It's been a year of transition for Woodland-Hills based Litton Industries Inc.
With its stock back on the rise and a team of new managers assigned to key positions, company officials say Litton is laying the groundwork for growth and higher profits by turning away from military electronics to focus on information technology and electrical components.
In June, Litton hired Ronald Sugar from TRW Inc. as its president and chief operating officer as part of an effort to boost sagging investor confidence in the company after Litton's stock fell to a 52-week low of $26.81 on March 8. Sugar's hiring was followed by a reorganization of several of the company's business units.
"Part of the attraction of coming here is that the company offered an opportunity to be creative," Sugar said. "The board was very open to how we might organize the company in the years ahead. I was not given a pat hand to play."
In October, Litton drew the disapproval of some industry analysts when executives announced that the firm intends to sell off its advanced-electronics division to concentrate on areas with better growth potential. (Northrop Grumman Corp. has been mentioned as a possible buyer, but no deal had been struck as of late last week.)
Meanwhile, Litton will continue to focus its energies on shipbuilding which is expected to account for about half of its profit after the advanced-electronics division is sold and on its electronic components and materials and information business systems, where Sugar said the company sees the greatest potential for growth.
In electing to give up its advanced-electronics group, which primarily makes military products ranging from laser range finders to attack warning systems, Litton officials cited lower-than-expected market growth and stiff competition from rivals in the U.S. and overseas.
If and when a deal is struck for the advanced-electronics division and Sugar said he expects several serious bidders in the months ahead Litton could use the proceeds from the sale to help reduce corporate debt or to boost investment in the company's remaining divisions.
"We're focusing on three areas where we see better return for our shareholders. That's what is driving this (divestiture)," Sugar said. "Right now, we're looking to see where we place our bets."
Although some questioned the timing of the sale in light of an anticipated increase in Pentagon spending, Wall Street has signaled its approval. Since the announcement, Litton's stock price has jumped about $12 a share, hovering last week near its 52-week high of $60.93 posted on Nov. 21.
"Now is a good time to be selling a business in that industry," said Sam Pearlstein, an analyst with First Union Securities in New York. He said the increase in Litton's stock price is directly attributable to the proposed sale because it promises a quick jump in shareholder returns.
Focusing on information systems and electronic components with a range of commercial uses may be a sound strategy for Litton, but it's not a sure bet. Pearlstein said the reorientation will require a major investment in the months ahead.
"But in the long term, the growth trajectory will probably be very good," he said.
Despite its rising stock price, Litton announced in September that earnings for the fiscal first quarter ended Oct. 31 would be lower than expected, due to a shortfall in its ship systems unit and problems with the firm's advanced-electronics segment.
While actual results are not expected to be released until later this week, Litton announced that its earnings per share will be about 20 percent lower than the $1.24 per share that it had projected earlier.
For the fiscal fourth quarter ended July 31, the company reported net income of $69.6 million ($1.52 per share), compared with a net loss of $21.7 million (48 cents a share) for the same period a year earlier. Revenue rose to $1.5 billion from $1.2 billion a year earlier.
Among the events affecting Litton in its fiscal fourth quarter was the apparent terrorist bombing of one of its missile destroyers, the U.S.S. Cole, in Yemen, which killed 17 sailors. Litton will repair the ship in the coming weeks at its Ingalls Shipbuilding facility in Mississippi.
"We are obviously upset about the way it came back to us, but we are very proud of the way the Cole held up in what was truly a massive explosion," Sugar said.
Sugar said Litton anticipates an earnings growth rate of up to 5 percent in 2001, with the company gaining momentum as the year progresses and a deal for the advanced-electronics division is completed.
"You're never as good as your high or as bad as your low," Sugar said of Litton's fluctuating stock value in 2000. "But the Wall Street market has loved (the planned sale)."
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