company Overview
Northrop Grumman develops and manufactures a vast array of defense products:
Command and control systems
Missile defense systems
Advanced radar systems
Civil government and public safety information systems
Conventional and nuclear powered naval ships
Satellites for a wide variety of missions
Logistics support and training
High-energy laser systems
Health information systems
Unmanned aerial vehicles
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Business Segments[3]
1.2.1 Aerospace Systems
1.2.2 Electronic Systems
1.2.3 Information Systems
1.2.4 Shipbuilding
1.2.5 Technical Services
2 Trends and Forces
2.1 Shipyard Closure And Contract Uncertainty
2.2 The Vast Majority of Northrop Grumman’s Revenue Stems from the U.S. Government
2.3 Defense Spending Competes for Room with Non-Defense Spending in the Budget; Baby Boomers Have the Potential to Pressure Government Spending in Favor of Non-Defense Spending
2.4 The Cutting-Edge Nature of Many of NOC's Contracts Creates Unpredictable Risk
2.5 Rising Raw Materials Prices Put Pressure on NOC's Margins
2.6 Key Products
3 Competition
4 References
Northrop also is developing the next generation airborne tanker transport, space radar, long-range strike aircraft bomber and the next generation aircraft carrier, destroyer and cruiser.
Business and Financial Metrics
First Quarter 2010 Results[2]
Northrop Grumman reported first quarter 2010 earnings from continuing operations of $462 million, or $1.51 per diluted share, from $366 million, or $1.10 per diluted share, in the first quarter of 2009. First quarter 2010 sales increased 8.5 percent to $8.6 billion from $7.9 billion. The company reported net income of $469 million for the quarter, up 21% from $389 million in the year-ago quarter. The improvement over the prior year reflects a decrease in net pension adjustment, higher segment operating income, and lower unallocated corporate expenses.
Business Segments[3]
Aerospace Systems
Northrop's Aerospace Systems segment is a provider of manned and unmanned aircraft, space systems, missile systems and advanced technologies critical to U.S. security. Key products include Global Hawk, Fire Scout and UCAS-D unmanned aircraft systems; B-2 bomber; James Webb Space Telescope; E-2 Hawkeye; Advanced EHF communications payload; Joint STARS targeting and battle management system; Space Tracking and Surveillance System; Airborne Laser Test Bed; and ICBM Prime Integration Contract.
Electronic Systems
Northrop's Electronic Systems segment develops airborne radar, navigation, electronic countermeasures, precision weapons, airspace management, space payloads, marine and naval systems, communications, biodefense, and government systems. Key products include F-16, F-22 and F-35 active electronically scanned array sensors; airborne early warning and control radars; Ground/Air Task Oriented Radar system; LITENING targeting and sensor system; systems for digital electronic warfare, aircraft missile defense and air defense; integrated bridge systems; situational awareness and fiber-optic gyro-based navigation; and automated postal sorting equipment.
Information Systems
The Information Systems segment develops advanced information solutions for defense, intelligence, civil agencies and commercial customers. Key products include Force XXI Battle Command, Brigade and Below/Blue Force Tracker; Guardrail; Automated Biometric Identification System; Centers for Disease Control Information Technology Services; theater and operational command and control systems; networked communications products; intelligence, surveillance and reconnaissance systems; cyber security solutions; enterprise systems; next-generation networking solutions; and systems integration and integration services.
Shipbuilding
Northrop's Shipbuilding segment is the sole industrial designer and builder of nuclear-powered aircraft carriers in the U.S., one of only two companies that design and build nuclear-powered submarines, one of two companies that are building the Navy’s current fleet of destroyers and a provider of life cycle support for submarines and surface ships. Key products include U.S. Navy Nimitz- and Ford-class nuclear-powered aircraft carriers; Virginia-class attack submarines; surface combatants; amphibious assault ships; U.S. Coast Guard National Security Cutters; nuclear aircraft carrier refueling and overhaul; and fleet and maintenance support. Northrop also owns the contract for the Landing Platform Dock (LPD) class ships, which included the USS New York, which contained pieces of the former World Trade Center. It plans to produce these at Pascagoula, Mississippi facility.[1]
Technical Services
Northrop's Technical Services segment is a supplier of life cycle solutions and long-term technical services for customers globally. Key capabilities include systems support, training and simulation and life cycle optimization and engineering for programs such as KC-10 Extender refueling aircraft logistics support; Nevada Test Site management and operations; U.S. Army Battle Combat Training Program; Hunter unmanned aerial vehicle life cycle support; and biometric capture services for the Department of Homeland Security.
