April 15, 2008 / 7:47 PM / in 10 years

UPDATE 2-Northrop to record Q1 charge on assault ship delay

(Recasts; adds analyst’s comments, U.S. Navy response; updates share movement)

By Bhaswati Mukhopadhyay

BANGALORE, April 15 (Reuters) - Defence contractor Northrop Grumman (NOC.N) expects to take a first-quarter pretax charge of 61 cents to 69 cents a share as quality concerns forced a delay in its program to build an amphibious-assault-ship, sparking a 7 percent slide in its shares.

The company said it will revaluate the cost and schedule to complete the construction of the amphibious assault ship known as LHD-8, and expects a total charge of $320 million and $360 million.

Northrop, which makes warships, nuclear submarines, unmanned surveillance aircraft and a range of military electronics, will now deliver the LHD-8 in the second quarter of 2009 to the U.S. Navy, indicating a delay of six months.

“Management did not understand the degree of the problem until the ship was in testing, and the cost of rework at this late stage increased the charge substantially,” J.P. Morgan Securities analyst Joseph Nadol said.

Rework related to LHD-8 will account for more than 80 percent of the charge, most of which is for higher labor costs, Nadol said in a note to clients.

“Most of the charge is cash with an impact through the first half of 2009,” Nadol, who kept his “neutral” rating on the stock, added.

Northrop, the No. 3 Pentagon supplier behind Lockheed Martin Corp (LMT.N) and Boeing Co (BA.N), said the expected charge does not impact its 2012 financial targets announced earlier.

Northrop said the charge will also reflect the resource impact on other Gulf Coast ships, and an evaluation of purchased intangible assets related to the shipbuilding business.

JP Morgan’s Nadol said Tuesday’s selloff in the company’s shares and the valuation gap that has emerged between Northrop and its peers could represent a trading opportunity.

The key rivals of the company are Lockheed Martin, Raytheon Co (RTN.N) and General Dynamics Corp (GD.N).

The U.S. Navy said in a statement it is concerned about the extension in the schedule and the related impact to the fleet, and is “exploring options to mitigate that operational impact.”

The LHD-8 will incorporate new systems, including the capacity to generate power using gas turbine engines and electric propulsion rather than steam turbines.

Shares of Los Angeles-based Northrop fell to a new 52-week low of $71.39, before recovering some of the losses to trade down $5.21 at $71.63 Tuesday afternoon on the New York Stock Exchange. (Additional reporting by Bill Rigby in New York; Editing by Pratish Narayanan)

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