Ronald D. Sugar
Chairman and Chief Executive Officer,
Northrop Grumman Corporation
On Thursday, January 24, 2008, Northrop Grumman Chairman and CEO Ronald D. Sugar appeared on the Fox Business Network to discuss the company’s 2007 fourth quarter and year-end financial results. Below is a transcript of the interview.
Liz Claman, co-anchor: Aerospace and defense giant Northrop Grumman – boy, they came out with some numbers. And they came out with some profits that were 10 percent higher year over year.
David Asman, co-anchor: They did, indeed. I believe we have the board of what they're trading at now. The company is known for its B-2 bomber. The actual number was $1.32; the estimate was $1.31, a bit above – and they exceeded Wall Street's expectations, as you can see – predicting more growth in 2008. CEO Ronald Sugar is here now to talk about it. Thank you very much for coming in, Mr. Sugar, appreciate it.
Ronald Sugar: Pleased to be here, David.
Asman: To what do you owe your current success? I hate to put it this way, but is it the fact we are so involved in defensive right now that times are good for you?
Sugar: It turns out that very little of what we're doing has to do with the direct war in Iraq or Afghanistan. But in fact there's a tremendous demand for technology and services for national security. And we don't see that demand abating.
We had a record year in terms of sales, earnings, cash flow. And obviously we're making great progress as we move forward.
Claman: Mr. Sugar, of course I'm sure you've heard about the stimulus package that has been reached in the government, and of course with Congress. How might that affect your business? What do you think about that? This is $150 million--billion chunk of money that would come out of somewhere. And in the meantime, conversely, analysts do expect a longer-term decline in defense spending growth. What do you think of a stimulus package like that? Would it affect your business?
Sugar: Well, Liz, two thoughts: One is that it won't have an immediate effect certainly this year or next on our business. Our contracts are long-term and they're things which we understand going forward which have already been funded and appropriated. However, I will say that anything that keeps the United States economy strong, keeps the economy robust, and minimizes variations in the economy will provide the nation with the resources it needs to defend itself, and we think that's a good thing.
Asman: How are you planning for the immediate future? Do you see a recession coming?
Sugar: You know, it's very difficult for me to see. Certainly in my industry, we do not. We see a very strong demand. The '08 budget for defense has been strong. It was up over the 2007.
The early indication is that the '09 budget, which is going to be presented by the President to Congress next month, is going to call for probably even further increases. So we think that these budgets are going to be driven by national security needs and not so much by immediate fiscal policy issues.
Claman: Mr. Sugar, if there is a stabilizing effect right now going on in Iraq, and we don't have an immediate dramatic war situation going on there, which is going to bring in more money for you in the future? Would it be the military and government contracts or would it be your commercial business? And do you start to turn your attention more to commercial business at this point?
Sugar: Well, Liz, most of our business is government work. It's just not defense. Some of it is other civil, state and local government. And so we see that as an important growing part of our business. But we don't see much exposure to a rapid pullout in Iraq. It doesn't affect our revenue in any meaningful way in the near term.
We do see, however, a tremendous need to recapitalize the planes and the ships and the ground equipment that have been used up and, frankly, are getting quite old in all three of the military services. And I think that'll be the driving factor in the revenues for this company in the next few years.
Asman: Well, you mentioned state governments. Over the past 10 years or so, they've been doing well in terms of getting their budgets in order and running surpluses. But that might not continue with this slowdown, particularly because it affects the homeowners and the local communities. Are you factoring that into your future earnings?
Sugar: Yes, we certainly are mindful of that. A lot of what we do for state and local governments are infrastructure improvements, such as putting in modern information technology systems. And those really need to happen irrespective of the budgets.
Clearly, if there is a reduction in receipts, in tax receipts, at state and local levels, that does affect spending plans. But today Northrop Grumman does not do a very large fraction of business in state and local. It will be growing in the future. But those products are still going to be needed.
Claman: You guys are pretty disciplined about shedding some businesses that didn't quite fit with the core. I'm thinking TRW Auto Parts. Do you look at acquisitions now and say, “What are we looking to get? What will build up the core business?” And what else do you shed?
Sugar: Well, that's a good question, Liz. We've been very, very disciplined in our balance sheet. We are now at the highest credit rating in the company's history and a debt-to-total-capital of 14 percent.
Claman: Good for you.
Sugar: So we have a lot of firepower. But one of the things we've been focusing on in addition to organic investments inside the company is making repurchases of shares. We just announced a $2.5 billion share repurchase program, which our investors very much enjoyed hearing. And we've been raising our dividend.
And we do look at acquisitions. We made three acquisitions this year. They were smaller ones, but they were very niche acquisitions which gave us extremely good capabilities in certain areas that we can multiply the effects of.
So, as we go forward, we'll look at acquisitions, but we're going to continue to be very, very disciplined in what we select.
Asman: Transportation – You guys are into shipping and other industries that involve transportation costs. The price of oil must concern you.
Sugar: You know, it doesn't really very much. What does concern us is the price of oil and jet fuel in terms of operating our military fleets. Certainly the steaming costs for the Navy are important., and that's why we've been working with the Navy on new generations of ships, both nuclear and conventionally powered, which are more efficient, which reduce steaming costs and reduce crew costs, because these ships will be in the Navy's inventory for three, four or five decades from the time we deliver them.
Claman: Mr. Sugar, come back. We really love having you on and we'd appreciate if you make an acquisition, you come and tell us first here on Fox Business
