Avondale Industries Business Information, Profile, and History

Company Perspectives:

Northrup Grumman Avondale Industries is a manufacturer of sea-going vessels. We serve marine, transportation, energy, defense and industrial customers. Our products are made to customer specifications and are supported with superior engineering and service. We strive to be the leading supplier in every market we serve by adding significant value to our products; by providing outstanding quality at the lowest possible cost; by honoring our pledges to on-time delivery; and by forging true partnerships with our customers. Only in this way can we continue to compete in such challenging industries.

History of Avondale Industries

The primary business of Avondale Industries is the construction, repair, conversion, and 'jumboization' of ships, barges, tugboats, and other vessels. The company is a major supplier of vessels to the U.S. Navy, constructing a full range of destroyer escorts, frigates, cutters, fleet oilers, landing ship docks, and landing craft air cushion (LCAC) at shipyards and repair and manufacturing facilities in Louisiana and Mississippi. In addition, the company is a major manufacturer of double-hulled tankers, barges, and other commercial ships. Briefly under the parentage of Litton (and known then as Litton Avondale Industries), the company was sold to the defense powerhouse Northrup Grumman in 2000 and became a part of that company's ship systems unit.

River Boats and Navy Ships: 1938--59

Avondale grew out of a small barge repair business, Avondale Marine Ways, Inc., which was founded in 1938 by James G. Viavant, Harry Koch, and Perry N. Ellis about 12 miles up river from New Orleans on the Mississippi River. Almost immediately it began building river boats and barges, at first as a way of keeping employees busy between repair jobs, which were much more profitable. By 1941 the company employed about 200 workers.

With the United States gearing up for World War II, the government took control of the flow of metals and other raw materials. In 1941 James Viavant flew to Washington to find out from the Maritime Commission whether there were any small vessels on which Avondale could bid. The result was a contract to manufacture four tugboats, the company's first major building contract. This was followed by a contract to construct 14 M3 coastal cargo ships, 300-foot shallow draft vessels. Avondale continued to build ships including tankers, tugs, and other coastal vessels for the government for the duration of the war, which required expansion of the original shipyard facilities.

After the war, the company continued to grow as the oil industry in southern Louisiana expanded during the 1940s and 1950s. Avondale began building drilling barges and work boats and built its first submersible drilling barge in 1951. As river and intercoastal traffic grew, there was increasing need for repair facilities. Avondale purchased a major new site in 1946 at Harvey Canal and continued to expand its repair facilities throughout the period. The company's name was changed to Avondale Shipyards, Inc., in 1960.

In 1959 Avondale was sold to the Ogden Corporation of New York for $14 million. The company remained a subsidiary of Ogden until 1985, building guided missile destroyers, destroyer escorts, auxiliary oilers, and other vessels for the U.S. Navy; various types of commercial vessels, including cargo vessels, off-shore drilling rigs, tugs, oil tankers, LASH cargo vessels, dredges, tug/supply vessels, product tankers, container vessels, and miscellaneous barges; and Coast Guard cutters. In 1985 Ogden sold seven companies, including Avondale Shipyards, to the employees, and these became Avondale Corporation under an Employee Stock Ownership Plan (ESOP). The ESOP, one of the largest ever formed, was 70 percent employee owned, with Ogden retaining a 30 percent share. Ogden continued to have a minor interest in the company, but concentrated on its food service, building maintenance, waste recovery and management, and allied businesses. In 1987 Avondale Industries divested itself of six of those companies. The shipyard, with its various divisions centered around New Orleans, continued as Avondale Industries, Inc. In 1988 the company was taken public; the employees owned approximately 44 percent of the common stock in 1989. In 1991 that figure was about 54 percent.

The Transition to Modular Construction: The 1970s and 1980s

After World War II Japan became the leader in innovative methods of building high-quality ships utilizing modular construction, also known as 'zone outfitting.' In this mode of construction, large projects are broken up into manageable modules, which are worked on simultaneously in different workshops or facilities, sometimes many miles apart. The modules are then transported to the ship site. This method results in tremendous cost savings, although it requires complex planning, logistics, and engineering to maintain tight tolerances between the modules. In the late 1970s Avondale made the decision to study and adapt the Japanese system. To this end, Avondale management, under Chief Executive Albert L. Bossier, entered into a unique technology transfer agreement with Ishikawajima Harima Heavy Industries (IHI) of Japan in 1981. It took the company approximately five years to retrain and retool, but modular construction eventually gave Avondale a decisive competitive advantage in the shipbuilding industry. While Avondale thrived, other shipbuilders such as General Dynamics and Lockheed closed shipyards, and Todd Shipyards and MorrisonKnudsen experienced severe losses. The relationship with IHI has continued, but on a case-by-case consulting basis. In addition to its changeover to modular construction, Avondale also invested heavily in facility improvements and expansion. Between 1970 and 1992, the company poured more than $258 million into new manufacturing shops, modular assembly buildings, and state of the art equipment. In 1992 its lifting equipment included a 600-ton floating crane, seven cranes with capacity greater than 130 tons, and 29 cranes with capacity greater than 50 tons. Avondale also had an 81,000-ton dry dock measuring 900′ x 220′ and a 20,000-ton Panama dry dock measuring 705′ x 118′. Equipment of this size has enabled Avondale to specialize in 'jumboization,' a process whereby a ship is cut in half and a matching section is inserted to lengthen the vessel.

