June 4, 2011 / 3:26 AM / 7 years ago

Huntington Ingalls battens hatches for rougher seas

NEWPORT NEWS, Virginia (Reuters) - Mike Petters, a former Navy man who is now chief executive of shipmaker Huntington Ingalls Industries (HII.N) will tell you that the words “It’s not my fault” are not in his vocabulary.

The superlift erected on the aircraft carrier Gerald R. Ford (CVN 78) is one of the heaviest Newport News Shipbuilding will construct and lift into the dock in this May 21, 2011 file photo. REUTERS/Chris Oxley/Huntington Ingalls Industries/Handout

“I grew up in an environment where the commanding officer was accountable for what happens on his ship,” Petters said in his office, adorned with maritime memorabilia from the Newport News shipyard’s 125-year-old history. “In this day and age, it’s easier for people to say ‘It’s somebody else’s problem.’”

Petters is bringing the insistence on accountability to his bid to turn around margins at Huntington Ingalls, the shipmaker that was spun off from defense contractor Northrop Grumman (NOC.N) just over two months ago.

To achieve better profitability, Huntington Ingalls is improving manufacturing processes, working its way through underperforming contracts that will fall off in two years and planning to close a New Orleans-area facility once the last of two ships being built there is delivered, around 2013.

“As the healthy part of the business expands to be the whole part of the business, there should be a natural expansion of the margin as a result of that,” said Petters, the son of a Florida orange farmer who majored in physics at the Naval Academy and served aboard a nuclear-powered submarine before earning a master’s degree in business.

While the company has said revenues are likely to be flat over the next five years, longer term Petters sees growth opportunities with its key customer, the U.S. Navy.

“I think the Navy’s got a big role to play in our economic security over the next hundred years,” Petters said on Wednesday. “Our ability to be a partner with the Navy will depend on our ability to perform.”

Wall Street is keen to see how the new company will weather the current cost-conscious military environment. Huntington Ingalls’s first-quarter profit, reported in May, fell short of analysts’ estimates by 6 cents per share.

The stock has fallen 14 percent from its closing price of $41.50 on March 31, the day it was spun off from Northrop.

“Continued congressional debate over U.S. defense budget funding could pose risks to Huntington’s top line and overhead coverage in future years as shipbuilding programs are likely to be closely scrutinized,” SunTrust Robinson Humphrey analyst Peter Skibitski said in a note to clients in May.

Mike Petters, president and CEO of Huntington Ingalls Industries (HII), speaks to reporters at the National Press Club in Washington, in this April 4, 2011 file photo. REUTERS/The National Press Club/Handout

SHOW ME STANCE

Northrop spun off Huntington citing little synergy with its other businesses focused on aerospace, electronic and information systems and technical services.

Jim McAleese, a Virginia-based defense consultant, said Huntington faces challenges improving profits at its Ingalls shipyards on the U.S. Gulf Coast, which contributed about 45 percent of the company’s 2010 revenues of $6.7 billion.

The question, he says, “is whether HII management can convince investors that it can turn around Ingalls, the trigger for the Northrop spin-off/divestiture in the first place.”

The Ingalls division, which has operations in Mississippi and Louisiana, has been a profit drag in recent years due to damage, workforce problems and other residual issues related to Hurricane Katrina, which devastated New Orleans in 2005.

Last year, Ingalls had an operating margin of negative 2 percent, versus 9.4 percent for the Newport News Shipbuilding division, according to Citigroup Global Markets.

Huntington’s goal is to have both units at 9 percent-plus operating margins over the next five years.

Analysts are skeptical the company can deliver, but Petters, a 24-year veteran of the shipyard, says the spinoff will allow Huntington to put a singular focus on improving performance and profits.

Company executives, many of whom worked at the shipyard before its takeover by Northrop a decade ago, are also focusing heavily on growing a culture of safety, quality — and accountability.

At the sprawling, 550-acre Newport News shipyard the focus on quality is embodied by a large rock outside the main office carrying a plaque with the words of company founder Collis Potter Huntington: “We build good ships here, at a profit if we can, at a loss if we must, but always good ships.”

Matthew Mulherin, president of Newport News Shipbuilding and a 30-year veteran of the company, recently loaded the rock on a flatbed truck and took it to every part of the yard to drive home the focus on quality.

The decision to close Avondale, Louisiana, which employs nearly 5,000 of Huntington’s roughly 38,000 workers, was painful but necessary because there isn’t enough work to justify operating that shipyard longer term, Petters said.

Petters says he is committed to transparency about the new company’s operations, but remains reluctant to give the performance forecasts demanded by many analysts. Such forecasts, he says, are meaningless in a long-cycle business where it can take up to seven years to build a single ship.

“You start trying to do something quarter to quarter in this business, it’s the wrong discussion,” Petters said.

Reporting by Karen Jacobs and Andrea Shalal-Esa; Editing by Tim Dobbyn

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