Northrop to eat $1.2B on B-21 program
The CEO says the company has now learned not to underbid on fixed-price contracts.
Northrop Grumman announced a $1.2 billion charge on the B-21 Raider program, confirming that initial production of the stealth bomber won’t be profitable.
It’s “probable” that the first five low-rate initial production lots “will be performed at a loss,” company CEO Kathy Warden told investors Thursday during the company’s earnings call for the final quarter of 2023. The call follows news earlier this week that the Pentagon has given Northrop the green light to start producing the bomber.
The $1.17 billion charge ($1.56 billion pre-tax) on the five initial-production lots is “largely driven by a change in our assumptions regarding funding to mitigate the impact of macro-economic disruptions on the LRIP phase of the program and higher projected manufacturing costs that reflect recent supplier negotiations and our experience in completing the first aircraft,” Warden said.
The Air Force gave Northrop $60 million last year because inflation had reduced the value of the fixed-price contract that governs initial production of the Raider. The company isn’t expecting any more money but they are in “conversations” to get relief on future production lots, Warden said.
Northrop has “updated our assumptions and through conversation and the tight budget environment, we've actually lowered those expectations for inflation relief and so at this point, our focus is on executing the program and finding opportunities in the performance on the program while we continue to work with the government to see if there is any inflation relief opportunity,” she said.
When Northrop bid on B-21, the company did not have a mature design but they still committed to a fixed-price contract—a mistake they won’t repeat, Warden said.
“We have, to my knowledge, not done that again and we have passed on some high-profile programs as a result of the risk balance that the customer puts forward in the [request for proposals] not meeting our standards,” she said.
For example, Northrop bid on the Space Development Agency’s Tranche 2 tracking satellites, but did not receive a contract. The agency awarded L3Harris, Lockheed Martin, and Sierra Space firm fixed-price contracts to build the satellites.
“On some very recent bids, we have taken a different approach in looking at firm fixed-price, where we've either declined to bid when the customer chose to go fixed-price, or we've offered a price in the case of SDA Tranche 2 that we thought was fair and reasonable and the customer decided not to further negotiate with us. These are things that are going to happen and we are going to remain disciplined,” Warden said.
Asked about the recent cost breach on the Sentinel program, the Air Force’s massive effort to replace its intercontinental ballistic missile, Warden remained confident that the program will be supported.
The overrun is due to growing costs with military construction, not with Northrop’s current execution of the engineering and manufacturing development, or EMD, phase of the program, Warden said.
“That's important because our design work in this phase is helping the Air Force to better estimate the cost of those later phases and due to a number of factors of learning, their cost estimates for the later phases have increased, and that's what's driving the Nunn McCurdy breach. As the Air Force has said, growth on the EMD would not have triggered the breach,” Warden said.
The latest cost estimate also reflects inflation since 2020, she said, which has been “significantly higher” than previously expected.