Northrop Claim to Save $600 Million in Shipyard Sale Is Questioned by U.S.

The Pentagon’s audit agency has concluded it can’t verify Northrop Grumman Corp. (NOC)’s assertion that divesting its shipbuilding business and shutting one of its three yards will save the U.S. as much as $600 million.

The Defense Contract Audit Agency in a Feb. 1 audit also concluded that Northrop’s claim for $310 million in federal reimbursement to close the Avondale, Louisiana shipyard is “unsupported,” according to a summary.

The Navy has not previously disclosed the audit. Its summary is referenced in an appendix of the Pentagon Inspector General’s new semi-annual report.

“Ninety-two percent of the claimed shutdown costs were unsupported because the contractor could not provide sufficient evidence of its underlying assumptions,” said Navy Commander Kathleen Kesler, an agency spokeswoman, in an e-mail. “Because these assumptions are integral to the savings computations, the resulting savings calculation could not be adequately evaluated.”

About $23 million of the $310 million is related to proposed labor, severance pay, incentive bonuses and relocation expenses, the audit said. The remainder of the proposed reimbursement was not identified in the audit summary.

The Navy and the Northrop spinoff company that inherited the claim, Huntington Ingalls Industries Inc. of Newport News, Virginia, are negotiating the savings and reimbursable costs from the planned Avondale closure, according to the company and the Navy.

Huntington and the Navy have not reached agreement on the “allowability of proposed restructure costs,” Navy spokeswoman Captain Catherine Mueller said in an e-mail.

Negotiation Process

“We are working with the Navy and DCAA on the specifics of the restructuring proposal,” William Glenn, a spokesman for Huntington, said in an e-mail. “The cost estimates submitted as well as the savings projections will be further supported through the negotiation process.”

The Navy’s Mueller and Huntington’s Glenn said the company is following Pentagon’s acquisition rules in applying for reimbursement of the shutdown costs.

Huntington, which had 2010 sales of $6.7 billion, became a separate company in March when Northrop Grumman spun off its shipbuilding unit.

Former parent company Northrop and Huntington, the sole builder of U.S. nuclear-powered aircraft carriers, have said the Avondale yard would be shut when work on two Navy amphibious ships is completed there in 2013.

Huntington operates two other yards. One is in its home city and the other at Pascagoula, Mississippi.

Keeping Avondale

In a recent interview Michael Petters, Huntington’s chief executive officer, said the company was seeking alternatives to closing Avondale.

While the “plan is to finish work and close the facility” at Avondale, “I’m open to alternatives to that,” Petters said in an interview at his Washington office. Petters said he was “working very hard” to find partners and closing the plant is “the least desired outcome.”

Avondale, with 4,800 workers, is the largest private employer in Louisiana, according to Huntington.

In July 2010, when Huntington’s former parent company Northrop announced its shutdown plan, Republican governor Bobby Jindal said he would work to find alternative uses for the site.

The 268-acre Avondale site, about 10 miles upriver from New Orleans, would be suitable for “heavy manufacturing, whether in energy or in marine” applications, Petters said.

The Louisiana Economic Development office has hired Chicago-based consulting firm A.T. Kearney Inc. to study Avondale’s capabilities and identify possible uses including other shipbuilding work and manufacturing industries that may use the yard, agency secretary Stephen Moret said in an e-mail.

Huntington fell 36 cents or 1 percent, to $34.48 at 1:23 p.m. in New York Stock Exchange composite trading. Before today the shares have declined 16 percent since the spinoff on March 31.

To contact the reporters on this story:

Tony Capaccio in Washington at acapaccio@bloomberg.net Gopal Ratnam in Washington at gratnam1@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at Msilva34@bloomberg.net

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