Trends and Forces
Shipyard Closure And Contract Uncertainty
The need, and the budget, for many of the largest ticket items in military spending is far less clear than in decades past. Northrop Grumman announced July 14 that it was closing the Avondale shipyard (located close to New Orleans) and that the company plans to consolidate ship building operations in the Gulf Coast region. More importantly, the company is exploring a possible spin-off of the entire ship building operations. This has all the looks and feel of what many other defense firms would see as a changed military and defense spending environment for years to come.
The company of is targeting operating costs, jobs, and that lovely term “efficiency” as it noted an overcapacity in the sector. The company also admitted that the ship building base will come more in line with new projections for U.S. and allies military spending trends and actual demand.
As part of the Louisiana closure, the Avondale shipyard employs roughly 5,000 workers and the closure is now targeted for 2013. The company noted that its future LPD warships would be built at the Pascagoula, Mississippi facility. The company is also moving its headquarters from Los Angeles to Falls Church, Virginia.
These are the new initiatives of Wesley Bush, the relatively new CEO. Targeting long-term profitability and margins is a definite goal here. The issue here at stake is that such big ticket items such as boats just might not be needed for anything more than replacement at this stage in the game. Many politicians are targeting some of the larger expenses and are trying to target areas that can utilize existing infrastructure.
The company has taken hundreds of million in charges in the last few years over delays, hurricane damage, and other issues brought up by the Navy. While the nuclear powered ship building facilities are not part of this, it would seem that Northrup could ultimately review that as well. However, that is a notion we’ll leave for a later date. The company outlined in this newest ship facility closure that it will have $113 million in consolidation charges, a benefit of $296 million in taxes unrelated to this action, and a net increase to earnings of $0.73 per share.
Whether a buyer or partner will come from the U.S. or from one of the European allies is still not known. The issue we see here is that shipbuilding could find itself in the spending cross-hairs for years and years. Budget cuts and deficit spending as far as the eyes can see are making this fear more of a reality.[1]
The Vast Majority of Northrop Grumman’s Revenue Stems from the U.S. Government
Northrop Grumman depends heavily on Department of Defense (DoD) spending by the U.S Government; about 90 percent of NOC’s revenue comes from products and services sold to the U.S. Government. Changes in the U.S. federal budget, in particular spending on defense, can have adverse affects on Northrop Grumman.
For the 2010 fiscal year, the president's base budget of the Department of Defense rose to $533.8 billion. Adding spending on "overseas contingency operations" brings the sum to $663.8 billion. When the budget was signed into law on October 28, 2009, the final size of the Department of Defense's budget was $680 billion, $16 billion more than President Obama had requested. Adm. Mike Mullen, the chairman of the Joint Chiefs of Staff expected an additional supplemental spending bill, possibly in the range of $40–50 billion, by the Spring of 2010 in order to support the wars in Iraq and Afghanistan. Defense-related expenditures outside of the Department of Defense constitute between $216 billion and $361 billion in additional spending, bringing the total for defense spending to between $880 billion and $1.03 trillion in fiscal year 2010.
