Huntington Seeks 9% Shipyard Profit by Cutting Production Flaws

At Huntington Ingalls Industries Inc.’s 665-acre shipyard in Pascagoula, Mississippi, shipbuilding unit president Irwin Edenzon says picking up a scrap of paper in the parking lot may prevent delays in building a $2.9 billion amphibious assault ship.

“If a paper finds itself on a ship, it finds its way into the bilge, and a welder drops fire into that bilge” the result may be “fire on the ship,” he said.

Fighting even unlikely sources of trouble may be critical to Huntington, the U.S. Navy’s largest builder of surface- warfare vessels. The company has been penalized by the Navy for poor quality and is now attempting a turnaround. It’s promising investors it will boost overall profit margins to 9 percent by 2015 from 5.5 percent now. The company was spun off from Northrop Grumman Corp. (NOC) in April.

“The basis for investing in Huntington Ingalls remains tied to improving margin performance in the Gulf shipyards,” said Douglas Harned, a New York-based analyst at Sanford C. Bernstein & Co. To meet its goal of 9 percent margins by 2015, profit at the Gulf Coast yards must expand to 5 percent from the current 2 percent, Harned said. He rates the stock as “outperform.”

The Newport News, Virginia-based company with 2010 sales of $6.7 billion will announce its quarterly results today, and analysts surveyed by Bloomberg expect profit of 82 cents a share on sales of $1.66 billion.

Huntington declined $1.71, or 5.8 percent, to $28.01 yesterday in New York Stock Exchange composite trading. The shares have declined 33 percent since the company was spun off in April.

Improving Quality

The company’s yards at Pascagoula and at Avondale, Louisiana, both on the Gulf of Mexico, between them build the Navy’s DDG-51 guided missile destroyers, LPD-17 amphibious transport dock ships, the new LHA-6 amphibious assault ship and U.S. Coast Guard cutters. The company’s Newport News, Virginia yard, builds nuclear-powered aircraft carriers and submarines.

As part of the spinoff, Northrop and Huntington have said they plan to shut the Avondale yard by 2013, potentially cutting about 5,000 jobs. Still, Huntington’s Chief Executive Officer Mike Petters said he may keep the yard open if he can find alternative uses for it.

Edenzon and Petters said the company is improving quality, on-time delivery and is better equipped to cope with hurricanes, which are common on the Gulf Coast. The goal, they said, is to avoid cost overruns and delays, which in the past have led to $431 million in charges on its books when they were a division of Northrop.

History of Repairs

Three of the five LPD-17 amphibious transport ships that Northrop’s ship unit built for the Navy since 2000 have returned for repairs. The Pentagon found poor quality welding and that contaminated lubrication oil damaged the ships’ engines.

Petters said that, until three years ago, the Gulf Coast yards were building a series of first-in-class ships, including the LPD-17 and the LHA-6. “We are moving out of that era and into serial production,” he said.

Huntington is performing 100 percent inspections in some areas, and has picked four aspects of shipbuilding -- hull, electrical, paint and pipes -- to ensure meet the Navy’s quality on the first attempt.

“The main thing we are looking to drive is elimination of rework,” Petters said. “If we do that, it has a greater effect on the schedule of the ship” than anything else. “It’s really expensive to do something pier-side that was supposed to be done in the stacking hall” where sections of the ship are assembled, he said.

Stacking Halls

By 2015, Huntington is aiming to finish as much as 90 percent of the new ships in stacking halls, where sections lie on their side allowing workers easy access, Edenzon said. The balance of the work is done on the pier where, for example, more difficult overhead welding may be required. Currently the company is finishing about 75 percent of the work before floating the ship, Edenzon said.

The company also has scaled back outsourcing of “complex steel structures,” Edenzon said.

The difficulty of turning around yards that have faced chronic quality problems has been compounded by coping with a workforce of new hires after the 2005 Hurricane Katrina chased away experienced workers.

Even some new workers have been lured away by jobs in offshore oil drilling and casino construction in nearby Biloxi - - 20 miles west of Pascagoula -- said Byron Callan, a defense analyst at Capital Alpha Partners in Washington.

Hurricane Katrina

Edenzon said the workforce has stabilized now and is “much better than three years ago,” with 3.5 percent attrition this year compared with double-digit rates following Katrina. The company operates a mentoring program that pairs experienced foremen with younger recruits, he said.

When Katrina hit the Pascagoula yard, water rose 21 feet above sea level, damaging electrical substations that were at about 16 feet, said Kevin Amis, vice president of operations. Since then, the company has raised all 12 power units to about 24 feet and made them portable so they can be moved to higher ground in emergencies, he said.

Huntington removed so much junk from its yard that it had 25 more acres of work space than before the storm.

Evacuation procedures also have been improved, Amis said. As the 2005 hurricane approached, it took the company five days to move people and material off the shipyard. “Now when a storm is coming, within 18 hours we can complete evacuation,” moving material to a parking lot six miles north, he said.

External Challenges

Even with the internal changes, Petters’s greatest challenge may be external, said Jesse Rick Perez, a former Navy researcher who studied shipbuilding for the Naval Sea Systems Command.

To expand its profit margin, Huntington may need to “cut back labor force and use more technology and better tooling” at its Gulf yards, said Perez, now the Washington director for Guam’s governor, Eddie Calvo. The company may face political pressure if it seeks to cut jobs in the state, especially from Secretary of the Navy Ray Mabus, a former Mississippi governor, Perez said.

Pressures on the Navy’s shipbuilding budget because of U.S. deficits also may set back Huntington’s plans. Programs may be stretched out or canceled, Perez said. The Pentagon already is mulling reducing the aircraft carrier fleet of 11 ships.

‘Far-reaching Impact’

Cuts to the carrier fleet would have “a far-reaching impact beyond Virginia,” where they are built, “as we spend from $2.5 billion to $3 billion on materials from suppliers in more than 40 states,” Petters said.

Huntington is building the first of the Gerald R. Ford- class nuclear-powered carriers, the most expensive warship ever built at a cost about $11.5 billion, including research and development.

The Navy has said the company may exceed its initial cost- plus contract of $5.2 billion by about $562 million, or 10.8 percent, because of “construction inefficiencies.” The Navy’s plans call for three Ford-class carriers to replace the 10 earlier Nimitz-class carriers.

Investors are looking for a road map for how Huntington achieves its goal of generating 9 percent profit margins, Sanford C. Bernstein’s Harned said.

The turning point will come in 2013 when Huntington completes work on two amphibious transport ships and one assault ship being built in its Gulf yards, Petters said.

To contact the reporter on this story: Gopal Ratnam in Washington at gratnam1@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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