Contractors Finding Strength in Numbers

oethe wrote, "on every mountain height is rest." Lockheed Martin executives would disagree.

In March 1995, Lockheed and Martin Marietta merged to become king of the hill in the federal contracting world. Lockheed Martin found itself perched high above all other defense industry climbers-no two corporations could combine to overtake it in federal revenues. Analysts expected the new giant contractor to take some time to enjoy the view from the top while it adjusted to the altitude.

Instead, Lockheed Martin kept on climbing. In April 1996, Lockheed Martin shelled out $9.1 billion to purchase most of Loral, the corporation currently clinging to the number nine spot in Government Executive's list of top 10 federal contractors. As a result of the acquisition, Lockheed Martin now employs 190,000 workers and expects annual sales of $30 billion. The Loral acquisition will widen the already enormous gap between Lockheed Martin and other federal contractors. Lockheed Martin's fiscal 1995 contract awards-won before the Loral purchase-were more than twice those of its closest competitor, McDonnell Douglas.

Many greeted the Loral acquisition with dismay. Lockheed Martin workers-still coming to terms with the restructuring and downsizing that accompanied the 1995 merger-ßand Loral employees braced for staff cuts. Over at McDonnell Douglas, CEO Harry Stonecipher vowed to replace regular subcontractor Loral with more neutral subcontractors, such as Litton Industries and Honeywell, when his company is competing with Lockheed Martin for the same contract. (Lockheed Martin's President and CEO Norm Augustine responded by warning that this "blacklist purchasing policy" could force his company to cancel some of its own subcontracting agreements with McDonnell Douglas.)

To win Federal Trade Commission (FTC) approval, Lockheed Martin and Loral finagled several deals: Loral's space and telecommunications business was spun off into an independent company in which Lockheed Martin holds a 20 percent share. Inter-company firewalls were set up to block the sharing of competitive information about tactical fighter aircraft and unmanned aerial vehicles. Still, the sheer size of the corporation bothers some industry watchers. Lockheed Martin is "basically a wholly owned subsidiary of the U.S. government," a Federation of American Scientists spokesperson quipped to The Rocky Mountain News in May.

"We are approaching the point that the FTC concerns [about fair competition] will be legitimate," conceded Augustine at the National Press Club in April.

The corporation should certainly have enough work to keep it busy. Lockheed Martin has contained Loral in its own business segment while it contemplates restructuring options. This brings the number of business segments over which Lockheed Martin presides to six: Space and Strategic Missiles, Aeronautics, Information and Technology Services, Electronics, Energy and Environment and the Loral segment, named Tactical Systems.

Space and Strategic Missiles is Lockheed Martin's biggest business, earning revenues of $7.5 billion in 1995. The segment manufactures Atlas rockets, Titan expendable launch vehicles and Trident fleet ballistic missiles. In 1995, the Air Force awarded the segment a $1.3 billion contract to build the fifth and sixth satellites in the Milstar constellation, which will provide secure communications for U.S. forces. Also, Lockheed Martin is prime contractor for the Army's Theater High Altitude Area Defense (THAAD) weapons system, currently in development, and is producing second-generation satellites for the Defense Department's Global Positioning System.

In July, the Space and Strategic Missiles division beat McDonnell Douglas Aerospace and Rockwell International to win the coveted Phase I contract of NASA's X-33 reusable launch vehicle program. The program aims to produce a new generation of space shuttles that will be cheaper to operate, and can be built and run by the private sector. Under the contract, worth $1 billion, Lockheed Martin's Skunk Works will build a prototype X-33 and conduct its first test flight by March 1999. NASA has not committed to replace today's space shuttle fleet with the prototype, but if it does, the Phase I contract could lead to $12 billion worth of business producing a new line of X-33 spacecraft. As stipulated in the contract, Lockheed Martin and its partners are contributing $220 million of their own money to the project's start-up costs and initial research and development.

Lockheed Martin's Aeronautics division took in $6.6 billion in revenues in 1995. The division's F-16 fighter and its derivatives are popular with the Air Force and international customers such as Taiwan, Turkey, South Korea, Greece, Singapore and Japan. In partnership with Boeing, Lockheed Martin is developing the F-22 Advanced Tactical Fighter, designed to replace aging F-15 fighters. The first test flight of the F-22 is scheduled for 1997 and production of 442 aircraft is slated to begin in 1998.

