Military Temporarily Bars Litton From Defense Work
The Navy on Wednesday barred Litton Industries from receiving new Defense Department contracts, one day after the firm agreed to plead guilty to overcharging the Pentagon by $6.3 million and to pay $15 million in restitution and penalties.
The temporary suspension, the latest in a growing number of Pentagon disciplinary actions against defense contractors accused of wrongdoing, could significantly hurt Litton’s defense electronics business if it lasts for several months or longer, analysts said.
However, the suspension will apply only to new contracts or renewals, not to those already awarded to the Beverly Hills-based firm, one of the nation’s largest defense contractors.
The firm will be given 30 days to respond to the suspension and submit any new information about the case, the Navy said. The suspension “is for a temporary period pending completion of a thorough review of the underlying facts surrounding the ongoing legal proceedings,” the Navy said.
A Justice Department investigation is continuing to determine if charges are warranted against additional Litton executives. A federal grand jury in Philadelphia on Tuesday issued a 325-count indictment against the Springfield, Pa.-based Special Devices division of Clifton Precision, a Litton unit, and two of its former executives.
The indictment charged the division with grossly inflating prices on about 45 contracts for radar and other electronic equipment from 1975 to 1984. Litton pleaded guilty to all charges, and its $15-million payment for restitution and penalties is the largest ever in a defense contract fraud case.
In a brief statement, Litton Chairman Fred W. O’Green said that the company “will take the specific additional actions necessary to reassure the Defense Department that it is a responsible company fully qualified to do business with the U.S. government.”
He and other company officers would not elaborate on what those additional actions might be or whether they would challenge the Pentagon’s suspension.
“Those improper activities are behind us,” Litton spokesman Robert S. Knapp said, noting that new programs, such as tighter management controls, have been instituted “to make sure than any violations of long-standing Litton policy don’t happen again.”
Other Firms Suspended
Litton thus joins a growing list of contractors that have been suspended by the Pentagon amid allegations of wrongdoing on defense contracts. Other major contractors suspended in recent months include General Dynamics Corp. and General Electric Co.
The Pentagon has increasingly ordered such suspensions, using the procedure to demand improvements in accounting procedures and the development of corporate codes of ethics.
The suspension could have a significant negative effect on Litton if it lasts for several months, some aerospace analysts said.
Defense business accounted for $2.1 billion, or about 46%, of Litton’s $4.6 billion in revenues in its latest complete fiscal year, which ended July 31, 1985. Litton received $1.53 billion, or 1.01%, of Defense Department contract awards in the government’s fiscal year ended Sept. 30, 1985.
Company Called Vulnerable
Litton is vulnerable, analysts said, because of its role as one of the nation’s leading suppliers of defense electronics equipment. Contracts for such equipment tend to be smaller and awarded more frequently than contracts for major aircraft or ship programs, thus making a suspension potentially more damaging, said Wolfgang Demisch, aerospace analyst with First Boston Corp. in New York.
In addition, the defense electronics industry has many competitors, many of which could take contracts away from Litton, Demisch said. For example, Litton is a major supplier of inertial guidance systems for missiles and aircraft, but that same work could be done by divisions of General Motors Corp., Singer Co. or Honeywell Inc., he said.
“So, a several months’ suspension is going to hurt,” Demisch said. “Competitors are likely to do their damnedest to take advantage” of Litton’s suspension.
Some Suspensions Are Brief
However, suspensions of larger defense contractors, such as General Dynamics, have tended not to last long, in part because of the Pentagon’s dependence on the products produced by those firms, said Jon D. Gruber, aerospace analyst for Montgomery Securities.
“They (the Pentagon) can’t suspend these guys for long or they’re dead,” Gruber said.
Some of Litton’s other major defense programs, which require periodic contract renewals, thus may not be affected because of their size and the impracticality of finding alternative contractors. Such is the case with Litton’s contract to build Aegis-class cruisers, one of the most sophisticated U.S. warships, Demisch said.