U.S. government defense spending. Spending on the Department of Defense makes up the largest component of the U.S. defenes budget[4]
U.S. government budget. Defense spending makes up the largest component of the U.S. government's budget.[5]
Defense Spending Competes for Room with Non-Defense Spending in the Budget; Baby Boomers Have the Potential to Pressure Government Spending in Favor of Non-Defense Spending
With the U.S. Budget experiencing increases in defense spending, there is competition for non-defense (entitlements) spending. Non-defense spending includes programs such as Social Security, Medicare, Medicaid, etc. that eligible people are entitled to. About 77% of the U.S. Budget for 2009 comprised non-defense spending; thanks to the baby-boomers, spending for this part of the budget has increased rapidly over the years, rising 759% from 1965 to 2007, from $169 B to $1.45 T.[6] As the baby boomers retire, non-defense spending will continue to increase and put pressure on other government expenditures, such as defense spending, as this large demographic of about 78 million people starts to retire.[7]
The Cutting-Edge Nature of Many of NOC's Contracts Creates Unpredictable Risk
Many of Northrop Grumman’s contracts contain performance obligations which require innovation and sometimes unproven technologies. In addition, NOC’s products cannot be tested and proven in all situations, and therefore can run into unforeseen problems, like spacecraft launch failure, problems with subcontractor components or services, or a product simply not working the way it's supposed to in a real-life situation.[8] NOC is responsible for cost overrun if a project malfunctions, which has a higher rate of occurring given the cutting-edge nature of the company's technology. The U.S. Coast Guard, for example, pursued a $96.1 M refund for faulty ships made by Northrop Grumman and Lockheed Martin; Northrop Grumman will also lose $360 M for delaying the completion of an amphibious assault ship because of wiring problems and other defects.[9][10]
Rising Raw Materials Prices Put Pressure on NOC's Margins
Northrop Grumman uses a substantial amount of steel, primarily for shipbuilding. Also, its subsidiary, Northrop Grumman Ship Systems Avondale Operations, is a supplier of carbon steel plates and shapes in the Gulf Coast area, providing steel products to the marine, oil field construction, and industrial sector.[11] Steel prices have been rising and continue to increase, from $.38/lb in April 2007 to $.55/lb in April 2008, cutting into NOC’s profit margin.[12] The company has negotiated long-term agreements with steel suppliers to mitigate the possibility of a steel shortage, though the risk associated with such contracts is that a long-term fall in steel prices would lead Northrop Grumman to pay more for steel from the contract than it would for steel from the market. Fortunately, NOC also has contracts with the U.S. Government to mitigate price risk related to its steel purchases, putting its margins in a better position than industrial manufacturers operating in the commercial sector.
Key Products
B2 Bomber
Its low-observable technology, “stealth”, and high aerodynamic efficiency gives the B-2 important advantages over existing bombers. Its “stealth” ability gives it a unique ability to penetrate an enemy’s most sophisticated defense and threaten its most valued targets.[13] It is capable of delivering both conventional and nuclear munitions. Valued at about $1.5 B a unit, the US Government is limited to purchasing only a few.[14] As the principal contractor and manufacturer, Northrop Grumman's income increases considerably as the quantity of B-2 bombers sold to the U.S. Government increases. Northrop is not able to profit from selling this product to foreign governments because the U.S. Government has ownership over the B-2.
KC-45
The KC-45 will provide better air refueling capabilities and will replace the KC-135 Stratotankers. Before take off, the KC-135 has to be set to refuel either Air Force or Navy aircrafts due to their different refueling systems. The KC-45 improves this drawback as it is equipped for both systems; additionally, it can be refueled in flight by other tankers.[15] What sells the product is its defensive system that allows it to enter into dangerous environments which would otherwise have to avoid, like all exisiting tankers must do. Additionally, it can carry cargo, passengers, and medical patients as a secondary role. The initial contract consists of four test aircrafts for $1.5B which can increase up to 179 tanker aircrafts for approximately $35B.[16] The total amount of KC-45 tankers ordered are solely determined by the U.S. Government. Several economic reasons why the U.S. Government favors purchasing this product is that: it will support about 48,000 jobs in the U.S., since no jobs will be sent abroad, and more than 230 companies in 49 states will see benefits.[17].
