Huntington Ingalls Industries Inc (HII.N) is on track to boost profit margins and keep paying dividends despite flat revenues in coming years, the U.S. shipbuilder's top executive said, citing ongoing efforts to cut costs and improve performance.
Mike Petters, chief executive of Huntington Ingalls, spoke with Reuters at the company's headquarters in Newport News, Virginia hours before the U.S. Navy announced that Huntington beat out General Dynamics Corp (GD.N) for a larger share of a $6.1 billion Navy order for nine new DDG 51 destroyers.
"Whether you win it or lose it, it's your performance that will drive your returns," Petters told Reuters in an interview overlooking the USS Roosevelt, a nuclear-powered aircraft carrier that Huntington Ingalls will finish overhauling and refueling for the Navy this year.
In March, the company won a $2.6 billion deal to refuel and overhaul another carrier, the USS Abraham Lincoln, and it recently completed work on the hull of the USS Gerald R. Ford, a new class of aircraft carrier.
Then on Monday, the Navy awarded Huntington Ingalls a contract to build five DDG 51 ships for $3.3 billion over the next decade. Huntington Ingalls will earn a profit rate of 14 percent on the DDG 51 deal, according to Navy spokesman Chris Johnson.
The DDG 51 win could help Huntington Ingalls achieve its goal of boosting its overall profit margin to 9 to 10 percent by 2015, from 5.3 percent in 2012.
Petters said the company was on track to meet its target after it completes work over the next year on two ships that have been a drag on profits. Both ships suffered residual problems linked to Hurricane Katrina that submerged the company's Pascagoula, Mississippi shipyard under 10 feet of water in 2005, and led to ongoing workforce issues at the Avondale shipyard in New Orleans.
Once those two ships are delivered, the company will be able to rebuild its overall profit margins, Petters said, noting that serial production of destroyers and submarines would help the company reduce costs, better manage its workforce and make more efficient capital investments.
ORDERS SCRUM
The former Navy officer cited strong continued support for the DDG 51 destroyers, aircraft carriers and submarines, but said declining defense budgets made it less likely that the Navy would launch new ship design programs.
Huntington Ingalls is proposing that the Navy extend production of the large-deck amphibious LPD ships that the company is building and use them for other missions, to take advantage of the existing production line, Petters said.
But he acknowledged tough competition for future Navy orders, describing the situation as the kind of scrum seen in fierce rugby matches: "It's a rugby term where they throw the ball out and everybody fights for it. Right now, missions, platforms, dollars, they're all being fought over."
Petters said the company began paying a dividend late last year, and he viewed that policy as "a long term commitment."
But he said the company would balance its returns to shareholders with the need to reserve cash for possible investments in new business areas, including a possible foray by the Avondale shipyard into the energy business.
Petters said the company was engaged in active discussions about building components for the energy sector at the shipyard, which is slated to close at the end of the year, although no decisions had been made about keeping the facility open.
The problem would be finding work for the facility and its already diminished workforce until the larger energy-related orders came in several years' time, he said.
"We've got to find a way to bridge from here to there in a way that makes sense," Petters said.
Petters said the company had already shifted some component work to Avondale from the Mississippi shipyard, but that would only extend the work there for a few months, Petters said.
"The clock is ticking," he said, although he said there was no specific date for a "go or no-go" decision. "We want to keep as many options open for as long as we can."
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