April 15, 2008
LHD-8 problems hit Northrop Grumman earnings
Northrop Grumman (NYSE:NOC) announced today that it expects to record a pre-tax charge to 2008 first quarter earnings of $320 to $360 million or $0.61 to $0.69 per diluted share. The charge will primarily reflect a re-evaluation of the estimated schedule and cost to complete the LHD-8 amphibious assault ship, as well as resource impacts on other Gulf Coast ships, and an evaluation of purchased intangible assets associated with the Shipbuilding business.
The amount of the expected charge will be finalized upon conclusion of ongoing reviews and will be recorded in the Shipbuilding segment. The amount of the charge and updated 2008 financial guidance will be disclosed when Northrop Grumman issues its first quarter results later this month. The expected charge does not impact the company's previously announced 2012 financial targets.
In recent weeks, lack of progress in LHD-8 on-board testing preparatory to sea trials prompted the company to undertake a comprehensive review of the program, including a detailed physical audit of the ship. This examination identified the need for substantial rework on the ship, primarily in electrical cable installations. The revised estimate to complete the ship results from a thorough examination of the amount of rework and the additional time needed to complete the ship. The LHD-8 is now expected to be delivered in the second quarter of 2009. In addition, an evaluation is being performed on other ships under construction at the Gulf Coast shipyard, including the resource impact caused by the delay in the LHD-8. The cost and schedule impacts to be finalized in that evaluation are included in the above charge.
"Northrop Grumman has a strong track record of delivering the world's most sophisticated and best-performing systems. Because of the critical missions our customers perform, we at Northrop Grumman demand of ourselves that we deliver only the best to our customers," said Ronald D. Sugar, chairman and chief executive officer of Northrop Grumman.
"The LHD-8 Amphibious Assault Ship will be no exception. However, in its current state, the ship does not meet our quality standards and it will not be delivered until it does. We are deeply disappointed by the impact of this unanticipated development on our customer and our shareholders. This is not acceptable to me or anyone at this company. We are taking all necessary steps to strengthen quality processes and management oversight of our Gulf Coast shipbuilding programs."
The keel for Makin Island (LHD-8) was laid in February 2004. LHD-8 features significant enhancements compared with earlier ships of the class. The LHD-8 will incorporate major new systems, including power by gas turbine engines and electric propulsion rather than steam turbines, and will incorporate extensive electrical upgrades over previous ships of the class. Delays in construction of the ship and financial performance for the program were exacerbated by Hurricane Katrina.