Northrop Grumman (NYSE: NOC) CEO Wes Bush described to investors Wednesday the aerospace and defense contractor’s moves to focus on affordability and make corporate-level investments to take costs out of programs such as the B-21 bomber in response to slower-growing budgets.
Budgets have not expanded at the same speed as global security issues but agencies remain in the position of making choices on priorities based on funding availability and that makes cost a primary factor in the current contracting environment, Bush said.
“I fully understand where they’re coming from, that things have to become much more affordable. Often times I think people hear that as some sort of great conflict between the defense industrial base and our customer community, it’s not, “ Bush said during Northrop’s third quarter earnings call.
“Our customers are saying they’ve got to be able to get more capability at a lower cost and that’s just the way it is. We all know it doesn’t do much good to fight over the small percentage differences that you can negotiate around profitability.”
Bush spoke to analysts a day after the Government Accountability Office released a heavily-redacted version of its review into the U.S. Air Force‘s selection of Northrop for the B-21 Long Range Strike Bomber contract in October 2015 over a team of Boeing (NYSE: BA) and Lockheed Martin (NYSE: LMT) that subsequently protested the award.
GAO upheld the Air Force’s selection in February and Tuesday’s release of auditors’ review over the B-21 marked the first public opportunity to see any details surrounding the award process for the highly-classified program.
GAO’s decision did not include any cost figures from either competing team but said Northrop™s proposal met the B-21 program’s requirements for low-rate initial production at a price lower than the Boeing-Lockheed team’s bid.
Bush cited cuts to indirect rates, labor costs and pensions reductions as key to Northrop’s B-21 proposal along with corporate investments and efforts to make a design “inherently more affordable to build” than other programs the company pursued.
GAO noted Northrop’s internal research-and-development spend on the design and labor cost reductions in the agency’s decision.
“We were able to bid the program with a very mature design and a disciplined approach that connected returns to investments and really drove on affordability. So it gave us a lot of confidence in our ability to go and execute on the program, ” Bush said.
The Air Force intends for the B-21 to eventually succeed the B-1B and B-52 bombers.
