Huntington Ingalls Rises After Profit Beats Estimates

Huntington Ingalls Industries Inc. (HII), the U.S. Navy’s sole builder of aircraft carriers, reported fourth-quarter profit that beat analyst estimates. The company rose the most in almost a year.

Huntington rose $2.56 or 6.8 percent to $40.46 at the close in New York trading, the most since March 31. Earlier today, the company said net income for the quarter ending Dec. 31 was $59 million, or $1.19 a share, exceeding the average estimate of 94 cents a share by 11 analysts surveyed by Bloomberg. The shares have gained 3.1 percent since the company was spun off by parent Northrop Grumman Corp. (NOC) last March.

The results “exceeded our expectations on earnings, revenues and cash flow,” Douglas Harned, an analyst at Sanford C. Bernstein LLC in New York, wrote in a note to clients today. “We see margin expansion and transparency of the revenue outlook as driving the case for investing” in Huntington, he wrote.

Huntington Ingalls Chief Executive Officer Mike Petters faces the challenge of containing cost increases in construction of new Ford-class aircraft carriers as well as winding down and closing the company’s Avondale, Louisiana, shipyard in 2013. Petters has promised investors that the company will boost profit margins to 9 percent by 2015 from 4.4 percent in 2010.

Interest Costs

The shipbuilding company said it recorded a non-cash goodwill impairment charge of $10 million during the fourth quarter. Net income declined compared with $63 million, or $1.29 a share, a year earlier, the company said. Interest costs during the quarter almost tripled to $29 million compared with a year earlier, the company said. It reported a profit margin of 6.6 percent for the quarter.

Huntington Ingalls operates yards in Avondale, where it builds Navy and Marine Corps amphibious assault ships and Coast Guard cutters; Pascagoula, Mississippi, where it builds the Navy’s destroyers; and Newport News, where nuclear-powered aircraft carriers and submarines are built.

The company splits work on destroyers and submarines with General Dynamics Corp. (GD) based in Falls Church, Virginia.

Sales at the Ingalls shipyard in Mississippi, where Huntington Ingalls builds non-nuclear ships, fell 7 percent to $676 million because of reduced sales of DDG-51 class destroyers and less work on two LPD-17 amphibious transport ships, the company said. The profit margin at the unit rose to 2.2 percent in the quarter compared with 1.4 percent in the same period last year, the company said.

New Carrier

Sales at the Newport News unit, which builds nuclear- powered vessels, rose 5 percent to $1.08 billion, aided by work on the USS Gerald R. Ford, the first in class of the U.S. Navy’s next generation of aircraft carriers. The profit margin declined to 9.5 percent from 10.3 percent last year, the company said.

The new carrier is about 40 percent complete and faces cost increases of as much as 18 percent, according to Senator John McCain, the top Republican on the Senate Armed Services Committee.

The full cost of the ship built by Huntington Ingalls plus added equipment, such as advanced radar and an electronic aircraft-catapult system, may be as much as $12.3 billion, according to McCain. The carrier is scheduled to be completed in 2015, and the Navy plans to build three such carriers.

McCain and Senator Carl Levin, a Michigan Democrat and chairman of the committee, have asked the U.S. Government Accountability Office to study why the carrier’s cost is rising.

Docking Fees

The Navy has said that it’s docking some of Huntington Ingalls’s fees for the cost increases, without specifying how much the company has lost.

Navy Secretary Ray Mabus wrote McCain this week that Huntington Ingalls and the Navy must show “significant improvement” in curbing costs for the carrier.

“The Navy is conducting a line-by-line review” of all remaining anticipated expenditures “to identify further opportunity to reduce cost and to mitigate risk,” Mabus wrote in the March 26 letter.

As with other defense contractors, Huntington Ingalls would be affected if Congress fails to avert $500 billion in automatic Pentagon budget cuts set to begin in January. That would be in addition to the $497 billion, 10-year reduction in the Pentagon’s projected spending already included in the Defense Department’s plans.

“We do not expect automatic cuts to set in, and continue to expect Congress to ultimately reach a negotiated solution,” Harned wrote in a March 22 note to clients.

The U.S. Navy’s 2013 budget, now being discussed in Congress, would delay production and funding for one DDG-51 destroyer to 2016 from 2014, and postpone work on one Virginia- class submarine from 2014 to beyond the current five-year defense plan.

Even with those delays, “we do not believe that this will substantially impact” Huntington Ingalls, Harned wrote. Huntington’s aircraft-carrier construction “remains intact,” according to Harned.

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

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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