Northrop faces financial flak as cost-cutters prepare to blast B-2.

Northrop faces financial flak as cost-cutters prepare to blast B-2

Report expected to push for cuts in B-2 production

Northrop Corp., the giant defense contractor entangled in legal problems, faces economic gloom from spending cutbacks being considered by U.S. Secretary of Defense Richard Cheney, the Business Journal has learned.

U.S. Air Force orders for Northrop's prize product -- the B-2 Stealth Bomber -- could shrink to a mere 30 from the 132 previously planned, under proposals expected to be presented to Cheney April 1, according to Washington, D.C. sources. Already Cheney has publicly announced he may "modify" the number of B-2s purchased as part of the five-year "Major Program Review" he has ordered for the Pentagon. That review is expected to recommend that only 30 B-2s be built.

Congress will likely receive a B-2 cutback plan with open arms. "The cost of the plane is already worth its weight in gold. We need to cut military spending, and that is a place to start," said Victoria Lion, aide to Sen. Alan Cranston, who has already proposed cutting B-2 production to 15 planes.

Northrop had planned to charge the Pentagon an average of $532 million apiece for the war planes, which are intended to be virtually invisible to Soviet radar.

Instead, the proposed B-2 cutbacks threaten to make Northrop nearly invisible: The Stealth Bomber accounted for about half of Northrop's $5.25 billion of revenues in 1989. At full production it would account for two-thirds of revenues in the 1990s, said Paul Nisbet, top-rated aerospace analyst with New York-based brokerage house Prudential Bache.

Northrop manufactures B-2s at its Palmdale facility, and the secret, black bombers are the only planes the 51-year-old company has in production.

Besides savaging the $70 billion Stealth Bomber program, Cheney is considering a five-year delay in funding production of the stealthy Advanced Tactical Fighter (ATF), a small fighter plane Northrop, in team with McDonnell Douglas, wants to build, sources said.

In reaction to rumors of the impending B-2 bashing, Northrop stock was hammered last week, falling to a seven-year low of $14.875 a share, off from a 52-week high of $28.50 a share.

Short traders -- stock market investors who bet a stock will go down -- are having a field day at Northrop's expense. "The balance sheet of Northrop is awful; technically they are almost bust," said Tom Barton, general partner in Dallas with Feshbach Bros., a well-known short-trading outfit. "The profits and losses are driven by the B-2, and the B-2 doesn't work and is too expensive. We started shorting this stock at $28, and we haven't stopped."

Northrop had a total market value last week of about $700 million.

At Northrop's Century City headquarters, which it sold for $218 million last year and leased back, officials were tightlipped about the possible major gutting of the B-2 program. "To my knowledge, no decision has yet been made," said Tony Contafio, Northrop spokesman. "I am not going to answer `what if' questions."

In Congress last week, from important senators to legislative underlings, sentiment appeared to be brewing against the B-2. "If the $70 billion price tag announced last summer produced sticker shock, I think the American taxpayer will be stupefied when he learns the true cost of the B-2 -- including the operation and support costs, will be about twice that amount," said Sen. William Cohen, a member of the Senate Armed Services Committee.

Mike Lofgren, military legislative liaison for U.S. Rep. John Kasich, Republican member of the House Armed Services Committee, said last week: "We would prefer to stop production....If is fair to say the Air Force knows it is not going to get anywhere near the 132 planes it wants." Lofgren added. "These leaks (about Cheney's possible cuts) indicate that both programs (the ATF and B-2) are in trouble."

Lofgren said that Northrop has been lobbying hard to keep B-2 production at 132 planes, and has lobbied him personally.

Already, Cranston, long a supporter of this state's huge military-industrial complex, has called for halting B-2 bomber production at 15 planes already built or on the assembly lines in Palmdale.

For Northrop, last week's budget scare is just the latest in a string of problems coming out of the nation's capital. The company has been under legal pressure of late for repeated contract problems with the Pentagon, and recently paid $17 million in fines to settle charges of criminal fraud and overcharging on defense contracts.

Northrop still remains the target of three major criminal investigations by grand juries around the country for fraud in testing and overcharging. Additionally, former employees and one current employee have filed a suit against Northrop alleging the company has overcharged the taxpayers $20 billion on the B-2.

Northrop's legal record is also raising doubts in Congress, said a source in the nation's capital last week. "There are people who are nervous about how trustworthy Northrop is on the B-2, which is already controversial enough because of its price," said Kevin Pedraja, deputy policy director for Business Executives for National Security in Washington, D.C. "How logical is it to have a company developing a cutting edge product when there are some questions about their integrity with respect to testing?"

Pedraja added that he thought Cheney would publicly "fall on his sword" in support of the B-2, but privately would cooperate with Congress in cutting production of the radar-evading bomber plane.

PHOTO : Northrop's Stealth Bomber: An expensive and rare plane. If program is cut, only 30 B-2s

PHOTO : may ever get built