Northrop Grumman's move won't alter Navy's course

The Navy has shrugged off Northrop Grumman Corp.'s decision to sell or spin off its shipbuilding business, including the Newport News shipyard that builds aircraft carriers and submarines.

"The announcement is a business decision, but we will stay engaged and will continue to evaluate how things progress, with the goal of being able to effectively execute the shipbuilding plan," Cmdr. Victor Chen, a Navy spokesman at the Pentagon, said Wednesday.

The Navy said it is committed to following the long-range shipbuilding plan presented to Congress earlier this year, which calls for an average of about $16 billion a year in ship construction to maintain a roughly 300 vessel fleet.

Northrop Grumman's review of the Navy's shipbuilding plan led it to conclude that there will be excess capacity at its Gulf Coast operations, which is why it also announced it was

closing its shipyard near New Orleans that builds amphibious assault ships, said Wes Bush, the company's CEO and president, during a teleconference Wednesday.

"Too many shipyards, not enough ships," said John E. Pike, director of GlobalSecurity.org, a military information website. "That wasn't a question of whether, it was how and when."

But, Pike acknowledged, he was surprised by Northrop's decision to shed its shipbuilding business.

"That's kind of hard for me to understand," he said.

Wall Street gets it, though. Shares of Northrop stock surged $1.73 to $56.99 in New York Stock Exchange trading Wednesday.

In a note to investors, Heidi Wood, a Morgan Stanley analyst, wrote: "For many of us this is no surprise given the operational challenges, sub-average profit margins and strained relationship with the Navy. An exit looks to be the right next step and a positive for shareholders. We think the Navy and Department of Defense will not issue objections to this announcement."

During the teleconference with Wall Street analysts, executives of Northrop Grumman reiterated that shipbuilding doesn't fit with its other defense-related businesses.

"Going forward, we perceive little synergy between shipbuilding and our other businesses," said Bush, citing strengths in aerospace, electronics, information systems and technical services. Bush said he still views shipbuilding as a viable, profitable business, but not one that is compatible with the strategic goals of the Los Angeles-based company.

"We think that separation from the rest of Northrop Grumman could make this specific shipbuilding opportunity more tangible for investors and lead to a better alignment of the remaining portfolio within Northrop Grumman," Bush said.

Asked whether Northrop might consider selling or spinning off its Newport News and Gulf Coast operations separately, Bush said no.

"From our perspective, as we look at our strategic alternatives, all of those alternatives contemplate the separation of the entire shipbuilding enterprise as an integrated enterprise," Bush said.

Northrop Grumman employs nearly 20,000 people in Newport News building nuclear-powered subs and carriers. It will close its Louisiana operations and consolidate that work into its Ingalls shipyard in Pascagoula, Miss., which builds surface combatants such as destroyers.

Bush said Northrop's review of the Navy's shipbuilding plan led it to conclude that there will be excess capacity at its Gulf Coast operations that a consolidation of those facilities would address. Northrop will consult with the Navy as it moves ahead with either selling or spinning off the shipbuilding operations, Bush said.

"It's going to be very important to Northrop Grumman that the Navy be very satisfied with the outcome here," he said.

Bush said he was reluctant to put a timeline on the process, but Jim Palmer, Northrop Grumman's chief financial officer, said it would be "a number of quarters before we're finished here."

The company was leaning in the direction of a spinoff rather than a sale, Palmer said.

"Spin is essentially all in our control - and a sale, obviously, we'd need to validate the interested parties," Palmer said. "We do believe there will be a number of interested parties."

One Pentagon spokesman told Bloomberg News on Wednesday that a sale to General Dynamics Corp. would be problematic, citing competitive concerns. General Dynamics is the nation's other large shipbuilder with yards that produce subs, surface warships and auxiliary ships.

"We will be watching closely to see what they decide to do," said Geoff Morrell, the Defense Department spokesman.

Robert McCabe, (757) 446-2327, robert.mccabe@pilotonline.com