Bae Systems Ship Repair Business Information, Profile, and History

Company Perspectives:

We are the leading provider of non-nuclear ship repair services in each of our strategic markets, and we maintain operations in major Navy megaports, including Hawaii.

History of Bae Systems Ship Repair

BAE Systems Ship Repair, formerly United States Marine Repair, Inc., is the nation's largest nonnuclear ship repair, overhaul, and conversion company. It has sites near the huge Navy bases at Norfolk, Virginia; San Diego, California; and Pearl Harbor, Hawaii, as well as smaller facilities in California and Texas. The company's prime customers are the U.S. Navy and other government entities, as well as owners of large commercial ships.

Origins

The history of BAE Systems Ship Repair's predecessor, United States Marine Repair, Inc., can be traced back to Southwest Marine, Inc., which according to the San Diego Business Journal was formed in 1977 when Art and Herb Engel won a contract to repair landing craft for the U.S. Navy. The brothers had grown up in the ship repair business around San Diego, which was the headquarters of the Pacific Fleet. Art Engel, who would be CEO, was just 30 years old at the time Southwest Marine was founded.

The company started out with just a half-dozen employees, according to Lloyd's List International. By the mid-1980s, it employed 1,500 people. Art Engel invested millions of dollars in productivity training, he told Lloyd's List.

U.S. shipyards emerged from the lean 1980s better able to compete with their subsidized European and Asian rivals for price-sensitive cruise ship business. In August 1990, Southwest landed a colossal $75 million contract to convert Royal Caribbean Cruise Line's Viking Serenade from a car ferry to a passenger liner. (Unfortunately, this project was stopped when Southwest claimed that it required an extra $38 million in work.)

Consolidation in the 1990s

The nation's shipyards would be hard pressed to find work in the military downsizing following the end of the Cold War. During the 1990s, the size of the Navy's fleet would be nearly halved to around 300 ships.

By 1990, Southwest was taking in revenues of $350 million a year and had 4,000 employees. It had recently acquired Portland, Oregon's Northwest Marine but would close it within two years after failing to see an expected boost to the commercial repair business that it was trying to build. In fact, Southwest remained 70 to 85 percent dependent upon government contracts. Southwest attributed the Northwest closure to a lack of protection against foreign subsidies.

In 1993, Southwest Marine refurbished its operations at two drydocks leased from the Port of San Francisco. The business was renamed San Francisco Drydock Inc.

In spite of renewed demand from the cruise ship industry, Southwest's business would be nearly cut in half due to the military downsizing that followed the end of the Cold War. Revenues were approximately $200 million in 1996. The contracting market led to a period of consolidation in the industry.

Acquired by Carlyle in 1997

B. Edward Ewing, a former executive at International Harvester, Lockheed Martin, and General Dynamics, was hired as president and chief operating officer in 1996 to help reverse Southwest Marine's fortunes. According to the San Diego Business Journal, he followed a philosophy akin to that of the similarly named (but unrelated) Southwest Airlines: putting the employees first in order to motivate them to deliver great customer service. Ewing became CEO in the fall of 1997 as Engel stepped down in advance of the company's acquisition by The Carlyle Group (through the holding company SWM Holdings, Inc.). The Carlyle Group was a Washington, D.C. investment bank that had considerable defense-related holdings. It paid $25 million for controlling interest in the shipyard.

At this time, Southwest Marine had shipyards in San Pedro and San Francisco, California, and Ingelside, Texas. Southwest acquired Virginia's Norfolk Shipbuilding & Drydock Corporation (Norshipco), another large naval contractor, in 1998. This gave Southwest a base on the Atlantic, and created the country's largest nonnuclear ship repair company, with annual revenues of $400 million.

Norfolk Shipbuilding's history dated back to 1915, when it was established as F.O. Smith Shipbuilding & Drydock. It had been run by the Roper family for several decades. Norshipco employed more than 5,000 people at its peak in World War II.

