Northrop's Biggest Foe May Have Been Its PastEric Schine
Tom Jones unquestionably left a vivid mark on Northrop Corp., the company he headed for nearly 30 years. Too vivid, perhaps, for his successor, Kent Kresa. Jones, who ran Northrop with the macho swagger of a fighter ace, reveled in building the fastest and flashiest fighters and bombers that the U. S. Air Force could dream up. In his biggest coup before leaving under a hail of controversy in 1989, Jones piloted his defense contractor past much larger companies to win the Air Force's biggest prize up to that time: the $65 billion B-2 stealth-bomber program.
Along the way, though, Jones also flew Northrop into a dark cloud of cost overruns, bribery charges, and criminal investigations. That legacy may have helped undo Northrop and its partner, McDonnell Dpuglas Corp. (box), on Apr. 23, when the Pentagon picked Lockheed Corp. over Kresa's company to build its new Advanced Tactical Fighter (ATF), a contract that may be worth $75 billion to $100 billion over the next two decades.
SCRAMBLING. The two supersonic stealth fighters, the Air Force admitted, scored almost equally high marks for technology and agility. But Air Force Secretary Donald B. Rice lauded Lockheed, noting with approval the way the Calabasas (Calif.) company "performed in controlling costs and meeting schedules" on its past Pentagon contracts.
For Lockheed and its partners, losing the contract wouldn't have been a staggering blow. It is for Northrop. The Los Angeles-based company could have used the giant contract--which could have meant some $45 billion in new revenues over the next two decades--to reduce its increasingly dangerous reliance on the massive B-2 program. The plane, which accounts for 50% of Northrop's $5.5 billion in sales, is a constant target for congressional budget cutters who disapprove of its $845 million-apiece price tag.
So far, Congress has promised to pay for only 15 B-2s. Now, each year, Kresa faces an annual funding battle: Four more B-2s are on the docket this fall. Congressional opponents already have their knives out. Predicts Representative John R. Kasich (R-Ohio), a member of the House Armed Services Committee: "The B-2 is going to be dead at the end of this year."
Those have to be chilling words to Kresa. For in the wake of the fighter loss, "the most important thing for Northrop is the B-2 and how that program moves forward," he admits. The company has little nonmilitary business to fall back on. Northrop's only commercial diversification to date is building a section of Boeing Corp.'s 747 fuselage. That accounts for only 10% of the company's revenues. Meanwhile, the cost-cutting Pentagon plans to scale back much of Northrop's other important military work in years to come.
STIGMA. That means Kresa, a mild-mannered engineer who took over as CEO in January, 1990, will spend much of the next few years in a marathon lobbying effort. Without the billions of dollars a year the Pentagon spends on the B-2, Northrop's airplane-building business stands to be reduced to subcontracting work on McDonnell Douglas's F/A-18 Navy fighter jet and its Boeing work. Seizing on the success of stealth technology--used in the gulf war on another plane, the F-117A stealth fighter--Kresa has spent much of the winter driving home to Congress the importance of the B-2 in future regional wars.
But Kresa is still fighting the stigma of Northrop's past sorry performance on the B-2 and other projects. Over the past four years, the company has taken $565 million in write-downs on military cost overruns. Among the most serious was $300 million in write-downs for classified programs in late 1989 and early 1990. Just last December, the Air Force stopped funding the company's problem-plagued Tacit Rainbow missile, which would have been worth nearly $4 billion to Northrop. Further problems date back to Jones's efforts to build the F-20 fighter. The company poured more than $1.1 billion into the F-20 between 1980 and 1986, then didn't sell a single plane.
Kresa has done a lot to clean up Northrop's act. To put the Jones era behind it, Northrop last year pleaded guilty to 34 counts of fraud for falsifying test data on two military programs and paid a $17 million fine. And Kresa has succeeded in sprucing up the company's balance sheet. By consolidating its electronics business and by folding its missiles and aircraft-building businesses into one unit, he has reduced debt 30%, to $777 million. Northrop's order backlog is at a near-record $6.4 billion.
'CLOSE CALL.' Kresa believes that Northrop will be able to use the technology developed for its ATF fighter to win new business. "Our people have gained a lot of expertise in advanced avionics and composite materials," he says. "All of that will bode well as we apply it to new and existing programs." But pointing the company in a new direction will be difficult. Northrop's electronics businesses should grow only modestly. And new military business will be hard to come by. Although the Pentagon wants to build a new, stretched version of the F/A-18 Hornet, funding is far from certain. In the meantime, Northrop's F/A-18 work continues to shrink. The company also has its eye on bidding to build the AX, a replacement for the A-12 airplane that the Navy canceled earlier this year. But the AX is at best a distant prospect: Production under that program won't be taking place until well past the year 2000.
The bottom line is that Northrop can't afford to give up on the B-2. Despite congressional opposition to the bomber, Northrop is likely to have the solid backing of President Bush and other political heavyweights. "It's going to be a very close call," says Paul H. Nisbet, an analyst with Prudential Securities Inc. He and other analysts give the program at least a 50-50 chance of survival.
Most analysts believe Northrop's near-term future is solid. Indeed, its share price had been rising for months until the ATF decision. Northrop stock fell 3 1/4 points, to 23 3/4, the day after it lost the ATF competition. But that's still well above the 14-to-18 range it traded in most of last year. "The real question is what Northrop will do for growth in the latter part of the decade," says Wolfgang Demisch, research director with UBS Securities Inc. And the pressure to come up with some answers just got more intense.