Nimitz-class Supercarriers (CVN)
The Nimitz-class Supercarriers are 1,092 feet long powered by nuclear reactors that operate for more than 20 years without having to be refueled, and exceeding speeds of 30 knots (56+ km/h). It carries more than 80 combat aircrafts and is built with three eight-cell missile launchers along with other weapon and combat systems.[18][19] It also includes decoys for countermeasures and electronic systems which identifies threats and their directions. The U.S. Government spends about $4.5B for each unit. The U.S. owns only 10 ships to date (CVN68-CVN77). Northrop Grumman does not make too many sales and depends on the U.S. Government to spend on such high profile projects.
Many products that Northrop Grumman develops for the U.S. become property of the U.S. Government. Northrop is not legally allowed to sell any of those products to any other customers, including foreign governments. Therefore, government spending on National Defense and on high profile projects has vast affects on Northrop Grumman. Increases in National Defense spending is highly correlated with the Republican party, while large cuts are correlated with the Democratic party. The party that holds the majority in Congress and the Presidential seat is of paramount importance to Northrop Grumman’s profit margins.
Competition
Northrop Grumman is one of the largest defense contractors. It competes with Lockheed Martin Corporation, The Boeing Company, Raytheon Company, and General Dynamics Corporation, which are among the largest companies in the U.S. defense industry. Its success in the competitive defense industry depends upon its ability to develop and market its products and services, and its ability to gather the resources needed to deliver those products and services with maximum efficiency. NOC is the only U.S. designer and builder of nuclear-powered aircraft carriers and one of two producers of nuclear-powered submarines, the other is the Electric Boat Corporation a a dividion of General Dynamics Corporation. However, it has to compete for most contracts.The U.S. Air Force found NOC’s more advantageous cost/price proposal bid to build the next generation of aerial refueling tankers KC-45 superior to Boeing's in four of the five most important selection criteria.[20] NOC also beat out Motorola for New York City’s contract in building a broadband wireless network.[21]
LEADING GLOBAL DEFENSE CONTRACTORS
COMPANY Country Defense Revenue ($) Total Revenue ($) Defense as % of Total
Lockheed Martin (LMT) US 36,090 39,620 91.1
Boeing Company (BA) US 30,800 61,530 50.1
BAE Systems UK 25,071 26,968 93
Northrop Grumman US 23,649 30,148 78.4
Raytheon Company (RTN) US 19,500 20,291 96.1
General Dynamics (GD) US 18,769 24,063 78
EADS NV (EADSY) Netherlands 13,203 52,019 25.4
L-3 Communications Holdings (LLL) US 9,990 12,477 80.1
Finmeccanica Italy 9,057 16,466 55
United Technologies (UTX) US 7,653 47,829 16
Thales France 6,997 13,599 51.5
KBR (KBR) US 6,400 9,600 66.7
SAIC (SAI) US 5,800 8,300 69.9
General Electric Company (GE) US 4,600 15,400 29.9
Honeywell International (HON) US 4,400 31,600 13.9
Rolls-Royce UK 4,062 14,008 29
ITT Corporation (ITT) US 3,659 7,808 46.9
DCNS France 3,565 3,565 100
Computer Sciences (CSC) US 3,530 14,616 24.2
Alliant Techsystems (ATK) US 3,066 3,565 86
DRS Technologies (DRS) US 2,732 2,821 97
SAFRAN Group France 2,641 14,959 17.7
Saab Åke Sweeden 2,462 3,078 80
Booz Allen Hamilton US 2,449 4,000 61.2
Mitsubishi Heavy Industries Japan 2,354 26,025 9
In January 2010, Northrop Grumman announced plans to move its headquarters to the Washington, D.C. area by 2011,[7] then in April 2010 narrowed the location to Northern Virginia[8] and finally in July 2010 announced its new location would be in Falls Church, Virginia
Northrop Grumman Corporation (NYSE:NOC) is the world’s third largest defense contractor; it manufactures aircraft carriers, submarines, space craft systems, mission-critical computer systems, and wireless communications infrastructure; about 90% of its revenue comes from the U.S. Department of Defense (DoD). The company is currently based out of Los Angeles, CA, but is scheduled to move to Falls Church, VA.[1]
With its success based primarily on American military spending, the country's political climate is the primary driver of Northrop Grumman's growth. Historically, defense spending has been inversely correlated with non-defense spending, as both compete for limited dollars in the budget. The imminent retirement of 78 million of America's citizens and their future demands for Medicaid and Social Security payment does not bode well for the defense industry as a whole.
