As a financial and legal crisis looms outside, 4,000 Northrop workers in a windowless factory in Hawthorne are feverishly toiling to correct production problems on the MX missile guidance system.
The aerospace contractor has remained behind schedule on the program for five years and is still four months behind in its deliveries. In November, it made no new deliveries of its product.
Management considers that only a lull before a substantial improvement in delivery rates, but investors are worried. The price of Northrop stock has plummeted by 45% in recent months, in part the result of problems in the missile program. Financial analysts say the decline, which leaves Northrop with a market value of only $1.2 billion, has become a signal of vulnerability on Wall Street.
Meanwhile, a federal grand jury in Los Angeles is reportedly investigating allegations of criminal fraud in the missile program; the federal government has already charged Northrop with civil fraud.
FOR THE RECORD
Los Angeles Times Monday December 21, 1987 Home Edition Business Part 4 Page 2 Column 6 Financial Desk 2 inches; 42 words Type of Material: Correction
A quote that was extracted from and displayed with a story about Northrop Corp. in Sunday's editions was incorrectly attributed to Northrop vice chairman Frank Lynch. In the story, the quote was correctly attributed to a former manager in Northrop's electronics division who was not identified.
Inside the Hawthorne plant, the financial and legal perils seem almost abstract, save for little red stickers that appear here and there on items, reminding employees in fine print, "Litigation materials, do not remove."
Northrop Group Vice President David N. Ferguson, who is leading the recovery effort at the firm's electronics division, said in a recent interview that the program is showing strong progress. Air Force officials readily agree.
"We will be back on schedule in the early part of next year," Ferguson predicted. "The number one thing is to ship quality products and, by God, we have done that."
But after more than a year of being the focus of unwanted attention for problems with its MX missile work, the damage to Northrop and the strain on the people involved are showing.
Moreover, the cumulative effect of Northrop's MX problems, which have roots that extend back many years, may put at risk the company's effort to move into the front ranks of the aerospace industry.
Although it is a well-known firm, Northrop ranked only as the nation's 31st-largest defense contractor in 1986. It had been counting on explosive growth in the next few years as production begins on some big-ticket programs, such as the Stealth bomber and the Advanced Tactical Fighter, but some analysts have started to raise troubling doubts about the company's capability of handling that growth.
'Scary' Stock Price
"There have been so many disappointments at the company," aerospace analyst Joseph Campbell of the Paine Webber investment firm observed. "It has a base of disappointed shareholders and a low, low stock price.
"I am reviewing carefully the Northrop bylaws and certificate of incorporation to determine how vulnerable they could be to a hostile takeover. I want to at least be prepared if anything happens that would make Northrop precarious. There is not a lot of room in the stock price."
Northrop stock closed at $25.375 Friday on the New York Stock Exchange, down 25 cents.
While the company is in no financial trouble, its profits are suffering due to the MX problems. Northrop was forced to take a writeoff against profits on the MX program in the most recent quarter.
David J. Smith, an analyst at Alex. Brown & Sons, terms the present low price of the company's shares "pretty scary," adding, "It is a dangerous position for the company if it wants to remain autonomous."
Northrop Senior Vice President Les Daly said the company has had "standard defenses" against a hostile takeover for several years. He added, "Many analysts recommend the stock as a buy or a hold. We think the fundamentals of the company are sound. And we think it should be valued higher, as they do."
Analysts also are not entirely reassured by the Air Force's backing of Northrop. "The Air Force has been quite supportive, but it suits their purposes to say those things," Campbell observed.
In fact, the Air Force is causing Northrop a good deal of financial stress by withholding $130 million in contract payments, more than 10% of the company's net worth, because of the late deliveries of guidance devices. At current interest rates, the withholding of the payments costs Northrop almost $1 million a month to finance.
What cannot be measured yet is the potential for Northrop's performance on the MX program to damage its chances to win future contracts. Under a new policy that is being formulated, the Air Force will weigh such problems against any division of the same company in future contract competitions.
"Any problem Northrop has had would to some degree affect any of the programs they will be bidding on in the future," said Lawrence A. Skantze, the recently retired general who commanded Air Force procurement. "My visceral feeling is that Northrop still has a lot of work to do to straighten out their act."