When it comes to Northrop Grumman's (NYSE:NOC) Global Hawk program, it's not just the unmanned aerial vehicle itself that is soaring. A recent government report shows that the Air Force's latest newest surveillance tool is costing a lot more than expected.
The Washington Post reported Tuesday that the Global Hawk program's cost has surged by almost $900 million since 2001. Each drone is now expected to carry a price tag of $123.2 million versus a 2001 projection of $85.6 million. As a result of the higher price, the Air Force has decided to scale back its purchase -- to 51 aircraft rather than 63.
While cost overruns are nothing new in the military contracting arena, they may take on new meaning in the current budgetary context. Over the past several weeks, news stories on the U.S.'s bloated budget deficit and the potential dangers of continued deficit spending have been popping up everywhere. Fiscal sanity seems to be returning to the country, and this portends cuts in spending. The growth in military expenditures seems likely to slow from this point, and that could translate into procurement reductions and program cancellations.
Given the high priority Global Hawk has received from the Air Force, this program certainly does not appear to be in danger. But some of Northrop Grumman's other contracts and those of its competitors, such as Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD), may be increasingly under the gun.
For its part, Northrop Grumman has used the positive cycle of the past few years to strengthen its financial profile. The company whittled down its debt in the first nine months of this year to $5.1 billion from $5.4 billion, and it boosted its cash position to $850 million from $342 million. Still, the days of guns and butter may be coming to a close, and that doesn't bode well for the performance of its stock.
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Fool contributor Brian Gorman is a freelance writer living in Chicago. He does not own shares of any companies mentioned here.
