The Securities and Exchange Commission yesterday charged that Litton Industries improperly concealed information from stockholders about hundreds of millions of dollars in anticipated losses from two major shipbuilding contracts, one civilian and one military.
According to charges filed in U.S. District Court by the SEC, the shipbuilding firm delayed accounting for losses -- which would have sharply reduced or wiped out reported earnings in some years -- counting on the Navy to eventually cover the losses.
In 1978, after years of claims and counterclaims in a dispute that appeared to threaten the Navy's shipbuilding program, the company finally entered into a public settlement that fixed Litton's losses at at least $200 million. At that point the company accounted for both the $200 million and a loss of another $128 million on the commercial contracts, but it wasn't soon enough, the SEC said.
Litton yesterday agreed to a settlement of the claims without admitting or denying the charges. As part of the settlement, the company agreed that the audit committee of its board of directors will carefully monitor military procurement contract overruns and disputes for the next three years and that the company will hire an independent consultant to review cost estimates and accounting under military contracts.
The SEC complaint focused on losses from contracts to built eight ships for the American Presidents Lines and Farrell Lines and a separate contract to build nine helicopter assault ships for the U.S. Navy.
Shortly after it began work on the commercial contracts, "Litton experienced severe problems" at its new shipyard in Pascagoula, Miss., resulting in delay, according to the SEC complaint. In the long run, some of the work was done in Litton's old shipyard instead.
As a result, Litton experienced cost overruns on the commercial contracts that amounted to about $128 million over two years, 1971 and 1972. Instead of recognizing the cost overruns, the company deferred them, assuming that profits from Navy shipbuilding contracts would eventually wipe out the loss.
"Litton's decision in 1967 to build the new shipbuilding facility in Pascagoula, Miss., was made in response to direct urging by the U.S. Navy," the company said in a statement filed with the complaint. The commercial contracts "were intended by Litton to 'debug' the new yard and its planned new manufacturing processes," the defense contractor said. For these reasons, the company considered some of the costs incurred during the commercial contracts as costs related to future Navy work.
Whether the costs are recoverable under U.S. government contracts has not yet been determined.
In 1978, however, Litton and the Navy reached an accord on losses stemming from the helicopter assault ships. That settlement, achieved in spite of opposition that labeled it an unwarranted bail-out, left Litton with a loss of $200 million on the military contracts.
"The uncertainties relating to Litton's recovery of its excess costs . . . were such that Litton lacked adequate grounds for not providing for a loss on that contract prior to 1978," when it did as a result of the settlement, the SEC complaint charged.
If it had provided for the loss earlier it would have "substantially reduced Litton's reported net income," the SEC complaint noted.