The company has used modular construction in some industrial nonmarine projects as well. These have included a 192-megawatt hydroelectric plant in Vidalia, Louisiana, four hazardous waste treatment plants for Ogden, compressor and pump modules for the oil industry, sulfur recovery units, cryogenic gas separation systems, sub-sea oil treatment units for oil companies, and a floating detention center for New York City capable of housing 800 inmates delivered in 1992.

Military Downsizing in the Early 1990s

By 1989 defense-related contracts, mainly with the U.S. Navy, accounted for as much as 85 percent of Avondale's business. In 1991 the Secretary of the Navy advised Congress that by 1995 the Navy's fleet would be pared from about 550 to 600 ships to 450, and the actual number might drop even lower. In terms of expenditures, this meant that the Navy's annual budget for shipbuilding would be reduced from $12--$14 billion in the 1980s to $6--$8 billion in the 1990s. In addition, because the Navy planned to concentrate on combat ships and submarines, vessels that Avondale had not previously produced, the effect of the cutbacks on Avondale would be that much greater.

In 1990 Avondale reported a net loss of $25.8 million and then a loss of $140.9 million in 1991. These losses were, however, not attributable to military downsizing, but rather to cost overruns on seven TAO (auxiliary oil tanker) and three LSD-CV (landing ship dock-cargo variant) contracts due to be completed in 1994 and 1995. In early 1992 the company applied for requests for equitable adjustments (REAs) of $300 to $340 million from the Navy. As Albert L. Bossier, Jr., Avondale's chairman, president, and CEO, stated at the time, 'The REAs we are pursuing with the Navy are intended to seek reimbursement for the portion of our cost overruns resulting from disruption of work caused by contract delays and changes initiated by the Navy.' To help alleviate a cash shortfall for 1992, the Navy released $15 million of earned retentions from previous contracts, and in December 1995 the two parties finally reached a settlement.

In 1992 Avondale learned that a competitor had been awarded a contract to build as many as seven MHC-51 minehunters, despite the fact that Avondale was already building four such vessels. On the other hand, the Navy changed its contract on three of the TAOs already being built by Avondale to make them double-hulled. The company also was awarded a $1.2 million contract to design ships for 'Sealift,' the ocean transport of weapons and supplies for ground troops. The company also launched the T-AGS 45 oceanographic survey ship for the Navy as well as several other ships in that year. In spite of the drop-off in Navy contracts, Avondale did show a small second quarter profit and a third quarter profit of about $280,000, although revenues declined for the sixth straight quarter from $205 million in the first quarter of 1991 to $139 million in the third quarter of 1992.

The combination of the Navy's cutbacks, the economic recession, and factors peculiar to the industry and/or Avondale hit the company particularly hard in its efforts to diversify. Congress passed the Oil Pollution Act of 1990 in the aftermath of the Exxon Valdez disaster. The Act mandated that all oil tankers entering U.S. ports after January 1, 2000 be double-hulled. Although this created some immediate opportunities for Avondale, the company found that the physical capacity of its main shipyard, the draft of the river, and the height of bridges spanning the Mississippi precluded it from making bids to retrofit or build ultra-large oil tankers.

In addition, although international demand for the replacement of large commercial ships was projected to be above average in the 1990s, most of Avondale's foreign competitors were subsidized by their governments, placing Avondale at a competitive disadvantage. In response to this, Avondale entered into a unique joint venture with Peter Gast Shipping GmbH, of Hamburg, Germany, and Wilhelm Wilhelmsen Ltd., of Oslo, Norway, in January 1991. Avgain Marine A/S, based in Oslo, was created to be an international broker of ship components, allowing Avondale to cut materials expenses by pooling purchasing power, and to boost Gast's efforts to market Avondale-built ships in Europe and elsewhere. It was thought that the lower value of the dollar would partially offset the disadvantage posed by European government subsidization. As Gast put it, 'Avondale's ship prices are now more competitive.'

Avondale's attempts to transfer its shipbuilding and managerial skills to nonmarine projects met with only limited success during this period. One bright spot during 1991, however, was a five-year contract worth approximately $63 million obtained by Avondale Technical Services, a subsidiary, to operate and maintain specialized commuter services for the handicapped and elderly in Dallas, Texas. The company also was looking into the possibility of getting back into the offshore construction business, principally offshore oil platforms for the international market.

Modernization and Mergers: Heading into the 21st Century

After losing out on a number of important bids in the early 1990s, it became clear that Avondale needed to improve its ship-building capacity to remain competitive. To this end, the company embarked on a major modernization project in 1994. This ambitious undertaking, focused primarily on Avondale's steel manufacturing capabilities, was aided in large part by a federal loan policy enacted by the Transportation Department the previous year. The new policy, designed to rejuvenate the slumping shipbuilding industry, was intended to spur comprehensive renovations of the nation's shipyards. With $15.9 million in federal assistance, the company was able to devote a total of more than $20 million to upgrading its operations. At the heart of Avondale's construction plan was an enclosed steel processing shed. The structure, along with a number of smaller manufacturing buildings, was completed in the fall of 1995, and expanded the total area of the company's shipyard to 500,000 square feet.

