Northrop Grumman Corporation (NOC) has decided to consolidate its Gulf Coast shipbuilding operations to cater more ably to the needs of its customers. The company also plans to find strategic alternatives for its shipbuilding business.
Northrop Grumman expects improved Gulf Coast program performance, cost competitiveness and quality through the proposed consolidation. Also, this consolidation marks a step forward in its efforts to improve performance and efficiency at its Gulf Coast shipyards that began with the integration of its shipbuilding operations in early 2008.
To give shape to the proposed consolidation, Northrop Grumman will close down the ship construction facility at Avondale in 2013. Going forward, the company will construct Landing Platform Dock (LPD)-class ship in a single production line at its Pascagoula, Mississippi facility. The company, with federal, state and local officials and others will explore alternate uses for Avondale.
Northrop Grumman anticipates productivity to drop at Avondale following the announcement of the consolidation. It now estimates an incremental cost of approximately $210 million for completing LPD 23 and 25 ships under construction in Avondale.
Of this incremental expense, the company will record $113 million 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 LPD 25. Shipbuilding operating income in the first quarter of 2010 was $106.0 million.
The company will also have a tax benefit of $296 million related to the final settlement with the Internal Revenue Service for the years 2004 through 2006. The cumulative effect will increase second-quarter 2010 adjusted earnings by 73 cents a share.
Management expects earnings in 2010 in the range of $5.75-$6.00 per share. The Zacks Consensus Estimate for the second quarter of 2010 is earnings of $1.47 per share. The Zacks Consensus Estimate is earnings of $6.00 per share for full year 2010 and $6.85 per share for full-year 2011.
Northrop Grumman will also incur huge costs on severance, relocation and asset write-downs related to restructuring and facility shutdown. The company expects these costs to be allowable expenses under government accounting standards and intends to recover them from contract wins going forward. Eventually, expected savings from consolidation will more than offset these restructuring costs.
Northrop Grumman also believes that by consolidating new ship construction on the Gulf Coast in one shipyard, the shipbuilding business will achieve improvement in performance and efficiency over the long term.
To better serve its shareholders, customers and employees, the company plans to explore strategic alternatives for the entire shipbuilding business. As the company expects little synergy between shipbuilding and other businesses, it intends to separate shipbuilding from Northrop Grumman. Strategic alternatives for the shipbuilding business include a spin-off to Northrop Grumman shareholders.
However, the company will evaluate the separation vis-à-vis the interests of shareholders, customers and employees, allowing both the company and shipbuilding to more effectively pursue their respective opportunities to maximize long-term value.
Northrop Grumman offers a strong program portfolio positioned to take advantage of growth in the defense space, growing balance sheet and an ongoing share repurchase program. However, lower backlog, loss of key contracts and substantial exposure to missile-defense-related programs can weigh on the company’s performance.
Based in Los Angeles, Northrop Grumman provides products, services and solutions pertaining to information and services, aerospace, electronics and shipbuilding to the military, government and commercial customers in the United States and beyond.
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