By Dana Hedgpeth
Washington Post Staff Writer
Thursday, July 15, 2010; A16
Northrop Grumman, one of the Navy's biggest contractors, said Wednesday that it plans to close one of its seven shipbuilding yards and may sell or spin off its entire naval business, signaling a major shift in its strategy.
The company said it will shut down its shipyard in Avondale, La., near New Orleans, and move all work on amphibious vessels to its facility at Pascagoula, Miss., by 2013. Northrop said it has hired outside advisers to help it evaluate whether selling its shipbuilding line makes sense for its shareholders and government customers.
"Recognizing our company's long-term strategic priorities, we foresee little synergy between shipbuilding and our other businesses," Northrop chief executive Wes Bush said in a statement. He said the consolidation to Northrop's Pascagoula facility will "reduce future costs, increase efficiency and address shipbuilding overcapacity."
For Northrop, shipbuilding was once seen as core to its business. The company has been a major supplier of destroyers, amphibious assault ships and other vessels for the Navy and Coast Guard. In 2001, it bought Newport News Shipbuilding in a $2.6 billion deal that made it one of the world's biggest shipbuilders.
But in recent years, the Pentagon's priorities have changed from complex and costly weapons programs to smaller, more agile technologies that can be used in modern wars against shadowy foes.
In response, Northrop has been emphasizing other business units that produce higher margins, industry analysts said. Last year, the company sold its advisory unit and withdrew its bid to build an aerial refueling tanker for the Air Force after it decided it couldn't make enough of a profit if it won the deal.
Since Bush became chief executive in January, he has pushed for Northrop to focus on electronics, unmanned aircraft, cybersecurity and missile defense, said Phil Finnegan, a defense industry analyst at the Teal Group. Northrop has also announced its plans to move its headquarters from Los Angeles to Northern Virginia.
"You've had a change in management and a new CEO who is clearly interested in taking the company in a new direction," he said. "They're likely to exit shipbuilding, they didn't go after the tanker deal. . . . They're beginning to see the U.S. defense budget stagnate, and it is now important to protect what you have."
Analysts said Northrop has had troubles with quality and profitability in its shipbuilding and that its potential sale leaves General Dynamics of Falls Church as the only other major shipbuilder in the United States.
"Northrop's Gulf Coast shipyards should be consistent profit generators," said Loren Thompson, a defense industry consultant. "The fact they haven't been is a source of endless exasperation for the company's management. They've run out of ideas of how to fix the profit and performance."
Northrop said it will take a $113 million charge in the second quarter as a result of closing its Avondale facility. Northrop's shares closed Wednesday at $1.73, up $56.99.
The company's seven main shipyards employ 40,000 people in Virginia, Mississippi and Louisiana and were considered big employers in those areas. Northrop executives said they expect there may be "some opportunities" for some of the 5,000 employees at the operation near New Orleans to relocate to the Pascagoula shipyard.
The Pentagon considers Northrop's moves to be "fundamentally a Northrop business decision," said Geoff Morrell, the Pentagon's press secretary.
"We don't have a view on that other than we want to preserve competition in the marketplace," he said. . If Northrop's decision to close its Avondale facility leads to reduced overhead costs and more efficiency, as company executives have said, that could mean "greater affordability of the ships they produce" for the Pentagon, Morrell said.
"If that's the intention and that's the outcome that would be a good thing for the department," he said.