Since NOC is one of the government's most important defense contractors, the company receives some benefits that civilian industrial manufacturers don't; for example, the company has contracts with the government to mitigate the risks associated with steel prices, so despite higher input costs, NOC's margins are not harshly affected. Northrop Grumman's main competitors include Raytheon Company, Boeing Company, and Lockheed Martin.
Company Overview
Northrop Grumman develops and manufactures a vast array of defense products:
Command and control systems
Missile defense systems
Advanced radar systems
Civil government and public safety information systems
Conventional and nuclear powered naval ships
Satellites for a wide variety of missions
Logistics support and training
High-energy laser systems
Health information systems
Unmanned aerial vehicles
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Business Segments[3]
1.2.1 Aerospace Systems
1.2.2 Electronic Systems
1.2.3 Information Systems
1.2.4 Shipbuilding
1.2.5 Technical Services
2 Trends and Forces
2.1 Shipyard Closure And Contract Uncertainty
2.2 The Vast Majority of Northrop Grumman’s Revenue Stems from the U.S. Government
2.3 Defense Spending Competes for Room with Non-Defense Spending in the Budget; Baby Boomers Have the Potential to Pressure Government Spending in Favor of Non-Defense Spending
2.4 The Cutting-Edge Nature of Many of NOC's Contracts Creates Unpredictable Risk
2.5 Rising Raw Materials Prices Put Pressure on NOC's Margins
2.6 Key Products
3 Competition
4 References
Northrop also is developing the next generation airborne tanker transport, space radar, long-range strike aircraft bomber and the next generation aircraft carrier, destroyer and cruiser.
Business and Financial Metrics
First Quarter 2010 Results[2]
Northrop Grumman reported first quarter 2010 earnings from continuing operations of $462 million, or $1.51 per diluted share, from $366 million, or $1.10 per diluted share, in the first quarter of 2009. First quarter 2010 sales increased 8.5 percent to $8.6 billion from $7.9 billion. The company reported net income of $469 million for the quarter, up 21% from $389 million in the year-ago quarter. The improvement over the prior year reflects a decrease in net pension adjustment, higher segment operating income, and lower unallocated corporate expenses.
Business Segments[3]
Aerospace Systems
Northrop's Aerospace Systems segment is a provider of manned and unmanned aircraft, space systems, missile systems and advanced technologies critical to U.S. security. Key products include Global Hawk, Fire Scout and UCAS-D unmanned aircraft systems; B-2 bomber; James Webb Space Telescope; E-2 Hawkeye; Advanced EHF communications payload; Joint STARS targeting and battle management system; Space Tracking and Surveillance System; Airborne Laser Test Bed; and ICBM Prime Integration Contract.
Electronic Systems
Northrop's Electronic Systems segment develops airborne radar, navigation, electronic countermeasures, precision weapons, airspace management, space payloads, marine and naval systems, communications, biodefense, and government systems. Key products include F-16, F-22 and F-35 active electronically scanned array sensors; airborne early warning and control radars; Ground/Air Task Oriented Radar system; LITENING targeting and sensor system; systems for digital electronic warfare, aircraft missile defense and air defense; integrated bridge systems; situational awareness and fiber-optic gyro-based navigation; and automated postal sorting equipment.
Information Systems
The Information Systems segment develops advanced information solutions for defense, intelligence, civil agencies and commercial customers. Key products include Force XXI Battle Command, Brigade and Below/Blue Force Tracker; Guardrail; Automated Biometric Identification System; Centers for Disease Control Information Technology Services; theater and operational command and control systems; networked communications products; intelligence, surveillance and reconnaissance systems; cyber security solutions; enterprise systems; next-generation networking solutions; and systems integration and integration services.
