A few weeks after the Navy released the bid requests for an unmanned aerial refueling tanker, Northrop Grumman [NOC] on Wednesday said it won’t bid for the MQ-25 Stingray program, saying it can’t make a business case for the project that benefits the customer and the company.
“Our assessment of the final RFP, which required a fixed-price incentive bid for this development work, was that we could not put forward an attractive offer to the Navy that would represent a reasonable business proposition for our company,” Wes Bush, Northrop Grumman’s, chairman, president and CEO, said in his scripted remarks during the company’s third quarter earnings call.
Fixed-price development contracts put financial risks on contractors when they run into significant technical challenges as they engineer and develop systems.
The Navy on Oct. 4 issued the Request for Proposal (RFP) for engineering and manufacturing development of the MQ-25 to four companies, Boeing [BA], General Atomics, Lockheed Martin [LMT], and Northrop Grumman.
Later during the earnings call, Bush said that winning a program “feels good” when a contract award is announced, “but if you can’t really execute on it, and deliver on it for your customer and your shareholders, then you’ve done the wrong thing. And we’ve worked hard over a long number of years … to have great clarity around what our objectives are.”
Bush also said that when a customer in the defense arena entrusts a company with providing a solution, “that’s a real bond of trust you cannot afford to break and we really look hard at executability under the terms of the RFPs that come out to make sure we can really execute.” He added that Northrop Grumman’s leadership demands that the company is “clear eyed” about the ability to execute on contracts.
The no-bid on the MQ-25 marks at least the third major program Northrop Grumman has pulled out of under Bush’s tenure. More recently, the company decided not to bid on the Air Force’s T-X aircraft trainer program and in 2010 it dropped from the Air Force’s aerial refueling aircraft program, dubbed KC-X at the time, after first winning the program with its partner European Aeronautic Defence and Space Company, now called Airbus Group.
Boeing successfully protested the initial award and later won over Airbus after Northrop Grumman bowed out.
Bush said Northrop Grumman has submitted a bid for a new Air Force ground surveillance aircraft, called JSTARs, although the service is reviewing the path forward on that program.
Northrop Grumman posted strong third quarter financial results driven by favorable pension adjustments, lower taxes, and work in its business segments related to aircraft, satellites, sensors, and air and missile defense systems.
Net income increased 7 percent to $645 million, $3.68 earnings per share (EPS), from $602 million ($3.35 EPS) a year ago, well above consensus estimates due to the pension tailwind and tower tax rate. Analysts’ had expected earnings of $2.91 per share.
Operating income was up in all three of the company’s segments, led by Aerospace Systems on classified manned aircraft and space programs, the F/A-18E/F fighter, and unmanned systems.
Sales were up 6 percent to $6.5 billion from $6.2 billion a year ago, again driven by Aerospace Systems and to a lesser extent by Mission Systems. Sales were down slightly in Technology Services.
The company raised its sales guidance for the year by close to $500 million to around $25.5 billion, and its earnings outlook to between $12.90 to $13.10 EPS, up from $12.10 to $12.40 previously. An improved pension outlook and better operating performance are behind the rosier earnings guidance.
After winning the Air Force’s new stealth bomber contract last year, the B-21 Raider, the company is only disclosing total backlog at the end of its fiscal years because of the classified nature of the program. In a filing with the Securities and Exchange Commission, Northrop Grumman said that backlog has “declined modestly” so far this year.
Free cash flow in the quarter was a strong $721 million. Total operating margin was 12.9 percent, down 50 basis points.