The Ship Model Forum

Shipbuilding Is Drag On Northrop Profit
By August Cole
Wall Street Journal
July 30, 2008

Northrop Grumman Corp.'s shot at a $40 billion U.S. Air Force aerial-refueling-tanker contract may be up in the air, but analysts focused Tuesday on the company's shipbuilding operations on the Gulf of Mexico during a second-quarter conference call.

Los Angeles-based Northrop said net income rose 7.6% to $495 million, or $1.44 a share, from $460 million, or $1.31 a share, a year earlier. Revenue rose 9.5% to $8.63 billion.

Northrop Chief Executive Ronald D. Sugar said the company believes the Airbus-based tanker that it offered along with partner European Aeronautic Defence & Space Co. remains the best choice for the U.S. Air Force. "New tankers are urgently needed now, and our KC-45 is ready to go now," he said.

After Boeing Co. successfully protested Northrop's victory earlier this year, the Defense Department is expected to solicit bids in the coming weeks in hopes of picking a new winner by year end.

Despite the overall improvement in Northrop's financial performance, its shipbuilding division continues to experience problems from the devastation brought by Hurricane Katrina in 2005. Operating income in the shipbuilding division slipped 6% to $126 million, despite a 24% increase in revenue to $1.69 billion.

Northrop surprised investors during the first quarter when it announced a $326 million charge blamed largely on botched electrical cabling on a Navy amphibious assault ship, the Makin Island.

During a conference call, President Wes Bush said he is confident the ship's fiber-optic cabling will be completed later this year. "I would add that timely accomplishment of this milestone is critical to our ability to support the test program on the delivery timeline that we've established," said Mr. Bush.

That step is crucial to delivering the ship to the Navy in the second quarter of 2009, and to shifting workers to other ships under construction. Northrop has said a shortage of experienced workers in the area hurt its ability to fully recover from the hurricane's effects.

The Makin Island is on Wall Street's radar because Northrop, not the Navy, is paying for the redone work. The problems required Northrop to pull workers away from other projects at the Ingalls shipyard in Pascagoula, Miss. In a sign of how seriously Northrop's management is taking the situation, Mr. Bush reviews the ship's progress weekly.

Northrop shares were down $1.13, or 1.7%, at $67.54 in 4 p.m. composite trading on the New York Stock Exchange.

How many ships have they built?

Remember Grumman has a long history of flying boats and seaplanes.

All the inspectors in the world can be purchased with the annual lunch budget of the board of directors.

Competition is what is needed. The one thing a company's management cannot control is an honest competitor. Look at the shellacking the US car industry has taken from abroad. When it was just four manufacturers, customer needs came last and these companies were the wealthiest in the country. Let Japanese and Europeans into the game and suddenly their old methods and sloppy products don't sell too well.

The USN and USCG need to buy European frigates to replace the LCS and FFG, and seriously look to larger designs from abroad in the future. We did this around 1900 and it had a very positive effect on shipbuilding at home.

My main criticism of Northrop Grumman, Lockheed Martin and, perhaps, Boeing is that they don't seem to put enough emphasis on quality and value in their products.

It may be helpful to recall that while the Elswick Cruisers were a very successful export design, they were not up to RN standards and therefore were not used by the "home team".

Such a direct relationship between quality work and the safety and efficiency of our armed forces seems tot be lacking today.

One might also note that the early Burkes have need stem strengthening, after sea experience showed the need. I don't know if this was a design flaw or a construction flaw.

It may be helpful to recall that while the Elswick Cruisers were a very successful export design, they were not up to RN standards and therefore were not used by the "home team".

The model these days seems to be to use a design adapted to the home market, then produced in variants for export to gain profit from the economies of scale. Differences would not be in the basic structure of the ship, but in equipment it is fitted with to tailor its needs to the buying navy.