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Takeaway: NOC is the dog that caught two cars with $80B bomber contract and this year's ICBM Tech Maturation downselect. It must focus on execution.

During a very positive Q3 earnings call, NOC CEO Wes Bush announced that Northrop would not respond to the Navy's recent RFP for the first aircraft carrier-based unmanned aircraft system program.  The announcement is a surprise:

  • Northrop's X-47 aircraft has been the prototype used by the Navy since 2011 to initially test UAVs aboard carriers. 
  • Ostensibly, the X-47 informed many of the requirements specified in the RFP for the MQ-25.
  • One would have thought that five years of Navy-funded development experience would have given Northrop some degree of advantage over LMT, BA and General Atomics, the other players in the Navy's ~$2.5B competition.

This is the third major DoD competition that has disappeared from Northrop's sights since it won the B-21 competition over a Boeing-Lockheed team last year.

  • In February of this year, Northrop announced that it would not respond to the Air Force's RFP for a new advanced jet trainer contract known as T-X, valued at $16B.  The award of that contract has been delayed until next May and will come down to LMT, BA or Leonardo DRS. 
  • More recently the Air Force has all but said that it wants to cancel its ~$7B JSTARS competition for the replacement of seventeen aging 707s with specialized radar to pick up moving ground targets.   The Air Force is now looking at a more distributed architecture in a concept that still requires maturation.  NOC's partnership with GD's Gulfstream looked to be the leader in that three way competition with LMT and BA for the prime contract.  NOC's head to head competition with RTN for the separate radar contract is apparently also at risk. 

While not stated directly by CEO Bush, much of the underlying reason for the withdrawal from the dwindling pool of future, open big ticket competitions has to be Northrop's need to focus resources on executing the mammoth B-21 program and on the Tech Maturation contract for the Ground Based Strategic Deterrent (ICBM replacement).  

  • While the terms of the B-21 contract are classified, it is clear that Northrop made a very aggressive bid to win a very complex cost-plus development and fixed price production contract. 
    • Reportedly the Air Force has budgeted as much as 40% above the winning bid for development, implying a perception of high risk and/or potential changes in requirements.  A fixed price production bid for work four to five years from now based on a high risk development contract translates as high risk to both the Air Force and Northrop.
    • Logically, the Northrop bid had to be aggressive if it beat on price a technically-acceptable team consisting of the very hungry Boeing, the world's largest commercial aircraft manufacturer desperate to find work for its military aircraft plant at St Louis, and Lockheed, the world's largest military aircraft manufacturer and the acknowledged expert on stealth technology.
  • The challenges for NOC on the B-21 are clear enough:
    • It must focus its internal resources on keeping the B-21 program. It must ramp up staff quickly and then execute development very efficiently and effectively if it is to make money on its already-submitted, fixed-price production bid four to five years from now and enjoy the promised big payoff over the ensuing 20 years. 
    • While the external (USAF) development resources for the B-21 program seem ample ($2B in FY 2018 growing to $3B in FY 2021) the typical 6-9% margins of a cost-plus type R&D contract are lower than what NOC has enjoyed recently. That combined with the need for robust company investment imply increased strain on future company cash. 
    • While everyone in the pol-mil resource chain seems to love the concept of this B-21 now, remember they also loved the B-2 in the 90's too.  That program ended after only 20 aircraft as unit costs approached $2B (each!).  Senator McCain hates the structure of the contract and losing bidders, Boeing and Lockheed are unlikely tor remain passive. The B-21 is not a risk-free program.
  • GBSD. NOC and BA recently beat out LMT for $350M Tech Maturation contracts to develop the Air Force's ICBM replacement.  This is another large ($18B) development program that could lead to a mammoth ($50B?) procurement contract. Winning the long term ICBM replacement prize will require company focus and investment over the next 18 months without a guaranteed payout. Downselect could occur as soon as two years from now (early FY20).