Northrop sees defense spending steady in near term

By Andrea Shalal-Esa

WASHINGTON (Reuters) - Northrop Grumman Corp Chief Executive Ron Sugar on Wednesday said U.S. defense spending would likely remain steady for the next few years, but significant changes might occur in fiscal 2011 and 2012, depending on the priorities of the Obama administration.

Given ongoing security threats and the way U.S. defense programs are structured, Sugar said he does not expect any "dramatic reductions" in major weapons programs.

"Nobody has a crystal ball. You may see some rearrangements of what's emphasized and what's not emphasized, but the way this system works, the next couple years are pretty well understood," Sugar said in webcast remarks to a New York conference sponsored by Aviation Week and Credit Suisse.

"There can be significant deviations in the '11, '12 period, depending on what the administration and the Congress decide to do," Sugar said.

He said Northrop is well positioned in areas that should do well in any readjustment of defense priorities, including unmanned aerial vehicles, a sector which he said is expected to grow substantially in coming years.

Another promising area is cybersecurity, Sugar said, citing mounting evidence that many countries are developing cyberwarfare capabilities, and that U.S. industry and government are facing numerous attempted attacks already.

Sugar said new business in the cybersecurity sector could amount to "billions and billions" of dollars of orders, but some of the work would be classified.

"It will be significant. It will be a piece that is growing faster than the other accounts," he said.

Shipbuilding should be steady, but the company is working hard to improve its profitability and margins in that area.

Information technology should remain stable in the defense and intelligence sectors, but state and local work will probably weaken, given the overall economic crisis, he said.

Asked about possible missile defense cuts, Sugar said only about $1 billion of his company's annual revenues come from there, and he does not expect the new administration to make wholesale cuts in this area, especially given the very real and growing threat of missile attacks by enemy states.

Overall, he predicted cuts could amount to around $500 million to $1 billion from the current annual spending level of $8 billion to $9 billion on missile defense, Sugar said.

Sugar said Northrop had an order backlog valued at around $70 billion at the end of the third quarter, about half of which was not yet funded with signed contracts. But he said the company has been cautious about adding any orders to the backlog unless they were fairly certain.

One exception is about $1.5 billion in backlog from a $35 billion contract for new aerial refueling tankers that Northrop won last February. The Pentagon in September said it would cancel the deal and redo the tanker competition, but Northrop said its contract with the Air Force has still not been formally terminated.

Spokesman Randy Belote said the two sides continue to engage in discussions about the issue.

At issue is how much of a termination fee the Air Force would have to pay Northrop for canceling the contract.

(Reporting by Andrea Shalal-Esa, editing by Gerald E. McCormick)