U.S. Navy Contracts Help Keep Litton Shipshape

There was nothing out of the ordinary about last week’s award of a $329.5 million U.S. Navy shipbuilding contract to Litton Industries Inc.

But the long expected-contract underscored a sometimes overlooked fact: Ordinary contracts for ordinary military hardware can still mean huge profits for the Woodland Hills-based defense giant.

Litton is better known for its guidance and control systems division, which makes high-tech devices for electronic warfare.

Recently that division broke new ground for Litton by landing a $22.3 million U.S. Army contract to build so-called interrogator antennas for antiaircraft weapons that distinguish friend from foe.

But the company is also a leading builder of U.S. Navy warships.

And while “guidance and control is the more exciting part of the company,” said Goldman Sachs analyst Howard A. Rubel. “Old reliable shipbuilding . . . is still an integral part.”

Last week’s contract awarded funds for construction of the company’s fifteenth DDG-51 class Aegis guided missile destroyer for the Navy.

The ship will be built at Litton’s Ingalls Shipbuilding division in Pascagoula, Miss.

The 8,600-ton Aegis is what the Navy calls “a multimission surface combatant,” said Navy spokesman Lt. Greg Geisen. That is, it’s a ship for “shooting missiles at beaches, launching Tomahawks and defending battle groups from incoming air attacks,” he said.

The selection of Litton was no surprise, since the program is several years old and contracts for Aegis destroyers are rotated yearly between Litton’s Ingalls, and General Dynamics’ Bath Iron Works in Maine.

But the contract is significant because it means Ingalls will continue to do what it’s been doing for several years: quietly chugging along with a $3.6 billion-backlog, and supplying well over a third of the company’s annual revenues, said Bob Knapp, Litton spokesman.

Annual operating profits from Ingalls in recent years have been about $132 million, he said.

Even though the government is building the Aegis fleet at a relatively slow pace, according to Rubel, an option in the contract for Litton to build two more destroyers in the next two years puts its value at nearly $1 billion.

For Litton, Aegis is “an annuity for the remainder of the decade,” said Cowen & Co. analyst Elliott Rogers Jr.

However, growth of Litton’s shipbuilding division depends on whether the company can successfully develop foreign markets and on the outcome of future competitions.

Much hinges on a contest expected later this year to build the Navy’s next generation of amphibious assault ships, the LPD-17.

Litton is competing against a team comprised of Avondale Industries and Bath Iron Works to build these ships.

As Rogers put it: “The winner of that obviously takes a lot. The loser sucks their thumb.”