These improvements went far to revitalize Avondale's business. By June 1995 the company had a contract with Ingram Ohio to build river hopper barges, and in the fall it reached an agreement with American Heavy Lift Shipping Company (AHL) to construct four double-hulled product/chemical tankers. The keel for the first vessel, the Captain A.H. Downing, was laid in October; when the ship was completed in May 1996, it became the first commercial double-hulled tanker launched in the United States. It was also the company's first commercial ship since 1984.

The increased capacity also enabled Avondale to make successful bids on new projects for the U.S. Navy. In December 1996 the company was named prime contractor in the design and construction of the first vessel in the LPD-17 program, the Navy's newest line of amphibious assault ships. The contract included options for two additional ships, and had a value of $1.5 billion. The company was also able to get back on schedule with its outstanding Naval projects, including the Strategic Sealift program. In January 1997 Avondale delivered its fourth MHC-51 coastal minehunter, and in March it launched the USNS Bob Hope, the first of five Strategic Sealift deployment ships. This brisk production delivered record revenues to the company, with net sales reaching $625 million in 1996, up from $576 million in 1995. Avondale's sagging share value also got a significant boost, rising from a low of $6 in early 1995 to $22 by January 1997.

With business booming, Avondale began looking for ways to expand its presence in the commercial vessel industry. In June 1997 it closed a $332 million deal with ARCO Marine to build two crude carriers, with an option for three additional ships. In September it formed a strategic alliance with rival Ingalls Shipbuilding to bid jointly on a number of commercial projects, including oil tankers. Hoping to further strengthen its bidding power, Avondale announced its intention to merge with Newport News Shipbuilding in January 1999, a move that would combine Avondale's expertise with naval and commercial surface ships with Newport's extensive experience building aircraft carriers and submarines. In May, however, Avondale received a far more lucrative offer from Litton Industries, owner of Ingalls Shipbuilding; in June the two companies reached an agreement, and Avondale became Litton Avondale Industries.

In addition to providing Avondale with the opportunity to become involved in a wider range of projects--including the burgeoning U.S. cruise vessel building business--the merger with Litton also turned out to be the unexpected solution to a lengthy battle between Avondale and its employees. The troubles began in 1993, when Avondale employees voted to join the New Orleans Metal Trades Union. Company executives, however, questioned the validity of the election procedures and refused to recognize the union. The National Labor Relations Board ruled to uphold the elections, and a lengthy legal fight ensued. Avondale's troubles were compounded in January 1999, when an OSHA investigation revealed that the company had deliberately falsified employee injury reports, resulting in safety citations exceeding $500,000. The company was vindicated in July, however, when a U.S. circuit court ruled that the 1993 union election was 'fatally flawed.' The merger with Litton, whose employees were already unionized, helped ease the tension, however, and in December Avondale's steel workers were officially unionized.

Throughout this transition period the company remained extremely active. It remained on schedule with the LPD-17 project; in July 2000, after three years of design and engineering work, construction began on the first vessel, the USS San Antonio. The company also continued work on its Bob Hope class Strategic Sealift ships, as well as a series of 'Millennium Class' tankers for Polar Tankers, Inc.

If the announcement in December 2000 of Northrop Grumman's acquisition of Litton Industries cast a small shadow of uncertainty on the future makeup of Avondale, fears were allayed by March 2001, when the Department of Defense announced that it was awarding an $11.3 million contract to Avondale for engineering services needed to support the Department's program for modifying its LPD 17 Class of ships. Moreover, by June 2001, Northrop Grumman had completed the integration of its Litton properties; Avondale found a home as a division of Northrop Grumman's Ship Systems. It seemed likely that the company would remain one of the nation's major shipbuilders for years to come.

Principal Operating Units: Shipyards; Modular Construction; Steel Sales; Gulfport Facility; Tallulah Facility; Integrated Product Development Environment; Repair Services.

Principal Competitors: General Dynamics Corporation; Newport News Shipbuilding Inc.; Todd Shipyards Corporation.

Chronology

• Key Dates:

• 1938: Avondale Marine Ways, Inc. is formed.
• 1941: Avondale wins first contract with U.S. Navy.
• 1959: Ogden Corporation acquires Avondale Marine Ways.
• 1960: Avondale Marine Ways becomes Avondale Shipyards, Inc.
• 1981: Avondale enters into technology transfer agreement with Ishikawajima Harima Heavy Industries of Japan.
• 1985: Ogden Corporation sells majority stake in Avondale Shipyards to the employees.
• 1990: Oil Pollution Act is passed.
• 1991: Avondale enters into joint venture with Peter Gast Shipping GmbH.
• 1999: Avondale is acquired by Litton Industries, becoming Litton Avondale Industries.
• 2000: Litton is acquired by Northrop Grumman Corp.; Avondale Industries becomes a division of Northrop Grumman's Ship Systems unit.