The Aeronautics division is competing for critical contracts this year in the Joint Strike Fighter (JSF) program (formerly known as the Joint Advanced Strike Technology program). The Defense Department will select two contractors to build demonstrator aircraft for the JSF program, which seeks a common, affordable fighter for the Air Force, Navy, and Marine Corps. A Lockheed Martin-led team is competing against teams led by Boeing and McDonnell Douglas to design the one-size-fits-all jet fighter. The Pentagon will eliminate one of the three bidders in late 1996; the remaining two will build two versions of their design and compete in a "fly-off" for the actual contract in 2000. DoD expects to buy at least 2,800 planes in a contract that could be worth $1 trillion.

Lockheed Martin's Information and Technology Services sector is the corporation's main civilian agency contracting unit. In 1995, it operated the Environmental Protection Agency's Environmental Supercomputing Center, worked to modernize the information systems of the Social Security Administration and provided services to the Treasury Department, the General Services Administration and the Patent and Trademark Office. In January of this year, Lockheed Martin won a six-year, $100 million Federal Bureau of Investigation contract to implement the agency's Automatic Fingerprint Identification Segment. The Information and Technology Services unit is also involved in a wide range of NASA programs, and has entered into a joint venture with Rockwell to negotiate a sole-source contract for the space shuttle program.

Sales in Lockheed Martin's Electronics division decreased almost 19 percent last year due to cuts in AEGIS surface ship combat systems and the AN/BYS-2 submarine combat system program. However, the Navy continued to be the division's single largest customer and awarded it a $577 million contract to upgrade the AEGIS system. Lockheed Martin's Energy and Environment division manages several facilities for the Energy Department, including the Nevada Test Site and the Idaho National Engineering Laboratory.

cDonnell Douglas danced to its own tune in 1995. It revived a huge program that observers had written off as a failure. It didn't give up on its commercial aircraft business, although that's what many analysts had advised. It declined to enter the mergers-and-acquisitions fray with any of its defense industry competitors. And here it is, solidly occupying the number two position in Government Executive's top contractors list. (McDonnell Douglas was the perrenial top federal contractor until the Lockheed-Martin Marietta merger knocked it down to No. 2 last year.)

The McDonnell Douglas tendency to fly in the face of convention resulted in its big triumph of 1995: The turnaround of the C-17 program. Just two and a half years ago, it appeared that McDonnell Douglas's contract with the Air Force to build a new transport plane, the C-17 Globemaster III, would bankrupt the corporation. Due to personnel upheavals at McDonnell Douglas, a rigid fixed-price contract from the Air Force and intermittent support from Congress, the C-17 was more than $1 billion over budget, a year behind schedule and failing to meet contract standards. Then-Defense Secretary Les Aspin gave McDonnell Douglas and the Air Force an ultimatum: Resolve the problems of the C-17 program in two years or scrap the contract.

Astonishing many industry observers, McDonnell Douglas and the Air Force did turn the program around. The company delivered the first squadron of C-17s in January 1995. Last August, the C-17 exceeded Air Force specifications in a 30-day reliability, maintainability and availability evaluation. By the end of 1995, McDonnell Douglas had delivered 11 C-17s ahead of schedule. The first operational wing of C-17s won praise for flying oversized cargo onto short, muddy runways in Bosnia and in post-hurricane St. Croix and St. Thomas. Swayed by these successes, the Defense Department ordered 80 additional C-17s from McDonnell Douglas in May 1996, bringing the total number of airlifters ordered to 120. The additional 80 planes will bring McDonnell Douglas $18 billion over the next seven years.

McDonnell Douglas is working to revive Douglas Aircraft Company, its commercial aircraft unit, which produces planes such as the MD-11 tri-jet, MD-80 twin-jet and MD-90 twin-jet. Five years ago, Douglas Aircraft controlled 22 percent of the commercial aircraft market; today it controls a mere 9.8 percent. The company has pinned its hopes for a comeback on its new MD-95 family of twin-jet airliners, designed to operate economically on routes currently flown by DC-9s. Delivery of the first MD-95s is scheduled for 1999 and Douglas Aircraft's first big customer will be Valujet Airlines, which is paying $1 billion for 50 MD-95s, with options to purchase 50 more. A Douglas Aircraft spokesperson said in July that the grounding of Valujet by the Federal Aviation Administration in June was not affecting the airline's order. But gathering other orders for the planes is proving to be difficult. Douglas Aircraft is competing with new planes recently unveiled by Boeing and Airbus. Scandinavian Airlines, for example, backed out of a major order in early 1995 to go with Boeing.