Norshipco maintained a reputation as one of the country's most modern naval repair sites. It found a thriving business repairing oil tankers in the 1970s (revenues were about $50 million in 1979) and the Reagan years greatly expanded the naval business. Revenues reached $200 million in 1990, when an executive told Lloyd's List that Norshipco was "probably the most successful repair yard in the U.S." The company had three shipyards and two drydocks; it then employed around 3,000 workers.

While demand from the cruise ship business rebounded in the 1990s, Norshipco, like other private shipyards, was hit hard by the Navy's policy of doing more of its repair work, particularly at the Norfolk Naval Shipyard. Norshipco had scaled back to about 1,500 employees at the time of the merger. The new owner further cut the headcount to just 700 workers; a majority of those laid off, however, were recalled within a year.

Southwest's parent company, SWM Holdings, Inc., was renamed United States Marine Repair, Inc. (USMR) in November 1998 to reflect its new geographic scope. At the time, USMR had revenues of about $400 million a year.

The headquarters was relocated from San Diego to the 110-acre Norshipco site in Virginia, which underwent a $12 million renovation, with $3 million spent on repairs and improvements such as landscaping and painting (including a $1 million, 60,000-square-yard paving project).

Purchased by United Defense in 2002

USMR filed for an initial public offering in March 2002, but that deal would not go through. Instead, in the spring of 2002, another Carlyle-controlled company, United Defense Industries Inc., bought USMR from The Carlyle Group for $316 million (most of it borrowed). United Defense, which was publicly traded, gained a business complementary to its military vehicle maintenance unit, Barnes & Reinecke.

According to the Daily Deal, Carlyle reaped cash proceeds of $150 million on its original $25 million investment. Carlyle had spent a total of $100 million in acquisitions (including the original 1997 buy of Southwest Marine and San Francisco Drydock) in building up USMR, noted the Washington Post.

USMR had 2,500 employees at six shipyards (USMR had entered the Honolulu market through a September 2001 agreement with Pacific Shipyards International). It was expected to benefit from the U.S. military's operations in the Middle East and the aging of the Navy fleet.

USMR bought Corrosion Engineering Services, Inc. (CES) in April 2005. CES was based in San Diego and employed 370 people at several facilities in the mainland United States and Hawaii. It specialized in providing corrosion control on both military and commercial vessels, including submarines.

Acquisition of United Defense by BAE Systems: 2005

BAE Systems, Inc., a unit of British defense giant BAE Systems PLC, acquired USMR's parent company, United Defense Industries, in June 2005. USMR subsidiary Southwest Marine was subsequently renamed BAE Systems San Diego Ship Repair. The other shipyards in San Francisco, Hawaii, and Norfolk also were prefixed with the BAE Systems name.

Principal Subsidiaries: Corrosion Engineering Services, Inc.; BAE Systems San Diego Ship Repair; San Francisco Drydock, Inc.; Norfolk Shipbuilding & Drydock Corporation; Capital Air Services, Inc.; Marepcon Financial Corporation.

Principal Divisions: BAE Systems Hawaii Shipyards; BAE Systems Norfolk Ship Repair; BAE Systems San Francisco Ship Repair; BAE Systems San Diego Ship Repair.

Principal Competitors: General Dynamics Corporation; Norfolk Naval Shipyard (U.S. Navy); Northrop Grumman Corporation.

Chronology

• Key Dates:
• 1915: Northfolk Shipbuilding (Norshipco) is founded as F.O. Smith Shipbuilding & Drydock.
• 1976: Southwest Marine is formed.
• 1997: The Carlyle Group buys a controlling interest in Southwest Marine through SWM Holdings, Inc.
• 1998: Norshipco is acquired; SWM Holdings is renamed United States Marine Repair, Inc. (USMR).
• 2002: USMR is acquired by fellow Carlyle company United Defense Industries.
• 2005: BAE Systems acquires United Defense and renames the shipyards.