Litton makes second plunge into submarine business.

Mississippi unit looks to benefit from any possible deal

After being out of the industry for 14 years, Litton Industries Inc. is trying to re-enter the submarine-building business.

Last week the Beverly Hills-based company said it had been given approval by the United States government to negotiate with Egypt to build two diesel-powered submarines for that country's navy.

A Litton spokesman said the potential deal with Egypt signals the company's desire to re-enter the business at its Ingalls Shipbuilding division in Pascagoula, Miss.

Between 1957 and 1974, the Litton shipyard built one diesel-powered and 12 nuclear-powered submarines for the U.S. Navy. It continued in the business until 1980 doing maintenance work and over-hauling submarines.

Litton got out of the business because it was losing ground to the country's two primary submarine-building companies -- the Electric Boat division of General Dynamics Corp. in Groton, Conn., and Newport News Shipbuilding Co. in Newport News, Va. In addition, the company stopped building submarines because it felt there was greater potential in building military surface ships, said spokesman Robert Knapp.

At the Ingalls shipyard, Litton currently builds large amphibious assault ships, as well as smaller cruisers, destroyers, corvettes and frigates.

"Obviously, the intent here is to go out and look for new products and new markets," said Phua Young, a financial analyst who follows Litton at securities brokerage Lehman Brothers in New York. "With other parts of their defense business downsizing because of the spending cuts, they have to go out and seek out new business."

What Litton has received from the U.S. State Department is an export license to sell diesel-powered submarines overseas. The license does not apply to nuclear-powered submarines.

As a result of the license, Litton is proceeding with negotiations with the government of Egypt to build two submarines under a joint contract with Howaldtswerke-Deutsche Werft, a German submarine maker. There is no contract yet with Egypt to build the vessels, said Knapp, and negotiations could take up to a year to complete.

According to Knapp, other submarine makers were initially interested in the proposed deal but they have since dropped out of the discussions and now the only negotiations are between the Litton/HDW team and Egypt. He said the contract to build the two submarines would be worth several hundred million dollars.

Under the tentative arrangement, major components parts of the two 200-foot-long submarines would be made in Germany and then shipped to Pascagoula for final assembly.

"Teaming arrangements, such as this one involving Ingalls and HDW, are a major element of Ingalls' long-term business strategy to expand into the international market," said Gerald St. Pe, president of the Ingalls division, in a statement. "Ingalls is already contracted to build naval vessels for one allied country, and is in the process of finalizing negotiations to modernize naval vessels for another country."

St. Pe was referring to a contract with the government of Israel to build three corvette-class surface military ships, and a proposed agreement to overhaul two of Venezuela's frigates. Corvettes and frigates are military surface ships that are smaller than cruisers, which weigh about 8,000 tons, and destroyers. Destroyers generally weigh a little more than 8,000 tons.

Knapp said it is unlikely Litton would ever get back into building either nuclear- or diesel-powered submarines for the U.S. Navy. The two existing submarine makers for the U.S. have the market wrapped up and, in addition, there are no indications that military spending will turn upward any time soon, said Knapp.

He also said it is unlikely Litton would ever be allowed by the U.S. government to build a nuclear-powered submarine for a foreign country. However, the company is actively looking for potential overseas customers for diesel-powered submarines, he said.

If Litton wins the Egypt contract, it would stabilize employment at the yard that is expected to decline over the next few years from 14,000 to 10,000, said Knapp.

The Ingalls shipyard accounted for $1.4 billion of Litton's $3.5 billion in revenues for fiscal 1993 ended last July 31. Of the defense company's $264 million in operating revenue for fiscal 1993, $130 million was produced by the Ingalls division.

Wall Street analysts who follow Litton said last week the Ingalls division has been a fairly steady and consistent money-maker for the company. They said the division's reputation at the Pentagon for delivering ships on time and on budget is also strong.

The Ingalls division currently has a $4 billion backlog of orders for military ships, down from $4.5 billion several years ago. The backlog has been shrinking as Pentagon spending has declined over the past five years.