Douglas Aircraft's operating revenues increased 23 percent in 1995, but they are still 11 percent lower than they were in 1993. In contrast, the corporation's military aircraft division, McDonnell Douglas's biggest business unit, thrived in 1995, setting records for revenues and earnings despite pressure on military procurement budgets. Military aircraft revenues were up 4.5 percent; operating revenues were up 27.8 percent. In 1995, McDonnell Douglas controlled more than 54 percent of the market for fixed-wing military aircraft. And the company is the prime contractor for 52 out of the 71 aircraft that the Pentagon plans to purchase in fiscal 1996.

The military aircraft division's F/A-18C/D Hornet fighter planes sold briskly in 1995, especially to foreign customers. McDonnell Douglas delivered 43 Hornets, including the first seven of Finland's 64 aircraft in 1995 and the first of 34 planes to Switzerland in January 1996. Malaysia will receive the first of its eight Hornets in October 1996. McDonnell Douglas declared in its 1995 annual report that it believes the impact of the shrinking Pentagon budget "could be mitigated by foreign sales" and is seeking to lengthen its list of foreign customers.

The military aircraft division's F/A-18E/F Super Hornet fighter completed its first flight in 1995, and the program is on budget and on schedule. The Navy plans to purchase 1,000 Super Hornets-at an estimated program cost of more than $80 billion-through 2015.

In another move that surprised analysts, McDonnell Douglas sat out the consolidation frenzy through 1995 and into mid-1996. John McDonnell, chairman of the board, and Harry Stonecipher, president and CEO, explained their position in the company's 1995 annual report. "We will not be driven to the merger or acquisition table out of a need for critical mass or top-line growth. Frankly, we already have critical mass. If we act, it will be from a position of strength. We have the luxury of waiting for the right deal."

Still, many industry observers maintain McDonnell Douglas won't hold out much longer. A merger with Boeing, which controls more than 60 percent of the commercial aircraft market, could solve Douglas Aircraft's problems. Other options that McDonnell Douglas might pursue include selling its missile business; buying competitors' helicopter businesses; or pursuing joint ventures in those areas.

eaders of Westinghouse's 1995 annual report may think there has been a publishing error. Photographs of David Letterman, Murphy Brown and Doctor Quinn, Medicine Woman, grace the pages that only a year before featured photographs of turbine generators and radar systems. But there's been no mistake: Westinghouse bought CBS Inc. for $5.4 billion last November, transforming the company into the largest radio and television broadcaster in the United States.

In fiscal 1995, it was business with Uncle Sam that bolstered Westinghouse's bottom line. Federal revenues accounted for fully 68 percent of the company's $6.2 billion in sales.

However, Westinghouse officials have visions of a non-federal future. In March, Westinghouse sold its defense electronics business to Northrop Grumman for $3 billion. Company officials have said they expect Westinghouse/CBS Group-the company resulting from the merger of CBS with Westinghouse's cable TV and satellite distribution businesses-to generate 65 percent of Westinghouse's earnings in the years to come.

"The changes in the defense industry, which has consolidated into larger, highly efficient players, presented us with a clear strategic choice," Michael H. Jordan, Westinghouse chairman and CEO, said as he announced the sale last December. "Take advantage of the high premiums for defense-related assets and divest the business, or grow in scale to retain our industry leadership position for the future. Given this choice and our strategic decision to drive investment and growth in our broadcasting business, the logical decision was the sale of our defense electronics business."

Westinghouse's strategy is part of its effort to focus on business areas it deems to have high-growth potential in order to pull itself out of its slump of recent years. Just four years ago, Westinghouse was $10 billion in debt. Through asset sales and divestitures, the company cut that debt-plus an additional $5.4 billion incurred when buying CBS-to $4.8 billion by the first quarter of 1996.

With the defense electronics divestment, Westinghouse will become a civilian rather than military contractor. Most of the company's civilian-side contracts are with the Energy Department. In March 1996, DOE and Westinghouse completed construction and testing at the Defense Waste Processing Facility at the Savannah River Site in South Carolina, the agency's largest new construction project in recent years. At the facility, liquid radioactive waste, a by-product of nuclear weapons production, is immobilized by processes which turn it into glass. Westinghouse also processes nuclear waste at the Energy Department's West Valley (N.Y.) Demonstration Project. In January, DOE extended the company's West Valley contract for five more years at $500 million.

