With its $5.1 billion acquisition of Litton Industries Inc. complete, Northrop Grumman Corp. now faces a far tougher and costlier task turning around three of Litton's four operating units.
Litton's defense electronics, information systems and shipbuilding operations have been plagued for years by manufacturing delays and cost overruns reaching into the hundreds of millions of dollars.
Much of the blame, according to industry analysts, lies with Litton management, but Northrop has already taken a series of steps to overcome the problems. To its credit, Northrop has planned its integration of Litton so thoroughly that the latter is expected to cease to exist by the end of the year.
Litton's defense electronics unit will be integrated with Northrop's Electronic Sensors & System Sector and the information systems unit with Northrop's Logicon Inc. subsidiary.
Litton's other two operations, shipbuilding and electronics components, will become standalone entities reporting directly to Northrop Chairman and Chief Executive Kent Kresa.
Analysts said that Northrop, now the nation's third or fourth largest defense contractor, must continue its sound track record of fluid management and successful acquisitions if it is to realize its goal of $15 billion in revenue within the next year and $18 billion the year after.
"(Litton) has had problems," said Thomas Meagher, vice president of equity research for BB & T; Capital Markets. "They have not managed their programs properly. They could have used some tighter cost controls and management attention to detail. You've got to get in there and manage those programs closely."
Northrop's most glaring dilemma exists at the Litton Avondale Industries shipbuilding operation in New Orleans. The company is $342 million over budget on the design and construction of the first of the Navy's LPD-17 transport ships, which was originally expected to be delivered sometime next year for $647 million. Now it is not expected to be complete until late 2004 at a cost of $989 million.
Litton also ran up $70 million in overruns in just the past six months for its commercial tanker program at Avondale.
At the defense electronics unit, problems creating state-of-the-art software have delayed production and generated cost overruns as well. The division is under contract to design and build aviation systems for helicopters that the U.S. military will sell to Australia and a satellite communications and control system for a Navy cruiser.
"It used to be you didn't have to do well because the Pentagon would bail you out. Not anymore," said Jon Kutler, president of Quarterdeck Investment Partners Inc. of Century City. "That has forced the whole industry to become better managers. Northrop recognized this early and has done a good job of refining its management skills. Often times you have to have someone from the outside question the way business is done in order to make changes."
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- NORTHROP---Litton Merger Seen as Boost For Northrop
- Turbulent Skies for Northrop
- DEFENSE---Litton May See Benefit From Competitor's Shipbuilder Deal
- NORTHROP---Northrop Bid Likely to Fail, But So What?
- CORPORATE FOCUS---War Footing Seen Adding to Climb in Northrop's Shares
- DEFENSE---Northrop Mobilizing to Battle Titans
- CORPORATE FOCUS---Move Away From Defense Work Aids Firm's Fortunes