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July 14, 2010

Northrop Grumman looking to exit shipbuilding

Northrop Grumman Corporation (NYSE:NOC) yesterday confirmed that it will close down its Avondale shipbuilding operation. It said it is also looking to exit shipbuilding completely.

CEO and President Wes Bush announced plans to consolidate the company's Gulf Coast shipbuilding operations and explore strategic alternatives for its shipbuilding business. He also said that "we foresee little synergy between Shipbuilding and our other businesses. It is now appropriate to explore separating Shipbuilding from Northrop Grumman."

Under the consolidation plans, ship construction at Avondale will wind down in 2013. Future LPD-class ships will be built in a single production line at the company's Pascagoula, Miss. facility. The company anticipates some opportunities in Pascagoula for Avondale shipbuilders who wish to relocate.

As a result of the Gulf Coast consolidation, the company will recognize an estimated pre-tax charge of $113 million in the second quarter of 2010. In addition, as previously disclosed, in the second quarter of 2010, the company will record a tax benefit of $296 million related to the final settlement with the Internal Revenue Service of tax returns for the years 2004 through 2006. The net impact of the charge and the tax benefit will increase second quarter 2010 earnings from continuing operations by about $0.73 per share. Neither of these items is reflected in the financial guidance the company provided on April 28, 2010.

"Our decision to consolidate the Gulf Coast facilities is driven by the need for rationalization of the shipbuilding industrial base to better align with the projected needs of our customers," said Wes Bush, chief executive officer and president. "The consolidation will reduce future costs, increase efficiency, and address shipbuilding overcapacity. This difficult, but necessary decision will ensure long-term improvement in Gulf Coast program performance, cost competitiveness and quality."

"We are extremely proud of our Avondale shipbuilders and their dedicated contributions to our company and our nation. We will work with federal, state and local officials and others to explore alternate uses for Avondale as the last two ships under construction reach completion," said Bush.

Northrop Grumman says the consolidation of Gulf Coast ship construction is the next step in the company's efforts to improve performance and efficiency at its Gulf Coast shipyards, which began with the integration of its shipbuilding operations in early 2008. Since that time, Gulf Coast organization and leadership, operating systems, program execution, risk management, engineering, and quality have been the focus of intense improvement efforts.

Northrop Grumman that consolidating new ship construction on the Gulf Coast in one shipyard will position Shipbuilding to achieve additional performance improvement and efficiency over the long term.

"Our decision to explore strategic alternatives for Shipbuilding is the result of a portfolio assessment to determine how to best serve our shareholders, customers, and employees. The performance improvement initiatives underway in our Gulf Coast operations will be further enhanced by the facilities consolidation. Recognizing our company's long-term strategic priorities, we foresee little synergy between Shipbuilding and our other businesses. It is now appropriate to explore separating Shipbuilding from Northrop Grumman," said Bush.

The company will evaluate whether a separation of Shipbuilding would be in the best interests of shareholders, customers and employees by allowing both the company and Shipbuilding to more effectively pursue their respective opportunities to maximize long-term value. Strategic alternatives for the Shipbuilding business include, but are not limited to, a spin-off to Northrop Grumman shareholders. The company has engaged Credit Suisse as its lead financial advisor. The company is also being advised by Perella Weinberg Partners.

Financial Impacts

As a result of the consolidation, the company expects higher costs to complete ships currently under construction in Avondale due to anticipated reductions in productivity and, as a result, is increasing the estimates to complete LPDs 23 and 25 by approximately $210 million. Of this amount $113 million will be recognized as a one-time, pre-tax cumulative charge to Shipbuilding's second quarter 2010 operating income. The balance will be recognized as lower margin in future periods, principally on the LPD 25. The company also anticipates that it will incur substantial restructuring and facilities shutdown-related costs including, but not limited to, severance, relocation expense, and asset write-downs. These costs are expected to be allowable expenses under government accounting standards and recoverable in future years under the company's contracts. The company estimates that these restructuring costs will be more than offset by future savings expected to be generated by the consolidation.


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