Other facilities Westinghouse manages for the Energy Department include the Waste Isolation Pilot Project, near Carlsbad, N.M., and the troubled Hanford Site, near Richland, Wash.

Hanford, where nearly 80 percent of DOE's spent nuclear fuel inventory is housed, is the site of the United States' largest environmental cleanup project. In the early 1990s, Westinghouse's efforts to develop a long-term storage plan for Hanford's radioactive wastes were such a failure that the government contemplated rebidding the project. Westinghouse appointed a new Hanford site president in 1994 who has cut 4,000 employees over the past two years and set new cleanup priorities. Early this summer, Westinghouse was competing against Bechtel Northwest Corp. to remain the primary contractor at Hanford.

One government market in which Westinghouse is striving to increase its presence is chemical weapons destruction. In March 1996, the Defense Department awarded Westinghouse a nine year, $575 million contract to destroy 2,250 chemical weapons at Anniston Army Depot in Anniston, Ala.

he first component of the international space station has yet to be launched, but it is already sprinkling riches on Boeing, NASA's prime contractor for the program since 1993. While Boeing's overall operating revenues declined for the second year in a row in 1995, Boeing's Defense and Space Group revenues rose for the second year, due mostly to space station work. In 1995, defense and space revenues totaled $5.6 billion, an increase of $700 million, or 14 percent, over 1993 revenues. The company's defense and space division accounted for 29 percent of its sales in 1995.

NASA has put Boeing in charge of the U.S. industry team that is designing, developing and integrating the space station with Russian, Japanese, European and Canadian counterparts. The project has an estimated value of $5.6 billion. Boeing reports the project is proceeding according to schedule, with more than 100,000 pounds of flight hardware completed. The first major space station components are due to be assembled in space in 1997.

The major earthbound programs of Boeing's defense and space division in 1995 included the F-22 fighter, V-22 Osprey tilt-rotor aircraft and RAH-66 Comanche helicopter. Boeing is preparing the F-22 for its first flight in 1997. Operational tests of the V-22 begin later this year. The RAH-66 flew for the first time in January.

Production and manufacturing of CH-47 helicopters, work to update military aircraft, production of 767 Airborne Warning and Control Systems and B-2 bomber subcontracting work also generated significant revenue for the company. And Boeing's sales of defense equipment to foreign governments rose 9 percent in 1995, accounting for 19 percent of total defense and space sales.

Not all of Boeing's defense and space initiatives were successful in 1995, though. The company had urged the Defense Department to expand its airlift capability by purchasing 747 aircraft modified for airlift operations from Boeing rather than by buying more C-17 airlifters from McDonnell Douglas. However, DoD chose to order 80 additional C-17s in May.

Boeing demonstrated its faith in the merits of partnership in 1995. The company is running three major programs with other defense contractors: It works with Lockheed Martin on the F-22, Bell Helicopter Textron on the V-22 and Sikorsky, a division of United Technologies, on the RAH-66.

Last November, Boeing officials met with McDonnell Douglas Corp. to talk about the potential for combining some of their business segments. Both companies refused to comment on the discussion, but the meeting fired the imaginations of industry analysts who speculated on what mergers might work best-and which ones the federal government would allow. While most agreed that the government probably would not permit the two companies to create a giant McDonnell Boeing, analysts thought that mergers of their helicopters or space businesses would be just the kind of consolidations the Pentagon has been encouraging. The buzz around the talks caused the stocks of both companies to rise.

Boeing has identified the Defense Department's conceptual design contracts for affordable aircraft, such as the Joint Strike Fighter (JSF) program, as rare sources of new government defense and space business. During 1995, Boeing completed a series of tests in preparation for the 1996 competition for the JSF contract.

ne big ship. That's what catapulted Tenneco Inc. from 41st place in last year's top 200 federal contractor rankings to 5th place in this year's list. In December, Tenneco's Newport News Shipbuilding and Drydock Company delivered to the Navy a new Nimitz-class nuclear aircraft carrier, the USS John C. Stennis. And so, government records show, the company received the final payment for the carrier-$3.47 billion.

Newport News has built all of the Navy's Nimitz-class carriers. However, the Nimitz-building business appeared to have dried up in the early 1990s. Before the John C. Stennis, the last time Newport News had commissioned a Nimitz-class carrier was 1992.

Now, Newport News is hammering away at two more carriers-the Harry S. Truman, due to be launched in 1998, and the Ronald Reagan, scheduled for delivery in 2002. And, in May, the Navy awarded the company operation a $119 million contract to refurbish the lead ship in the class, the Nimitz itself.

