Closing Bell - Manifest Space: World’s Biggest Space Business with Northrop Grumman CEO Kathy Warden 9/14/23

Episode Date: September 14, 2023

The fastest growing defense prime is also home to the largest space business in the world. Northrop Grumman's space systems surged 17% in both Q1 and Q1 -- the combination of 20 companies brought together over time. While 85% of the company's space business is concentrated in national security, the company also does work for civil and commercial space. In a rare interview, Morgan Brennan speaks with CEO Kathy Warden from inside of Northrop Grumman’s mission operations center. 

Northrop Grumman is the fastest-growing defense prime, and its space business is actually the largest in the world. It's powering the contractor's broader growth, too. Sales in the space systems segment surged 17 percent in both the first and second quarters. And the portfolio as it exists today is only about three years old, the combination of 20 companies brought together over time. We are focused on being at the forefront of technology and that has led us to grow the portfolio very rapidly. And what we see today is a broad variety of applications for our products. National security is our core and it will remain our core. There are applications though in civil and commercial and we look to leverage that technology base quite broadly.

Eighty-five percent of Northrop's space business is national security, much of it classified, including the Sentinel program to modernize the nuclear triad's ICBMs and the next-gen interceptor for homeland missile defense. But Northrop also does work for commercial customers. Think satellite communications. There's an emerging space logistics business to service craft and geosynchronous orbit. And for NASA, it's built everything from the James Webb Space Telescope to the Cygnus cargo capsule that's currently attached to the International Space Station. I sat down exclusively with CEO, President, and Chair Kathy Worden

to discuss it all inside Northrop Grumman's Mission Operations Center in Dulles, Virginia, following a bunny suit clad tour of the unclassified facilities, seeing more than a dozen satellites and the next two Cygnus capsules in various stages of production. On this episode, a rare interview with the CEO of one of the biggest aerospace and defense companies in the world. I'm Morgan Brennan, and this is Manifest Space. As America, we might not be actively fighting a war on terror anymore. The policy has shifted, the investment dollars have shifted. It's now much more of a focus on things like near-peer competition with China and the like. We have Russia fighting a war

in Ukraine. How do you think about the geopolitical landscape right now, and what does that mean in terms of the way you're making investments and the types of technologies and capabilities you're looking to bring to the government? It's definitely a complex environment that we're operating in. You noted the investments that China is making in their military buildup and also technology advancements. So in one dimension, we need to keep pace and stay at the forefront of technology advancement. On the other hand, there are adversaries that have lesser capability that also are aggressors, and we need to make sure that we are able to have the capability and capacity to address those threats as well. So in terms of the U.S. and our allies, they are really dealing with a wide variety of

threats right now, and it's our job to make sure they have the tools and technologies they need to be successful. So let's talk a little bit about the role that space plays in all of that, because it is a warfighting domain. We're seeing a lot of growth, Northrop Grumman specifically, double-digit sales growth, it would seem, every quarter. Huge growing business for you. 85% of the portfolio is national security focused,

to the extent you can talk about it, some of these programs and what they mean in terms of those new next-gen capabilities. Well, space is a very exciting environment for us to operate in. It's a challenging environment. There's no doubt that our team, the people, their expertise, and the product lines that we have make it look easy from time to time, but it really is rocket science. And so right now we are focused on being at the forefront of technology,

and that has led us to grow the portfolio very rapidly. And what we see today is a broad variety of applications for our products. National security is our core and it will remain our core. There are applications though in civil and commercial and we look to leverage that technology base quite broadly. And I do want to talk a little bit more about commercial and civil, particularly given the fact that we are sitting in mission control for Cygnus, which is currently attached to the International Space Station.

But first, just a little bit more on national security. You're very heavily involved, and you have multiple contracts for multiple legs of the nuclear triad and modernization of that, including Sentinel, which is the ICBM, the Intercontinental Ballistic Missiles that will replace the Minuteman missiles. I realize it's classified. To the extent you can share an update on that development. Well, Sentinel is an important program for the reasons you note. It is a core of our strategic deterrence as a nation, and we are modernizing it, which includes everything from a new missile to a new command and launch capability. And as a result, we are in the early phases of developing

these pieces, which will ultimately come together and reach initial operating capability toward the end of the decade. It is progressing well, but there's no doubt that supply chain disruption and some of the other challenges that all industrials have faced over the last 12 to 18 months are impacting timelines on the program. So we're working hard with the Air Force in partnership to make sure that we can deliver this important capability for our nation. Yeah, and this capability sits under the Space Systems business, which is part of the reason I bring it up, as does Homeland Missile Defense, so the Next Gen Interceptor. Yes. And that program is important because as we detect foreign missile launches, we need to

