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."
Efforts to rejuvenate operations got off on the right foot last summer, analysts agreed, when Litton installed Ronald Sugar, former chief financial officer of Cleveland-based TRW Inc., as its president and CEO. Sugar is now widely believed to be Kresa's heir apparent.
Under Sugar's watch, efforts have been made at Litton to shore up the Avondale operations in New Orleans by shifting management there from its defense-related Ingalls Shipbuilding enterprise in Pascagoula, Miss.
"(Sugar) has a very good reputation in the industry as a guy who knew what is going on, both financially and operationally," said Meagher. "He has expertise in both areas. (And) Litton has been parachuting people from Pascagoula into the Avondale operation to get them up to speed, because that's where the problems have been."
Despite the organizational changes, Litton officials said there are no plans to replace Jerry St. P & #233;, chief operating officer of Litton Ships Systems.Early setbacks
Problems with the LPD-17 arose almost as soon as the Navy awarded Litton a $641 million contract to design, construct and support the initial amphibious attack ship in April 1997.
The company was the lead contractor in an alliance of defense firms that includes Raytheon Electronic Systems, General Dynamics Corp.'s Bath Iron Works subsidiary and Intergraph Corp.
The Navy has said it wants up to 12 of the 684-foot-long, 25,000-metric-ton vessels delivered by 2007, with eight to be constructed by Litton and four by Bath Iron Works in an overall contract that could be worth more than $6 billion. The ships, which would each transport up to 720 Marines, are designed to last 40 years, or about 10 years longer than the average Navy ship, and require less maintenance.
"It's perfectly normal to go through growing pains when designing a new ship," said Randy Belote, a Litton spokesman. "This is the most sophisticated and complicated ship program ever undertaken by the U.S. Navy. We're working closely with the Navy to recognize the design deficiencies."
Still, the problems do not stop there. Litton's Avondale operation has also incurred a $70 million cost overrun since last October in building the first of two tanker ships for Polar Tankers Inc., a subsidiary of Philips Petroleum Inc.
Analysts cited inexperience in building commercial tankers, which require a double hull to prevent oil leakage should one wall rupture, in a market dominated by Japanese and Korean shipbuilders.
"The key issue here is that they've never built these before," said Meagher. "They don't have any experience. It's been a startup and they've been learning their way through it."
The unit that Northrop has little to worry about is Litton's electronics components unit which contains the interconnect technologies section (connecting commercial electronics systems) that Kresa called Northrop's fastest-growing division. It posted a $79.8 million profit in the fiscal year ended July 31, 2000 with profit margins of 16 percent, analysts pointed out. The unit's revenues increased from $595.8 million in fiscal 1998 to $701.4 million in fiscal 2000, records show.
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