"Three years ago, the obituaries were all being written for this yard," Dana Mead, chairman of Tenneco, told The New York Times in February. "So when you put this against that background, not only has there been a pretty dramatic recovery, but a resurrection."

Newport News has also benefited from a change of heart at the Pentagon and in Congress. About three years ago, as part of a cost-cutting strategy, the Clinton Administration began pointing all construction of nuclear submarines to General Dynamics' Electric Boat division and all construction of nuclear carriers to Newport News. Not willing to sit back and watch a large portion of their business float away, Tenneco lobbied hard to get the Pentagon to send them nuclear sub-building work again.

Recently, Newport News president Bill Fricks testified at a House hearing that the Navy could save $3.5 billion if it canceled production of a third Seawolf submarine and let Newport News bid to supply its new attack submarines. As a result, Congress affirmed Newport News' right to participate in the new attack submarine program. In early 1996, the Pentagon announced that it would split its order for four prototype attack submarines between Newport News and Electric Boat. After the prototypes are built, the two companies will compete for the $71 billion contract to build the subs.

It's not necessarily going to be smooth sailing for Newport News in the future. Navy work accounted for 95 percent of Newport News' revenues in 1995. While recently won contracts will keep the shipbuilding yard busy for the next few years, it could be in deep trouble if Navy contracts decline again. So, Newport News has begun to round up commercial and international orders. The company hopes to derive as much as 30 percent of its business from commercial ships and foreign military orders by the year 2000, Tenneco chairman Mead told The New York Times.

In May, Newport News laid the keel for the first commercial ship it has built in nearly 20 years-Despotico, one of four tankers recently ordered by the Greek company Eletson Holdings. Newport News is also building five Jones Act Double Eagle product tankers for the Dutch company Hvide/Van Ommeren, an order worth $240 million. Earlier this summer, the company was negotiating a $2 billion contract with the government of the United Arab Emirates.

Newport News will be navigating the choppy waters of the future alone. In March, Tenneco announced that it would spin off Newport News Shipbuilding as an independent company by the end of 1996. Tenneco, an $8.9 billion conglomerate with four significant business segments (packaging, automotive parts, natural gas and shipbuilding), is shedding units to concentrate on its core interests-packaging and automotive parts.

he price tags on defense products manufactured by Hughes Electronics Corp., the $14.8 billion government contracting unit of General Motors, were once so high they shocked even the Pentagon. Now, Hughes is advertising itself as an economical contractor. In 1995, the company consolidated divisions and standardized manufacturing processes in an effort to reduce its prices for services-and pinch some extra profits out of its government businesses to help finance its commercial ventures.

The corporation gathered Hughes' multiple defense businesses under one umbrella, Hughes Aircraft Company, combined four Navy-related businesses into a single Naval and Maritime Systems division within Hughes Aircraft and realigned four information systems divisions into a single business unit. But Hughes reports that its biggest cost-saver last year was the company's development of common engineering, planning and development processes.

"From now on," enthused HAC president John Weaver in Hughes Electronics' 1995 annual report, "if a customer has a weapons system that includes some combination of missiles, radar and electro-optical products, there will be a seamless interface between engineering groups, and the company will be more efficient."

HAC acquired three companies in 1995 and early 1996 that it believes will also help to control service costs. The company bought CAE-Link Corp. in February, to enhance its ability to provide military training and simulation services; Magnavox Electronic Systems Co. in December, to help develop more affordable ways to upgrade analog military communications systems to digital; and Itek Optical in 1996, to improve Hughes' reconnaissance expertise.

Government business generates 31 percent of Hughes Electronics' revenue. Due to divestments made in 1995, Hughes Aircraft Company now operates only four primary business units: weapons systems, radar and communications, information systems and electro-optical systems.

Major contracts that Hughes won in these areas in 1995 include those for the low- and high-altitude components of the Air Force's Space-Based Infrared System and a missile early warning and surveillance system. With 15 other companies, Hughes was awarded a $2.4 million contract to electronically integrate soldiers' equipment, the initial phase of the Army's Land Warrior program. The potential value of the contract over the next 20 years is $1 billion.