be able to intercept them. And Next Gen Interceptor develops new capabilities for being able to more accurately both intercept as well as defeat those missiles. Now, you have a number of contracts with the Space Force and also with the Space accurately both intercept as well as defeat those missiles. Now, you have a number of contracts with the Space Force and also with the Space Development Agency as well, a recent win for another transport batch of satellites for SDA as well. Some of these programs, the tipping point from development to production is NIE, right? Yes, it is. And we really don't think of it being a major point in development to production transition. We think of it as a continuum. So as we are producing,

we want to make sure that we are learning from those experiences. And then the next time we develop a weapon system, those lessons learned on production go into development. And likewise, we think about producibility as we develop. So really, it is a continuum as we move from development to production and then even into maintenance now with digital threads that enable us throughout that whole life cycle. When you talk about maintenance, you also have a space logistics business. Is that what you're referring to or is it different? It is. We do have a space logistics business and it's not like traditional maintenance businesses because you can't reach out and touch a satellite in space with human hands,

but you can with robotic arms and our mission extension vehicles which can help to move a satellite, give it more fuel, all things that help to extend its longevity even though it's not like maintaining a car or an airplane. And you have two of these vehicles on orbit, geosynchronous orbit, and more in the works as well. How big is that opportunity? I think about some of these commercial communication satellites, for example, where maybe they're getting retired not because they're not operating but because they run out of fuel. That's right.

And so in many ways this is part of our sustainability agenda, because those assets are still healthy and have value to add, but just need a simple refuel. And this capability hasn't been available in space prior to our mission extension vehicle that now offers that new life. I have to think that the U.S. government would be particularly, and allies, would be particularly interested in some of those capabilities as well, given the fact. And look no further than Russia's invasion of Ukraine last year, the critical role that space infrastructure plays in the start of any conflict. Absolutely. Space is going to be key in providing not only information that is enabled by space-based communications and sensing, but also as part

of an overall warfighting domain like air, land, sea, and cyberspace have become. So let's talk a little bit more about the commercial side of the business, because I did go through one of the facilities here on this campus, saw something like a dozen satellites that are in various stages of production. The commercial piece of the business, how robust is that? What does the demand look like for that? And how are you thinking about moving forward when the competitive landscape is increasingly

including more startups? Well, our core, as I said, is national security. So when we think about commercial applications, it is where technology is applicable in commercial without a lot of variation from what we would already be investing in, in national security. And so that takes us into certain aspects of commercial market, but not many, because we want to stay true to what we know and how we differentiate, and that is national security. Let's talk a little bit about the civil side, too,

because you've had some pretty incredible feats on that front, whether it's the James Webb Space Telescope, which is literally a time machine in space right now, beaming back incredible pictures that I think no one thought would have been possible not that long ago, or Cygnus, which is attached to the International Space Station, with two more in production actually here at this location. We are incredibly proud of the work the team did on the James Webb Space Telescope. As you know, the science that is coming from that telescope is amazing.

Even people who are astrophysicists who understood what could be explored with a telescope, it is having more impact than any of us could have envisioned. We also are proud to have been servicing the International Space Station for many years and continue to do so with our Cygnus cargo vehicle, as you saw this morning. And that capability is one that will be highly relevant in decades to come as we look at manned space travel and what it takes to create habitats for humans who will dwell in space. So it is just the dawn of a new era with what we're doing in civil space. I mean, that's the perfect lead-in for my next question, which is Halo, the habitat

and logistical outpost. And I realize you're in a quiet period, but last earnings season, it certainly got a lot of attention from investors because it impacted space systems margins. To the extent you can walk through the development process of Halo, and we'll start there. Yeah. Well, Halo is complex in that it is a habitat, but it is tied to the gateway, which is the architecture that NASA is building for taking humans into space and then deploying them to the moon. So as the Gateway architecture evolves, so must Halo. And what we're seeing is that that evolution is still very much in process. So we're working with NASA to make sure that as those changes permeate to Halo's design,

we are working in a way that's smart, that gets us jointly the capability for both the Gateway and the Habitat matured quickly, but in tandem. So that's the process that we're going through and we'll keep our investors informed as we learn more about how much of that impact will be Northrop Grumman and how much is NASA and how we work together to make this program a success. Got it. In terms of Cygnus, you did a launch last month, last time that you're going to use that particular iteration of the Antares rocket, in part because it's made with some Russian and Ukrainian components. You're partnering up with a startup, Firefly, on the new, the next generation. How does it speak to, how do you decide

when to develop something internally and when to partner externally or make an investment externally? It's a multidimensional decision process. One is our long-term strategy. And does that investment fit into the core of our strategy? Or is it an area where a partner may have more aligned aspirations for investment?

