Northrop Grumman Gets Defensive

This is a partial transcript from "Your World with Neil Cavuto," February 2, 2005, that was edited for clarity.

NEIL CAVUTO, HOST: Northrop Grumman (NOC) is also benefiting from a boost in defense spending — profits rising 31 percent, in line with estimates. Revenue up 10 percent. The stock picking up about one percent.

With us now from Los Angeles, Dr. Ron Sugar. Dr. Sugar is Northrop Grumman's chairman and CEO.

Doctor, good to have you back.

RONALD SUGAR, CHMN. & CEO, NORTHROP GRUMMAN: Good to be back, Neil.

CAVUTO: The wind at your back obviously has been increased interest in defense related spending. I wonder how long it continues. What do you think?

SUGAR: Well, certainly, we have seen a great year in '04. We have projected revenues and earnings for '05, which show continuing growth.

You know, if the world were getting safer, then I think that the projections would be down over time. Unfortunately for all of us, we're not seeing that. So, I think over time, depending on the threat, we're going to see continued interest and strength in defense spending.

CAVUTO: The president is expected, Ron, as you know, tonight, to outline what he meant in his inaugural address about securing freedom across the world. Many read into that military implications. Do you?

SUGAR: Well, obviously, the United States is a great power. We have important obligations around the world. Key to that is our ability to project power when we need to. Obviously, it has to be used under the control of diplomatic means.

But certainly, our job is to make sure that the nation has the best equipment and, of course, we want to make sure that the folks are trained extremely well.

CAVUTO: All right, now, we're getting mixed reads on how some of you defense guys are doings, from Boeing (BA) and General Dynamics (GD) and Lockheed Martin (LMT).

Is there a sense that you all can't benefit here? That we're going to be selective and fine-tuning in our defense procurement, even for the $80 billion that the president is going to call for Iraq for this year? What do you make of that?

SUGAR: Well, first of all, the $80 billion for Iraq is largely not going to go to defense contractors as much as it is to expenses to pay for the ongoing daily costs of the war.

If you look out over time, there has been talk of reducing the rate of growth of the defense budget. We've read a lot about so-called defense cuts. What we're really seeing is reductions in the rate of growth of spending. And what...

CAVUTO: What would they be? I've heard that, as well. I'm sorry to jump on you there, but if we've been running out a 6-8 percent clip, what are we going to run at more: 1.5 percent to three percent? What?

SUGAR: Well, it's hard to make a projection on that. I think if you look at the president's own budget, and we've not seen it. February 7, we'll see it. I think we're looking at mid single digits in terms of growth rate over the next five years or so, as opposed to mid- to high single digits.

And fundamentally, what's going to happen is that each year the Congress is going to make decisions in appropriating money. The most important decision will be what the Congress does this fall when it appropriates the '06 money. Beyond that, it's all plans; it's not appropriated money.

CAVUTO: There was an Iraqi minister this week, sir — I'm sure you remember it — saying after the elections, and they seemed to go well, maybe American troops can be out of there in 18 months. That was disavowed by other Iraqi officials, as it was, and those in the White House.

What do you make of that possibility that we're out of there sooner than earlier thought?

SUGAR: You know, I think the real question is how to reduce the number of casualties that we and the Iraqi people face. We have been in the Balkans and Bosnia and other places for years and years. In fact, American forces are deployed around the world in various places. We've been no Korea for 50 years.

I think it's not so much a matter of are American forces present, as much as a matter are our folks taking casualties? And that clearly is something you want to all get under control.

CAVUTO: And that's something that you see happening now?

SUGAR: Well, we certainly hope so. You know, it's hard for me to predict. Obviously, we're all hoping for improved stabilization in Iraq and doing everything we can to make sure the folks we have over get everything they need to do it.

CAVUTO: Very quickly, Ron, while I have you here, the Federal Reserve hiked interest rates again. They seem to indicate in their minutes, maybe you're better at reading the minutes than I am — I don't understand a word they're saying — but they seemed to hint that they're going to have a lot more hikes...

SUGAR: On the one hand.

CAVUTO: A lot more hikes as the year ensues. What does that mean to you?

SUGAR: You know, it doesn't mean a whole lot to the business that we're in here at Northrop Grumman. We're much more keyed to the real and perceived threat that the nation has to gear up to, and the expenditures that have to be put there.

Clearly, if we were in a commercial economy situation, we'd be much more closely attuned to interest rate hikes.

CAVUTO: OK. Ron Sugar. Thank you, sir. Always appreciate it.

SUGAR: Thank you, Neil. Glad to be here.

CAVUTO: Ron runs Northrop Grumman Corporation.

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