Two contracts awarded in fiscal 1995 made Hughes a main supplier to the Federal Aviation Administration. In August, the FAA awarded a team comprised of Hughes, Wilcox Electric Inc. and TRW a $475 million contract to develop and implement the Wide Area Augmentation System, which will enable the United States' air traffic control system to use global positioning technology. In September, the FAA awarded Hughes a $140 million contract to develop the Advanced Oceanic Automation System, part of a program to upgrade and automate the nation's oceanic air traffic control operations.

1995 also saw Hughes form the Standard Missile Company with one-time Standard Missile contract competitor Raytheon. The company, owned in equal parts by Hughes and Raytheon, is the Navy's prime contractor for the design, engineering, production and depot-level maintenance of the Standard Missile.

n 1995, a rain forest dampened Raytheon's enthusiasm for defense conversion-but only temporarily.

In 1994, Raytheon won an international competition to build an environmental surveillance system for the Brazilian government. However, allegations that an independent Raytheon contractor had bribed a Brazilian official surfaced, and, in November 1995, Brazil's legislature let Raytheon's contract expire. Only after months of lobbying by Clinton Administration officials did they relent and let the project go forward.

Now, analysts expect the rain forest project to be the biggest defense conversion project in history, creating 1,100 jobs in the United States and bringing Raytheon $150 million a year for the next 10 years.

Another Raytheon strategy for coping with the consolidating defense industry-teaming up with competitors-also paid off. In June 1995, H&R Co., a joint venture between Raytheon and Hughes Aircraft Company, was one of two winners of the Army contract for the International Medium Extended Air Defense System (MEADS). Each U.S. team has been paired with a European counterpart team to carry out the first phase of the program-project definition and validation. In 1999, one of these multinational teams will be awarded a contract for the program's second phase-design and development. MEADS, also known in the United States as the Corps Surface-to-Air Missile, will provide U.S. and Allied forces with missile batteries, sensors, and command-and-control systems. The program has a potential value of more than $3 billion.

A second Raytheon/Hughes alliance, the Standard Missile Company, won $47 million worth of work producing the Standard-2 Block IV missile. Hoping for similar successes, Raytheon has joined forces with Northrop Grumman Corp. to bid for the Defense Department's Joint Air-to-Surface Standoff Missile (JASSM) contract.

Over the past year, Raytheon also continued to win contracts in its top market-missiles. Raytheon's largest program is the Patriot surface-to-air missile system, the centerpiece air defense system in the United States. Patriot sales brought in over $1 billion in 1995. In fiscal 1996, Raytheon will conduct $35 million worth of research in the first phase of the Army's $75 million Patriot Anti-Cruise Missile Seeker upgrade program. Other recent missile contracts include a follow-on, $52 million contract for the Enhanced Fiber Optic Guided Missile Demonstration Program, awarded by the Army in January; and a $174 million contract to manufacture 623 Advanced Medium Range Air-to-Air Missiles (AMRAAMs) and spares, awarded by the Air Force in January.

Raytheon's aircraft division, which supplies planes for commercial and regional airlines as well as aircraft training systems for the military, will provide the next-generation trainer for Air Force and Navy pilot candidates. This Joint Primary Aircraft Training System contract, awarded in February, is valued at up to $7 billion over 20 years-a big win for the company.

Raytheon increased its presence in air traffic control in April with the commissioning of a new air traffic control center it created in Oslo, Norway. The company has provided air-traffic-control systems to Schipol Airport in the Netherlands and the German Air Navigation Service, and is currently installing air traffic control systems in India, Oman, Hong Kong, China and Australia.

While Raytheon recorded its highest total sales in its history in 1995-$11.7 billion-sales and profits from Raytheon's defense operations declined. Defense-related sales accounted for 20 percent of the company's total sales. However, the U.S. government portion of Raytheon's backlog at the end of 1995 was $5.1 billion, $1.7 billion higher than at year-end 1994. This was due in part to their May 1995 acquisition of E-Systems, a $2 billion defense and government electronics company that specializes in intelligence, reconnaissance and surveillance systems.

orthrop Grumman Corp. has had its share of problems with government programs in recent times. The company explained in March that its latest round of cuts-1,200 workers were scheduled to be sent home by July-was due to declining work on its two major aircraft programs, the B-2 stealth bomber and the F/A-18 attack fighter, and to the shrinking production budget of its new version of the F/A-18.

Perhaps the company's biggest headache has been the cool reception accorded by the Clinton Administration to its signature product-the swept-wing B-2. Last year, Northrop Grumman lobbied hard to convince the Administration to fund the production of 20 new B-2 bombers, enlisting the support of seven former Defense secretaries in its effort. However, in February the White House decided against ordering more B-2s because it believes the planes are not needed and are too expensive. The White House estimated that it would cost $30 billion to build and operate 20 more B-2s.

