Northrop Gets That Sinking Feeling, Eyes End of Shipbuilding

Northrop Grumman, one of the U.S. military’s two major shipbuilders, said late this afternoon it is reconsidering its entire shipbuilding business, including consolidating its embattled Gulf Coast units and even sell-offs.

“Recognizing our company's long-term strategic priorities, we foresee little synergy between Shipbuilding and our other businesses,” said CEO Wes Bush. “It is now appropriate to explore separating Shipbuilding from Northrop Grumman.”

Bush, who as a new chief executive has not been afraid to make dramatic changes, said in a prepared statement that the moves were driven by “customer” needs, but that they will also will “ensure long-term improvement” in the company’s naval program performance, cost competitiveness and quality.

Meantime, Northrop will consolidate its Gulf Coast shipbuilding operations like LPD-class Navy ships in Pascagoula, Miss. Construction at nearby Avondale will wind down in 2013. The company said it expects higher costs to complete ships currently under construction in Avondale, due to anticipated drops in productivity, so it will increase the estimates to complete LPDs 23 and 25 by about $210 million.

Of that amount, $113 million will be swallowed as a one-time, pre-tax cumulative charge to Shipbuilding's second-quarter 2010 operating income, according to Northrop. The balance will be recognized as lower margin in future periods, principally on LPD 25.

Strategic alternatives for the Shipbuilding business include, but are not limited to, a spin-off to Northrop shareholders, the statement said. The company has engaged Credit Suisse as its lead financial advisor.

Changes to Avondale and Northrop’s shipbuilding business had been debated publicly since the spring. “The yard faces a bleak business outlook due to weak demand from its U.S. Navy customer and chronic production problems,” Lexington Institute executive and defense industry consultant Loren Thompson wrote in April. Meantime, Bush has removed Northrop from competition for the USAF KC-X aerial refueling tanker program while also announcing a move of the company’s headquarters from Los Angeles to the Washington, D.C., suburbs.

Northrop said it will webcast a conference to discuss the Shipbuilding announcement at 10:30 a.m. EDT on July 14.

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