Shipbuilding
Northrop's Shipbuilding segment is the sole industrial designer and builder of nuclear-powered aircraft carriers in the U.S., one of only two companies that design and build nuclear-powered submarines, one of two companies that are building the Navy’s current fleet of destroyers and a provider of life cycle support for submarines and surface ships. Key products include U.S. Navy Nimitz- and Ford-class nuclear-powered aircraft carriers; Virginia-class attack submarines; surface combatants; amphibious assault ships; U.S. Coast Guard National Security Cutters; nuclear aircraft carrier refueling and overhaul; and fleet and maintenance support. Northrop also owns the contract for the Landing Platform Dock (LPD) class ships, which included the USS New York, which contained pieces of the former World Trade Center. It plans to produce these at Pascagoula, Mississippi facility.[1]
Technical Services
Northrop's Technical Services segment is a supplier of life cycle solutions and long-term technical services for customers globally. Key capabilities include systems support, training and simulation and life cycle optimization and engineering for programs such as KC-10 Extender refueling aircraft logistics support; Nevada Test Site management and operations; U.S. Army Battle Combat Training Program; Hunter unmanned aerial vehicle life cycle support; and biometric capture services for the Department of Homeland Security.
Trends and Forces
Shipyard Closure And Contract Uncertainty
The need, and the budget, for many of the largest ticket items in military spending is far less clear than in decades past. Northrop Grumman announced July 14 that it was closing the Avondale shipyard (located close to New Orleans) and that the company plans to consolidate ship building operations in the Gulf Coast region. More importantly, the company is exploring a possible spin-off of the entire ship building operations. This has all the looks and feel of what many other defense firms would see as a changed military and defense spending environment for years to come.
The company of is targeting operating costs, jobs, and that lovely term “efficiency” as it noted an overcapacity in the sector. The company also admitted that the ship building base will come more in line with new projections for U.S. and allies military spending trends and actual demand.
As part of the Louisiana closure, the Avondale shipyard employs roughly 5,000 workers and the closure is now targeted for 2013. The company noted that its future LPD warships would be built at the Pascagoula, Mississippi facility. The company is also moving its headquarters from Los Angeles to Falls Church, Virginia.
These are the new initiatives of Wesley Bush, the relatively new CEO. Targeting long-term profitability and margins is a definite goal here. The issue here at stake is that such big ticket items such as boats just might not be needed for anything more than replacement at this stage in the game. Many politicians are targeting some of the larger expenses and are trying to target areas that can utilize existing infrastructure.
The company has taken hundreds of million in charges in the last few years over delays, hurricane damage, and other issues brought up by the Navy. While the nuclear powered ship building facilities are not part of this, it would seem that Northrup could ultimately review that as well. However, that is a notion we’ll leave for a later date. The company outlined in this newest ship facility closure that it will have $113 million in consolidation charges, a benefit of $296 million in taxes unrelated to this action, and a net increase to earnings of $0.73 per share.
Whether a buyer or partner will come from the U.S. or from one of the European allies is still not known. The issue we see here is that shipbuilding could find itself in the spending cross-hairs for years and years. Budget cuts and deficit spending as far as the eyes can see are making this fear more of a reality.[1]
The Vast Majority of Northrop Grumman’s Revenue Stems from the U.S. Government
Northrop Grumman depends heavily on Department of Defense (DoD) spending by the U.S Government; about 90 percent of NOC’s revenue comes from products and services sold to the U.S. Government. Changes in the U.S. federal budget, in particular spending on defense, can have adverse affects on Northrop Grumman.
For the 2010 fiscal year, the president's base budget of the Department of Defense rose to $533.8 billion. Adding spending on "overseas contingency operations" brings the sum to $663.8 billion. When the budget was signed into law on October 28, 2009, the final size of the Department of Defense's budget was $680 billion, $16 billion more than President Obama had requested. Adm. Mike Mullen, the chairman of the Joint Chiefs of Staff expected an additional supplemental spending bill, possibly in the range of $40–50 billion, by the Spring of 2010 in order to support the wars in Iraq and Afghanistan. Defense-related expenditures outside of the Department of Defense constitute between $216 billion and $361 billion in additional spending, bringing the total for defense spending to between $880 billion and $1.03 trillion in fiscal year 2010.