Northrop Grumman was left to hope that a Defense Department study on the Pentagon's long-range air attack needs, ordered by President Clinton and due out in late 1996, would change the Administration's mind. "We do not rule out the possibility the study could come in and provide the basis for buying additional B-2s," Robert Bell, a National Security Council official, said in February. "But we don't presume that."

Yet Northrop Grumman officials still think the defense contracting world hold opportunities for them. "In spite of perceptions to the contrary, there are areas within the defense industry that are growing," chairman Kent Kresa told shareholders at a meeting in May. "The Electronic Industries Association is predicting the Pentagon's electronics procurement budget will reach nearly $20 billion by the year 2000, a 23 percent increase over today. We believe that most of that growth will occur in areas with high-leverage technologies, such as those encompassed in surveillance precision strike and targeting systems, information warfare and advanced battle management."

In order to take advantage of these emerging opportunities, Northrop Grumman executives believe, their operation has to transform itself from principally an airplane company to an electronic sensors and systems integration firm. This planned metamorphosis was behind Northrop's acquisition of Grumman in 1995 and its March 1996 purchase of Westinghouse Electric's defense and electronics division for $3 billion.

The change is already evident. Just three years ago, Northrop Grumman derived more than 80 percent of its revenues from aircraft production and only 15 percent from electronics. The Grumman acquisition doubled the company's electronics revenues to nearly 30 percent. With the addition of Westinghouse's defense and electronics division, the company estimates that its electronics and systems integration business will grow to nearly 50 percent of sales.

One winning product in Northrop Grumman's systems integration line is its Joint Surveillance Target Attack Radar System (Joint STARS), an airborne surveillance system that provides real-time information about ground activity. Northrop Grumman designed the system and installs it in Boeing 707 airplanes that it modifies. The Pentagon commandeered two developmental Joint STARS aircraft for use in the NATO peacekeeping mission this past winter in Bosnia, and the surveillance system won rave reviews. In February, Northrop Grumman delivered the first of 20 production Joint STARS aircraft on order by the Pentagon. The government has expressed interest in expanding the order, and Northrop Grumman is discussing the possibility of offering Joint STARS to NATO in a program that could exceed $6 billion. A decision on this proposal is expected in 1998.

Kresa told shareholders at the May meeting that Northrop Grumman's "strategic thrust in electronics in no way minimizes the importance we place on our military and commercial aircraft businesses." The company is McDonnell Douglas's main subcontractor on the C-17 military transport plane and stands to benefit from the recent Defense Department decision to triple C-17 production. Work on the complete order of 120 C-17s will bring Northrop Grumman an estimated $2 billion. In 1996, Northrop Grumman and teammates McDonnell Douglas and British Aerospace will compete for the latest contract in the Pentagon's Joint Strike Fighter (JSF) program. The program aims to develop an affordable JSF to replace aging F-16s, F/A-18s and other aircraft. Northrop Grumman has already received more than $78 million worth of JSF awards.

his entry will be Loral's last appearance in Government Executive's annual top 10 federal contractors list. In January, Lockheed Martin Corp. bought most of Loral for $9.1 billion. Acquisition was an ironic end for Loral, as the company shot to the top of the defense industry by taking up divisions of its competitors-Unisys, IBM, LTV, Ford and Goodyear among them.

The Lockheed Martin deal, assembled in secret over the last four months of 1995, transferred Loral's defense electronics, systems integration and telecommunications businesses to Lockheed Martin. While Lockheed Martin develops an integration plan, these former Loral divisions comprise a separate business segment, Tactical Systems, at their new company. To comply with antitrust laws, Loral's telecommunications and space division was spun off into an independent $1 billion company, Loral Space and Communications Corp., in which Lockheed Martin owns a 20 percent share. Loral Space and Communications will concentrate on the emerging international market for civilian satellite telecommunications.

Loral's core defense businesses-a group which included electronic combat, tactical weapons, training and command, control, communications and intelligence (C3I)-continued to receive contracts after the merger with Lockheed Martin was announced.

