Huntington Ingalls Industries finished 2012 ahead of Wall Street analysts’ expectations, as it nears completion of several of its less profitable Gulf Coast shipbuilding contracts.
The company on Wednesday reported sales revenues of $1.82 billion, a 5.1 percent improvement over the same period a year ago, and diluted earnings of 98 cents per share for the three months ending Dec. 31.
But while laying out highlights for the company moving forward, Huntington Ingalls CEO and president Mike Petters also spoke expansively about the uncertain business environment for the shipbuilding company because of cutbacks to Navy programs.
The Navy has pushed back to an unspecified date the multi-billion-dollar, four-year refueling and overhaul of the aircraft carrier USS Abraham Lincoln, reacting to Congress’ inability to pass a 2013 budget. Petters said the shipyard has adjusted so workers can start work on the ship with minimal disruption, even though it was scheduled to arrive at the yard on Valentine’s Day.
“Our team continues efforts on the ship at Naval Station Norfolk, and we'll work to make as much progress as possible, as efficiently as possible, prior to Lincoln's arrival,” he said.
But he voiced frustration later during the call about the process: “none of that work (on the Lincoln) is being done the way that it ought to be done, so it's all becoming more inefficient.”
Late in the day Wednesday, the Navy freed up $40 million that allows preparation work on the Lincoln to continue to be performed at Naval Station Norfolk. A Navy official noted that moving the money around would help the shipyard retain skilled workers and prevent a more serious disruption to a number of carrier projects that could be impacted by delays to the Lincoln timeline.
But Petters did not candy coat the company’s situation and its vulnerability if Congress doesn’t pass a budget for 2013, which would leave the Pentagon with lower-than-expected funding set by a stopgap measure called a continuing resolution.
“I've said in the past that shipbuilding was more insulated from sequestration due to the long-term nature of our contracts in our backlog,” he said. “But we are not insulated from the impact of a continuing resolution.”
“The failure to pass a defense appropriations bill for 2013 has delayed the start of the Refueling and Complex Overhaul of the USS Abraham Lincoln and could impact our (Department of Defense) customer’s ability to execute on new work,” Petters said. “This will result in inefficiencies in the programs, increased cost, reduced learning curves, increased risk to an already fragile industrial base, and as the Navy has communicated, the fleet's operational readiness.”
“Delaying the start of any shipbuilding or overhaul program invariably makes it more expensive because the work is precisely coordinated across numerous departments and with suppliers. All of that has to come together in a very synchronized way. And when you start moving things around, you upset that synchronization.
“My view of it, my personal view, my view is that the law will go into effect and that the energy will be focused on creating an appropriations bill or some kind of continuing resolution that actually creates a stable base for this to go forward into next month. And so trying to speculate on how that's all going to play out is -- we've just chosen not to try to create any particular cases because we know that whatever cases we create will be wrong.”
Petters also highlighted the impact the continuing resolution is having on the company’s Mississippi shipyard, where executives are competing for work on Navy destroyers.
“The destroyer program was a bid that we put together last summer,” he said. “My view is the Navy would’ve been able to evaluate those bids and make those awards before the end of last year, but because we had a CR, they had to push that off until the end of March or April.”
Though sequestration is set to start on March 1, absent a congressional intervention, Petters said executives are more focused on March 27, the date by which the Navy needs a budget if it is going to fund the Lincoln project in the 2013 fiscal year.
Though Petters was pressed by several analysts to describe how the company will react if things don’t go the shipyard company’s way in Washington, he said he doesn’t have a crystal ball: “The degree of uncertainty is as high right now as I've ever seen it.”
Petters said the next month in Washington will be instructive in terms of determining the company’s outlook. For now, he said, the company remains on pace to achieve profit margins of 9 percent, not only at Newport News but also on the Gulf Coast where profitability has lagged behind.
“We’re, quite frankly, in the middle of a big political decision right now that's going to play out over the next 30 days,” he said.
The company's revenues of $1.82 billion were up from $1.74 billion in 2011 and ahead of an average analyst prediction of $1.7 billion.
Earnings dropped from $1.35 per share in the final quarter of 2011, but the just-announced figure, nevertheless, beats expectations of 90 cents per share by 8.9 percent.
Petters attributed progress at the company to improving profit margins at the Gulf Coast-based Ingalls Shipbuilding unit while maintaining stability at Newport News Shipbuilding, the country’s largest shipyard and the only manufacturer of aircraft carriers.
Ingalls’ operating margins improved for the quarter, rising to 5.3 percent compared to 2.2 percent at the end of 2011.
Newport News Shipbuilding’s operating margin slipped to 9.1 percent from 9.5 percent for the three-month period, which the company said was the result of a workers’ compensation expense.