March 31, 2011 / 1:13 PM / 8 years ago

UPDATE 2-Northrop ship spin-off expects flat sales

* Flat sales seen for new few years — CEO

* Still plans to close Avondale facility

* Northrop to report ship results as discontinued ops

* Shares up (Rewrites with CEO, analyst comment)

By Karen Jacobs

ATLANTA, March 31 (Reuters) - Shipmaker Huntington Ingalls Industries Inc (HII.N), newly spun off from defense contractor Northrop Grumman Corp (NOC.N), expects flat sales through 2015 against a tough backdrop for U.S. defense spending, but new contracts could aid business beyond that point.

“Based on the work that we have and the contracts that we’re negotiating, we can see our horizon out beyond 2015,” Huntington Ingalls Chief Executive Mike Petters told Reuters.

Petters, who had been president of Northrop Grumman Shipbuilding since 2008, said sales would be “pretty flat” through 2015. He said manufacturing improvements brought to U.S. Gulf Coast shipyards would help boost margins and cash flow for Huntington, which is based in Newport News, Virginia and has 38,000 employees.

He said plans are still on to close a shipyard in Avondale, Louisiana, after construction there winds down in 2013.

“Our plan today is when the second ship is finished, to proceed to close the facility,” Petters said.

Huntington Ingalls shares were up 89 cents, or 2.3 percent, at $39.09 in afternoon trading. Northrop Grumman was up 1.2 percent, or 76 cents, at $62.98.


Morgan Keegan analyst Brian Ruttenbur said shutting down Avondale, which employs about 5,000 people, was the path to better margins and profit for Huntington Ingalls, which competes with General Dynamics Corp (GD.N) and Australia’s Austal Ltd (ASB.AX).

Morgan Keegan research shows the ship company had a 2010 EBITDA margin of 6.4 percent, compared with 11.2 percent for the General Dynamics marine unit.

While shipbuilding is not considered a growth business, “it can be good cash flow and a turnaround story, and that’s what (Huntington Ingalls) is,” Ruttenbur said.

Huntington was spun off on Thursday after Northrop announced plans for a sale or spin-off last year, citing little synergy with its other businesses, which are focused on aerospace, electronic and information systems and technical services.

The ship unit had been a drag on Northrop earnings due to charges for delays, poor quality work and damage from Hurricane Katrina.

The separation of the ship operation enables Northrop, which provides unmanned spy planes and ballistic missile defense work, to focus on faster-growing businesses such as intelligence that are in higher demand as U.S. defense spending comes under pressure.

“We see the spin-off as positive, providing tangible evidence of (Northrop) management’s commitment to focus on margins, capital efficiency and portfolio optimization, rather than scale,” Sanford Bernstein analyst Douglas Harned said in a note to clients.

Northrop shareholders received one Huntington share for every six shares of Northrop common stock. Northrop, which is moving its headquarters to Virginia from Los Angeles this year, said it will report shipbuilding results as discontinued operations for the first quarter and prior periods. (Reporting by Karen Jacobs; editing by Derek Caney and Andre Grenon)

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