U.S. government defense spending. Spending on the Department of Defense makes up the largest component of the U.S. defenes budget[4]
U.S. government budget. Defense spending makes up the largest component of the U.S. government's budget.[5]
Defense Spending Competes for Room with Non-Defense Spending in the Budget; Baby Boomers Have the Potential to Pressure Government Spending in Favor of Non-Defense Spending
With the U.S. Budget experiencing increases in defense spending, there is competition for non-defense (entitlements) spending. Non-defense spending includes programs such as Social Security, Medicare, Medicaid, etc. that eligible people are entitled to. About 77% of the U.S. Budget for 2009 comprised non-defense spending; thanks to the baby-boomers, spending for this part of the budget has increased rapidly over the years, rising 759% from 1965 to 2007, from $169 B to $1.45 T.[6] As the baby boomers retire, non-defense spending will continue to increase and put pressure on other government expenditures, such as defense spending, as this large demographic of about 78 million people starts to retire.[7]
The Cutting-Edge Nature of Many of NOC's Contracts Creates Unpredictable Risk
Many of Northrop Grumman’s contracts contain performance obligations which require innovation and sometimes unproven technologies. In addition, NOC’s products cannot be tested and proven in all situations, and therefore can run into unforeseen problems, like spacecraft launch failure, problems with subcontractor components or services, or a product simply not working the way it's supposed to in a real-life situation.[8] NOC is responsible for cost overrun if a project malfunctions, which has a higher rate of occurring given the cutting-edge nature of the company's technology. The U.S. Coast Guard, for example, pursued a $96.1 M refund for faulty ships made by Northrop Grumman and Lockheed Martin; Northrop Grumman will also lose $360 M for delaying the completion of an amphibious assault ship because of wiring problems and other defects.[9][10]
Rising Raw Materials Prices Put Pressure on NOC's Margins
Northrop Grumman uses a substantial amount of steel, primarily for shipbuilding. Also, its subsidiary, Northrop Grumman Ship Systems Avondale Operations, is a supplier of carbon steel plates and shapes in the Gulf Coast area, providing steel products to the marine, oil field construction, and industrial sector.[11] Steel prices have been rising and continue to increase, from $.38/lb in April 2007 to $.55/lb in April 2008, cutting into NOC’s profit margin.[12] The company has negotiated long-term agreements with steel suppliers to mitigate the possibility of a steel shortage, though the risk associated with such contracts is that a long-term fall in steel prices would lead Northrop Grumman to pay more for steel from the contract than it would for steel from the market. Fortunately, NOC also has contracts with the U.S. Government to mitigate price risk related to its steel purchases, putting its margins in a better position than industrial manufacturers operating in the commercial sector.
Key Products
B2 Bomber
Its low-observable technology, “stealth”, and high aerodynamic efficiency gives the B-2 important advantages over existing bombers. Its “stealth” ability gives it a unique ability to penetrate an enemy’s most sophisticated defense and threaten its most valued targets.[13] It is capable of delivering both conventional and nuclear munitions. Valued at about $1.5 B a unit, the US Government is limited to purchasing only a few.[14] As the principal contractor and manufacturer, Northrop Grumman's income increases considerably as the quantity of B-2 bombers sold to the U.S. Government increases. Northrop is not able to profit from selling this product to foreign governments because the U.S. Government has ownership over the B-2.
KC-45
The KC-45 will provide better air refueling capabilities and will replace the KC-135 Stratotankers. Before take off, the KC-135 has to be set to refuel either Air Force or Navy aircrafts due to their different refueling systems. The KC-45 improves this drawback as it is equipped for both systems; additionally, it can be refueled in flight by other tankers.[15] What sells the product is its defensive system that allows it to enter into dangerous environments which would otherwise have to avoid, like all exisiting tankers must do. Additionally, it can carry cargo, passengers, and medical patients as a secondary role. The initial contract consists of four test aircrafts for $1.5B which can increase up to 179 tanker aircrafts for approximately $35B.[16] The total amount of KC-45 tankers ordered are solely determined by the U.S. Government. Several economic reasons why the U.S. Government favors purchasing this product is that: it will support about 48,000 jobs in the U.S., since no jobs will be sent abroad, and more than 230 companies in 49 states will see benefits.[17].
