Avondale Industries, Inc.

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Avondale Industries, Inc.

5100 River Road
Avondale, Louisiana 70094
U.S.A.
(504) 436-2121
Fax: (504) 436-5304

Public Company
Incorporated: 1938 as Avondale Marine Ways, Inc.
Employees: 6-8,000
Sales: $592 million
Stock Exchanges: NASDAQ
SICs: 3731 Ship Building & Repairing; 3441 Fabricated Structural Metal

Avondale Industries, Inc., is a diversified company whose primary business is the construction, repair, conversion, and “jumboization” of ships, barges, tugboats, and other vessels. The company is a major supplier of non-combat vessels to the United States Navy, constructing a full range of destroyer escorts, frigates, cutters, fleet oilers, landing ship docks, and landing craft aircushion (LCAC) at shipyards and repair and manufacturing facilities in Louisiana and Mississippi. It is also involved in non-marine, industrial construction projects as well as other ventures in Louisiana, Mississippi, and Texas.

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 upriver 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 that Avondale could bid on. 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 Navy; various types of commercial vessels, including cargo vessels, offshore 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.

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 in order 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 1980-81. 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 Morrison Knudsen 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 plowed 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 above 130 tons, and 29 cranes with capacity greater than 50 tons. Avondale also had an 81,000-ton drydock measuring 900’ x 220’ and a 20,000-ton panamax drydock 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 in order to lengthen the vessel.

The company has used modular construction in some industrial non-marine projects as well. These have included a 192-mega-watt hydroelectric plant in Vidalia, Louisiana, four hazardous waste treatment plants for Ogden, compressor and pump modules for the oil industry, sulphur 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.

By 1989 defense-related contracts, mainly with the 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 550-600 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 T-AO (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 $300-340 million from the Navy. As Albeit 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.” While the REAs had not been settled as of January 1993, the Navy released $15 million of earned retentions from previous contracts, which helped alleviate a cash shortfall for 1992.

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 T-AOs already being built by Avondale to make them double-hulled. The company was also 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 dropoff 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. While 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. As of January 1993, Avon-dale had not received orders for commercial double-hulled tankers.

In addition, while 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 Cast’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, “Avon-dale’s ship prices are now more competitive.”

Avondale’s attempts to transfer its shipbuilding and managerial skills to non-marine 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 was also looking into the possibility of getting back into the offshore construction business, principally offshore oil platforms for the international market.

In spite of the global recession, cost overruns, and Navy cutbacks that so adversely affected Avondale in the early 1990s, the company can draw on its more than 50 years of technical and managerial innovation and expertise. Its experience with modular construction would seem to position it ideally to take on industrial, non-marine contracts during a period of economic recovery. The company also appears well suited to profit from the Oil Pollution Act of 1990. In addition, the strategy institutionalized in Avgain Marine A/S shows promise of expanding Avondale’s business base beyond the United States when the world economy expands.

Principal Subsidiaries

Avondale Technical Services, Inc.; Crawford Technical Services, Inc.; Avondale Gulfport Marine, Inc.; Avondale Enterprises, Inc.; Genco Industries, Inc.