July 13 (Bloomberg) -- Northrop Grumman Corp. Chief Executive Officer Wes Bush may be giving up on one of the two U.S. Navy shipyards whose vessels were cited for defects and delays.
Governor Bobby Jindal of Louisiana said yesterday that Northrop has told the state that the yard in Avondale near New Orleans risks being shut because it lacks orders beyond 2012, putting about 5,000 employees out of work. Louisiana is in talks with possible buyers and tenants, Jindal said in a statement.
Closing Avondale may help Bush boost shipbuilding profits margins that are less than half of those at General Dynamics Corp. Earnings have been damped by $431 million in charges since 2008 for delays, poor-quality work and damage from Hurricane Katrina at Avondale and a yard in Pascagoula, Mississippi.
“It would be a good thing for Northrop if they can extricate themselves without negative financial impact,” Peter Klein, senior portfolio manager at Cleveland-based Fifth Third Asset Management, said in a phone interview. His firm owns about 160,000 shares, or less than 1 percent of Northrop’s stock, according to Bloomberg data.
Randy Belote, a spokesman for Los Angeles-based Northrop, said the Navy’s long-term shipbuilding plan “requires a smaller industrial base” while declining to comment on any conversations between Jindal and the third-largest U.S. defense contractor.
Northrop acquired the shipbuilding business of Litton Industries Inc. in 2000, adding the Avondale and Pascagoula yards. In 2001, it bought Newport News Shipbuilding Inc. to expand into nuclear-powered aircraft carriers and submarines, and topped General Dynamics as the biggest Navy shipbuilder.
Bush, 49, who became CEO on Jan. 1, has focused on improving the Gulf Coast yards. Northrop’s operating margin for its ship division was 4.8 percent last year compared with 10.1 percent for General Dynamics. Shipbuilding sales in 2009 were $6.21 billion, or 17 percent of Northrop’s $33.8 billion total.
The Louisiana and Mississippi yards make transports and amphibious assault ships that take Marines into battle and DDG-51 Arleigh Burke-class destroyers, whose production alternates between Northrop and General Dynamics. Consolidating output of those vessels in one Gulf Coast yard would help Northrop match capacity to the Navy’s future purchases.
Avondale’s future already was in question after the Navy told lawmakers in February that it was canceling the planned purchases in 2012 and 2014 of two amphibious command ships due to have been built at the yard.
Off to Mississippi
Once Avondale finishes building its transport ships from the LPD-17 class in 2012, any potential work on future vessels from the 11-ship class will be done in the Ingalls yard in Pascagoula, Jindal said in an e-mailed statement, citing comments from Northrop to the state.
The governor said he and U.S. lawmakers from Louisiana will appeal to the Navy and the “federal government not to turn its back on New Orleans and Avondale.” Spokesman Frank Collins said Jindal, a Republican, wasn’t available to elaborate.
Discussions about other users for the yard are being held in case Northrop exits, because the company “does not intend to keep Avondale open for the long term in the absence of a viable Navy shipbuilding program there,” Jindal said in the statement.
Senator Mary Landrieu, a Louisiana Democrat, plans to write Navy Secretary Ray Mabus asking for his support to preserve jobs at Avondale, her spokesman Aaron Saunders said in an e-mail.
Northrop rose 71 cents, or 1.3 percent, to $55.26 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have declined 1.1 percent this year.
Without Navy orders, “it makes little sense” for Northrop to keep Avondale open, Howard Rubel, a Jefferies & Co. analyst in New York, said in an e-mail. The Navy “won’t pay the freight for an inefficient yard,” said Rubel, who has a “buy” rating on Northrop stock.
Of five LPD-17 transports completed since 2000 at Northrop’s two Gulf Coast yards, three needed to return for repairs after the Navy found poor-quality welding or lubrication-oil contaminants that damaged the ships’ engines.
In April 2008, Northrop took a $326 million pretax charge for exceeding budget and delays on one class of ship, and $105 million more in July 2009 for cost increases to finish vessels from two other classes.
With damage from Katrina adding to the strain from the quality defects and delays at the Gulf Coast yards, “we have problems in every area,” Mike Petters, the ship unit’s president, said in a recent interview.
Northrop has added training for welders, tighter supplier oversight and tougher inspections to end defects and delays, Petters said. Even with those steps, the drag on earnings from shipbuilding may last until 2012 when Northrop delivers the ninth ship in the LPD-17 class, he said.
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