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Despite Great Effort, Litton's Troubles Persist

September 14, 1986|RALPH VARTABEDIAN | Times Staff Writer

When Fred O'Green became only the second chief executive in the history of Litton Industries in October, 1981, he set out to recast the very character of the firm--a 1950s-style conglomerate with its hands in a vast array of industries.

Under a restructuring that included the divestiture of 25 corporate divisions with sales of $1.3 billion, Litton focused itself on three core industries that management considered the best of its high-technology lot.

But that strategy has done little to avert a painful series of recent upsets that have slashed profits, undermined its status as an ethical contractor and left a dent in its reputation for doing top-notch work in defense electronics.

Litton's experience seems to show that corporations flocking to the 1980s strategy of divesting themselves of extraneous divisions and focusing their operations more narrowly will not necessarily find the panacea that they expect.

Litton was founded in 1953 as a conglomerate, before the term had even been invented. The theory of the conglomerate was based partly on the idea that diversification lessened the risk of everything going bad at once.

"Conglomerates not only still work, they are a natural business form, providing that the public sees value," Roy Ash, the retired co-founder of Litton Industries, said in a telephone interview. "General Electric has value, and it's made up of a lot of operations."

Litton stock is widely considered to be undervalued in the market. Analysts say that Litton's defense electronics segment alone could be sold for more than the $2.1-billion market value of the entire company.

The company attempted to bolster its stock price last year when it spent $1.3 billion to buy back 36% of its outstanding common stock at $87.60 per share, leaving 27.2 million shares outstanding. But since that buy-back, the stock price has sunk to $76.

Laggard performance, including two consecutive annual declines in net income, is largely to blame. In addition, Wall Street analysts have been consistently downgrading their projections of Litton's profits in recent months. All three of its core industries--defense electronics, oil exploration services and industrial automation--have experienced difficult business conditions or problems of their own making.

Keeps Getting Worse

"Every quarter it looks like it has gotten a little bit worse," said John Simon, an analyst at Seidler Amdec Securities. "I have been steadily reducing my estimates."

Litton, headquartered in Beverly Hills, reported 10 days ago that its net income dropped 76% in fiscal 1986, which ended July 31. The company was stung by big write-offs in its troubled oil exploration services business and its sometimes balky defense business.

In addition, the firm had to cough up $17 million to settle charges that its Clifton Precision special devices division in Springfield, Pa., had defrauded the Navy. Litton pleaded guilty in July to a 325-count indictment that charged that the unit had inflated its cost estimates.

O'Green declined to be interviewed, saying that it would be "inappropriate" while the firm remains under suspension by the Defense Department in connection with the Clifton Precision incident.

The Pentagon suspended Litton from bidding on new contracts, which has caused the loss of "significant business," the company said. Last month, the suspension against Litton's largest defense contracting units was lifted, but several units, including Clifton Precision, remained under suspension.

The fraud charges and the ensuing suspension were only the latest trauma that has beset the firm and it will likely be the easiest to correct. More nettlesome will be Litton's problems in its defense electronics, industrial automation, oil exploration services and microwave oven manufacturing operations.

Main Areas of Growth

The engine of Litton's internal growth has been its defense electronics business, which consists primarily of supplying the Air Force and Navy with navigation equipment, principally inertial navigation gear that uses mechanical and laser gyroscopes. In addition, it is a major supplier of so-called command, control and communications systems, which the military relies on to direct its forces in battle.

Operating profit at Litton's advanced electronics sector, which includes the two principal defense electronics units, dropped to $116.8 million in fiscal 1986 from $221.9 million the year before. The principal cause was a $49-million pretax charge taken in the third quarter on the company's contract to build an air defense system for the Saudi Arabian army.

Litton refuses to disclose exactly what went wrong in Saudi Arabia but completion of the program has been delayed 18 months. Litton has dismissed earlier speculation that the delay was caused by Saudi Arabia's inability to pay for the system.

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