The other area that we look at is capability. Is there another company out there who is not only capitalized to invest but has a capability that we think is intriguing and would complement what our engineers are capable of doing? And so that's what we decided with the medium launch vehicle that we needed, that Firefly would be the right partner and that this is an area where Northrop didn't need to fully bear that investment. But by partnering with Firefly, we could get the capability that we need jointly. So just to dig into it a little bit more, in terms of investments or partnerships versus M&A, how do you think about that as well in this current environment? We really focus more on what we need to be able to deliver on our programs,

and a partnership is a good way to start, get to know one another, understand the company, build technology together, and then ultimately that may lead to us wanting to make an investment in that company or an acquisition at some point in time. But we have the ability to work with these companies first and really understand what's under the covers, and I think that serves us well to make good decisions about M&A. I do want to circle back on civil space for just a moment because you have a joint venture with Boeing for some of the future SLS rockets for NASA. The details around that JV, to the extent you can share them and whether there are actually going to be commercial applications or other types of government appetite for this rocket since it is at least right now a $2 billion launch

per vehicle. We're still in the early innings with SLS and understanding what that business model will look like in the long term, how many launches, whether there are other potential applications aside from the NASA Artemis program. And so what I would say is that there's still a lot of evolution to come in both what the joint venture would look like as well as the business model behind it. And we're working with NASA and Boeing to put that together.

A few other questions for you that are not space-related. B-21, big focus of investors right now. A lot of questions about whether there's a possibility of a charge. LRIP, the beginnings of production, is that still on track for Q3? Well, we are really tracking well on the B-21. We continue to feel optimistic about meeting the goals that we've set for the program, including the schedule for first flight. And as we think about how that translates into financials, it is a situation where the B21 performance is something that will serve us well in the long run, and we'll work our way through any interim financial challenges that the program

represents, but it still will be a great capability not only for our nation but our investors over time. With earnings over the summer, you made some news talking about NGAD and the fact that you're not going to be bidding on that program. Why that decision? A number of factors. We look at the program itself and is it one that we feel is core to moving our company forward. Second, we look at whether it's a program that we have a high probability of winning. We look at whether it's a smart investment for us and that often comes down to the risk-reward profile in the program itself, how it is set up for acquisition. And all of those factors combined led us to decide that that program in particular was not one that

we would pursue as a prime. However, we are expected to be involved in the program as a supplier, and we are actively working that. But it doesn't send a message about our commitment to building aircraft. As you know, we, with B-21, are building the first sixth-generation aircraft. We believe we have a lot to offer in that area going forward, and we are keenly set on continuing to be a leader in that space. A lot of focus on the FAXX competition as well. More broadly, defense spending, especially at a time where there's a lot of focus

on the fiscal 2024 budget, what that's going to look like, when we're gonna get it. Does it continue? What are you seeing? And I guess not just in terms of U.S. appetite, but also in terms of allies and what that means for foreign military sales and the like. We are expecting this budget process to have challenges in meeting timely appropriations, but we've seen that before. And to the extent that a continuing resolution is short-lived, meaning gets resolved in this calendar year,

that's something that both the Department of Defense and the industrial base know how to operate under, and I'm confident that we'll be able to do so. Longer term, the question is whether the threat environment, which continues to both elevate and expand, will drive our policymakers to prioritize national security. And we have seen that in recent years, and I see no indication that that commitment is changing. There's been strong bipartisan support for national defense. Are you seeing increased demand for munitions and other types of weapon systems in Ukraine as well? We are, absolutely. And I don't expect that to diminish anytime soon.

But really, that is over and above what the Department of Defense is prioritizing in its budget related to priorities that are long and enduring. We hope that the Ukraine conflict is not long and enduring. But regardless, it has established priority for weapons restockpiling and the like. I have just one more question on all of this, and that is, as you do see analysts actually game out the possibility of an extended continuing resolution, what would that mean for Northrop Grumman?

How are you thinking about that? Are there programs that would be significantly impacted? We don't see a significant impact to any particular Northrop Grumman program, but I will say that it would not be good for national security to have an extended continuing resolution. Our country needs the certainty of a strong deterrence, and that is underpinned by strong bipartisan support for national security and national defense spending. We also need to keep these programs moving at pace. When we can't fund them consistently, they do not move at the pace we all know that they need to for our modernization.

And since schedule is so important for releasing these capabilities, I'm hopeful that our Congress will see that a continuing resolution does nothing but disrupt that. That does it for this episode of Manifest Space. Make sure you never miss a launch by following us wherever you get your podcasts and by watching our coverage on Closing Bell Overtime. I'm Morgan Brennan.