Nimitz-class Supercarriers (CVN)
The Nimitz-class Supercarriers are 1,092 feet long powered by nuclear reactors that operate for more than 20 years without having to be refueled, and exceeding speeds of 30 knots (56+ km/h). It carries more than 80 combat aircrafts and is built with three eight-cell missile launchers along with other weapon and combat systems.[18][19] It also includes decoys for countermeasures and electronic systems which identifies threats and their directions. The U.S. Government spends about $4.5B for each unit. The U.S. owns only 10 ships to date (CVN68-CVN77). Northrop Grumman does not make too many sales and depends on the U.S. Government to spend on such high profile projects.
Many products that Northrop Grumman develops for the U.S. become property of the U.S. Government. Northrop is not legally allowed to sell any of those products to any other customers, including foreign governments. Therefore, government spending on National Defense and on high profile projects has vast affects on Northrop Grumman. Increases in National Defense spending is highly correlated with the Republican party, while large cuts are correlated with the Democratic party. The party that holds the majority in Congress and the Presidential seat is of paramount importance to Northrop Grumman’s profit margins.
Competition
Northrop Grumman is one of the largest defense contractors. It competes with Lockheed Martin Corporation, The Boeing Company, Raytheon Company, and General Dynamics Corporation, which are among the largest companies in the U.S. defense industry. Its success in the competitive defense industry depends upon its ability to develop and market its products and services, and its ability to gather the resources needed to deliver those products and services with maximum efficiency. NOC is the only U.S. designer and builder of nuclear-powered aircraft carriers and one of two producers of nuclear-powered submarines, the other is the Electric Boat Corporation a a dividion of General Dynamics Corporation. However, it has to compete for most contracts.The U.S. Air Force found NOC’s more advantageous cost/price proposal bid to build the next generation of aerial refueling tankers KC-45 superior to Boeing's in four of the five most important selection criteria.[20] NOC also beat out Motorola for New York City’s contract in building a broadband wireless network.[21]
LEADING GLOBAL DEFENSE CONTRACTORS
COMPANY Country Defense Revenue ($) Total Revenue ($) Defense as % of Total
Lockheed Martin (LMT) US 36,090 39,620 91.1
Boeing Company (BA) US 30,800 61,530 50.1
BAE Systems UK 25,071 26,968 93
Northrop Grumman US 23,649 30,148 78.4
Raytheon Company (RTN) US 19,500 20,291 96.1
General Dynamics (GD) US 18,769 24,063 78
EADS NV (EADSY) Netherlands 13,203 52,019 25.4
L-3 Communications Holdings (LLL) US 9,990 12,477 80.1
Finmeccanica Italy 9,057 16,466 55
United Technologies (UTX) US 7,653 47,829 16
Thales France 6,997 13,599 51.5
KBR (KBR) US 6,400 9,600 66.7
SAIC (SAI) US 5,800 8,300 69.9
General Electric Company (GE) US 4,600 15,400 29.9
Honeywell International (HON) US 4,400 31,600 13.9
Rolls-Royce UK 4,062 14,008 29
ITT Corporation (ITT) US 3,659 7,808 46.9
DCNS France 3,565 3,565 100
Computer Sciences (CSC) US 3,530 14,616 24.2
Alliant Techsystems (ATK) US 3,066 3,565 86
DRS Technologies (DRS) US 2,732 2,821 97
SAFRAN Group France 2,641 14,959 17.7
Saab Åke Sweeden 2,462 3,078 80
Booz Allen Hamilton US 2,449 4,000 61.2
Mitsubishi Heavy Industries Japan 2,354 26,025 9