In January 1996, the Army gave Loral a $31 million contract to do additional testing on the company's major new tactical weapons, Patriot Advanced Capability (PAC) III missiles. The PAC IIIs are currently in the engineering and manufacturing development phase. Also in January, the Air Force Space Command awarded Loral a $110 million contract to provide C3I services at the Cheyenne Mountain Complex in Colorado Springs, Colo. Cheyenne Mountain is part of the nation's missile warning and defense system. In February, the Army chose Loral to develop four prototype High Mobility Artillery Rocket System launchers. This 53-month technology demonstration contract is worth $23 million.

Throughout 1995, Loral provided systems integration services to the Federal Aviation Administration, the U.S. Postal Service, the Internal Revenue Service and various defense agencies. Contract awards included one for FAA's Advanced Automation System upgrade contract, worth $955 million. The contract charges Loral with developing and installing display systems for air traffic control centers and a management system for airport towers.

The Internal Revenue Service awarded Loral a follow-on contract for the computerized Document Processing System (DPS) that the company began developing for the IRS in 1994. Once created, DPS will image and store tax returns and correspondence for the agency. DPS will replace the imaging system developed by Northrop Grumman in 1993, which the IRS currently uses. While protracted fiscal 1996 federal budget negotiations forced Loral to delay the installation of pilot DPS components by several months, Congress did not cut funds for the project, valued at $1.4 billion over 15 years.

Recent defense systems integration contracts include a follow-on contract from the Air Force to upgrade data processing subsystems for Airborne Warning and Control System (AWACS) aircraft. The contract has a potential value of $87 million through 1997. In February, the Army selected Loral as the prime contractor for its Intelligence and Electronic Warfare Common Sensor system program. Loral will integrate electronic warfare equipment on Army helicopters and vehicles during the five year, $277 million program.

ockwell has an image problem. Most people think of the $12.9 billion corporation as a defense contractor-manufacturer of B-1 bombers and ICBM guidance systems. In reality, Rockwell derives most of its earnings from its commercial and international businesses-producers of sunroof systems, modem chips and bar code scanners among them. In fiscal 1995, these businesses grew 30 percent to comprise 72 percent of the company's total sales. Government business, including aerospace contracts, accounted for less than 30 percent of Rockwell's sales in fiscal 1995.

It's true that, once upon a time, the U.S. government was Rockwell's main customer-in 1985, 63 percent of the corporation's revenue came from government contracts. But Rockwell's strategy to survive the shrinking Pentagon budget has been to replace $4 billion in defense and government sales with $4 billion in commercial sales over the past 10 years. That has meant diversifying with a vengeance. Unique among its competitors, Rockwell has cobbled together businesses in a wide range of fields-aerospace, semiconductors, automation, vehicle systems and avionics.

Rockwell CEO Don Beall told shareholders at the company's annual meeting in February that he expects the proportion of income generated by Rockwell's electronics, commercial and international businesses will increase. Still, said Rockwell president Don Davis last September, "Rockwell's government businesses continue to represent a core part of our company." And a more distinct part: Last September, Rockwell combined its former defense systems division with its Rocketdyne and space systems divisions to create a single Aerospace and Defense division.

Rockwell's aerospace business accounted for 19 percent of sales in fiscal 1995. Rockwell is NASA's number three contractor, providing rocket engines and launchers for the Space Shuttle program and acting as a subcontractor to Boeing for Space Station Alpha. NASA recently selected Rockwell, along with Lockheed Martin, to take over day-to-day management of the space shuttle program. Earlier this year, Rockwell competed against McDonnell Douglas and Lockheed Martin for a $900 million contract to develop a prototype of NASA's next-generation X-33 reusable launch vehicle. Although NASA awarded the X-33 contract to Lockheed Martin in July, Rockwell will still be involved in the project since Lockheed Martin's winning design uses rocket engines manufactured by Rocketdyne.

Much of Rockwell's defense work is in the business of keeping systems up to date. Last year the Air Force awarded the company a four-year, $232 million contract to integrate joint direct attack munitions, global positioning satellite and anti-jamming communications in the B-1 bomber fleet. The Air Force also awarded Rockwell the contract for the Scope Command Modernization Program, potentially worth $350 million.

Rockwell continues to receive orders for its AGM-130 precision weapons. The Air Force ordered 102 weapons worth $55.3 million in 1995 and 100 more weapons worth $30.5 million in March 1996. As of March, the Air Force had ordered a total of 600 AGM-130s from Rockwell.

In December, the Air Force gave Rockwell responsibility for the Aerospace Guidance and Metrology Center at Newark Air Force Base in Newark, Ohio. The contract, part of USAF's depot privatization program, is valued at $264 million.