How the numbers add up behind the Northrop-Orbital combo

Northrop Grumman has heavily touted the opportunity to expand its space footprint through the pending acquisition of Orbital ATK announced last month as new data sheds further light on the added scale this newer and larger Northrop will have.

The combined company becomes the fifth-largest player in the space vehicles segment overnight, according to a report posted Wednesday by public sector-focused big data and analytics firm Govini.

When you take the California Institute of Technology out of the mix, the Northrop-Orbital entity moves up a notch and becomes the fourth-largest space vehicle contractor in the private sector behind Lockheed Martin, Boeing and their 50-50 United Launch Alliance joint venture.

“Lockheed and Boeing have been the dominant players in the launch and space vehicle market for some time and there’s a lot of contention from commercial players like SpaceX and Blue Origin,” Govini’s director of analytics and professional services Matt Hummer told me.

Northrop is in turn “making a play to build out the full capability in space” and gain leverage in adjacent markets like missiles and munitions, Hummer said.

Govini’s look under the hood shows that space vehicles accounted for 37 percent of Orbital’s average of $2.2 billion in unclassified federal prime revenue for fiscal years 2013-17.

Of course, that is the data we can see. It does not include classified activity, which Northrop has signaled is growing and particularly in the space domain. Hummer told me there are “a lot of classified dollars” in the Air Force, where Northrop has a strong space footprint.

Nearly all of Orbital ATK’s space vehicle contract obligations are from NASA, according to Govini’s research. “Northrop’s existing footprint at the Air Force could bring that capability into (NASA),” Hummer told me.

This comes as Northrop continues to emphasize tighter discipline in the programs it pursues. Bush announced in Northrop’s third quarter earnings call Wednesday the company had dropped out of the Navy’s MQ-25 unmanned aerial tanker competition and shed further light on how that disciplined approach plays out in government IT.

Bush also said then that Northrop’s focus “on really big things in space” will be aided by Orbital ATK’s portfolio of “smaller… more agile response capabilities.”

For instance, Orbital manufactures launch vehicles and solid rocket boosters for NASA. “The Orbital ATK platform gives (Northrop) that booster call," Hummer told me.

Then there is the opportunity for Northrop to have a strong presence in the U.S. military’s nuclear modernization efforts. Govini estimates the Pentagon will have to spend $350 billion over 10 years to modernize its nuclear triad: land-based intercontinental ballistic missiles, strategic bombers and submarine-launched missiles.

Guided missiles accounted for 14 percent of Orbital ATK’s sales in fiscal years 2013-17, according to Govini. Lockheed Martin and Raytheon have collectively captured 80 percent of guided missile spending in that time frame but Northrop’s move is a “serious play for that as well,” Hummer said.

But perhaps the biggest contributor to Northrop’s post-close financial performance will be Orbital ATK’s “high-growth, high-margin” munitions business as the report describes.

This is key to how Northrop is paying for Orbital ATK: $7.8 billion in cash financed with both debt and cash on hand, plus the assumption of $1.4 billion in Orbital ATK’s long-term debt. Northrop is issuing $8.25 billion in debt to help pay for the deal.

Govini backs Orbital ATK’s munitions business to contribute cash flow that “will bolster servicing this debt.” Orbital ATK captured almost $6 billion in fiscal 2013-17 munitions money at almost 49.1 percent of its overall capture in that time frame.

“This cash cow finances the debt service Northrop is going to take on,” Hummer told me.

Northrop could also potentially spin it off down the road if the company wanted to create more shareholder value.

Investors historically have backed defense and government contractors as strong generators of cash, which goes toward dividends and stock repurchases.