Inflationary and other macroeconomic pressures are buffeting the next-generation stealth bomber program, but Northrop Grumman [NOC] currently doesn’t expect to incur a loss during the initial production phase of the B-21 Raider, which remains on track for the first low-rate initial production (LRIP) contract this year and first flight later this year, the company said on Thursday.
A loss on the B-21 is “possible” but not “probable,” which is why Northrop Grumman included a discussion of the program and ongoing macroeconomic factors in its annual report filing with the Securities and Exchange Commission (SEC), Dave Keffer, the company’s chief financial officer, said during the company’s fourth quarter earnings call.
“Principally due to the company’s latest estimate of the impact macroeconomic factors may have on our cost to complete the LRIP options, as well as ongoing discussions with our suppliers and our customer, we now believe it is reasonably possible one or more of the LRIP options could be performed at a loss and the range of such loss across the five LRIP options is between $0 and $1.2 billion,” Northrop Grumman says in the SEC filing.
Northrop Grumman and the Air Force in December unveiled the B-21, rolling out the aircraft from a hangar at a plant in Palmdale, Calif. The company won the B-21 contract in 2015, covering the engineering and manufacturing development (EMD) and LRIP phases of the program.
Northrop Grumman in the fourth quarter of 2022 updated its cost estimates for the LRIP phase based on macroeconomic conditions that include inflation, supply chain and labor constraints. The potential loss during LRIP is not factored into current financial results or future guidance.
Despite the cost pressure on the program, the company’s “unit cost projections remain below the government’s independent cost estimate,” Kathy Warden, Northrop Grumman’s chair, president and CEO, said on the call.
She said the program is “performing exceptionally well” and that the government continues to support the purchase of at least 100 B-21s, which are in the program of record.
The Air Force plans to award five LRIP contract lots in this phase of the program expected to run through the rest of the decade, Keffer said.
Any losses on B-21 during LRIP would be spread across the five initial production lots, so the company doesn’t expect any material impact to cash flow in 2023 or over the next three years, Warden said.
Northrop Grumman’s bottom-line in the quarter benefited from a $66 million favorable adjustment on the ongoing EMD phase of the B-21 based on future incentives the company expects to earn on the program. For all of 2022, the program realized $133 million in positive estimated adjustments to complete EMC, the company said.
The EMD phase of the program is cost-type, which means the government reimburses Northrop Grumman for certain unexpected costs. LRIP is primarily fixed-price, which means cost overruns are the responsibility of the company.
To lessen the company’s cost risks, it may seek “equitable adjustment or claims,” it says in the SEC filing. Warden also said that that ongoing efforts to improve business processes, real estate consolidation, and digital initiatives that aid in developing programs and operations will help lower the company’s cost structures over time.
Sales related to the B-21 are expected to increase somewhat in 2023 but not significantly with start of the transition from EMD to LRIP, Keffer said.
The Air Force has close to $1.8 billion to spend in fiscal year 2023 on B-21 LRIP. The service expects delivery of the first bomber in the mid-2020s.