The main challenges facing Huntington Ingalls Industries [HII] in the next few years include continuing to retire risk on several amphibious transport and assault ships along with managing the transition of the company’s shipyard at Avondale, La., which is currently planned to wind down operations next year, according to Mike Petters, HII’s president and CEO.
“Clearly successfully retiring the risk that we have in the programs that we have, the LPDs and LHAs, that’s at the top of our list,” Petters told Defense Daily in an interview Thursday, which marked HII’s one year anniversary as a publicly traded company. “We have to get that right or nothing else falls into place.”
The LPD-17 San Antonio-class of amphibious transport dock ships and the LHA-6, the lead in the America-class of amphibious assault ships, have struggled in their production runs, leading to hundreds of millions of dollars in cost overruns dating back several years or more when HII was still part of Northrop Grumman [NOC]. Now the programs appear to be on track in terms of keeping within HII’s business plans as well as meeting the Navy’s deliver schedules.
During HII’s earnings call last Wednesday, Petters, as he did during the company’s second quarter call last fall, said that 2013 is an “inflection point” for HII in terms of being able to unburden itself from some of its difficult program issues and begin to ramp up margins to 9 percent (Defense Daily, March 29 and Nov. 14, 2011). That’s because later this year HII expects to deliver LPD’s 23 and 24 and then in 2013 LPD-25 and LHA-6. In 2011 margins were 6.1 percent excluding a goodwill impairment charge.
The next challenge is getting Avondale “right,” Petters said. Currently HII is planning to close its shipyard in Avondale next year after completing work on LPD-25.
“We need to remove it from the Navy footprint so that our Navy work becomes more affordable,” Petters said of closing Avondale. “And so those two things are going to be consuming us between now and 2013,” he said of working through the LPD and LHA ship programs and shutting down Avondale.
HII is open to keeping Avondale operating through a potential joint venture, but four things need to align, including the Navy agreeing to how the company handles its restructuring costs if the yard stays open, help from Louisiana, which has offered tax incentives for any company wanting to partner with HII, having a partner that understands non-Navy shipbuilding, and a shipbuilding market that can last, Petters said during last week’s earnings call.
Another challenge that HII is working through is production of the first of a new class of aircraft carriers, the Gerald R. Ford (CVN-78), which has also been beset with cost growth that has the attention of Congress (Defense Daily, March 9 and March 23). The ship, due to be delivered in 2015, is under a cost-plus contract which means HII’s fees go up the more it keeps costs down.
As with HII’s amphibious ship programs, Petters said the company is conservatively managing the risk to the CVN-78 in line with its business plan.
“I can say with great confidence that our business plan is not being affected at this point because our business plan accounts for what we think is the risk remaining on the program,” Petters said in the interview.
While HII is essentially a pure-play builder of ships and submarines a provider of related repair services for the Navy, and to a lesser extend the Coast Guard, the company is taking on some non-shipbuilding work, or at least work a step removed from its core business. For example, last fall HII received a contract from Bechtel Marine Propulsion Corp. to provide maintenance services for two nuclear reactor prototypes at a site in New York that supports the Navy’s Nuclear Propulsion program. That work is worth nearly $600 million over 10 years.
Petters sees this contract as offering the potential for more work in nuclear reactor maintenance.
The company is also building shield-building wall modules for nuclear reactors under construction in Georgia and South Carolina.
This contract represents a significant achievement for us as we expand into commercial nuclear energy,” Petters said on the earnings call.
“We are a heavy manufacturer,” Petters said to Defense Daily. “When heavy manufacturing left the United States, we stayed. Now people are trying to figure out how to make stuff in this country…We are actively involved in talking to folks who have really hard things to do. And so that’s the discussion.”
Petters said he is not “limiting” his view of HII’s potential business for heavy manufacturing to what the company can do in the nuclear energy market.