Huntington Ingalls Warns Pentagon Cuts May Inflate Shipbuilding Costs
The head of Huntington Ingalls Industries Inc. (HII) said Wednesday that a new round of enforced Pentagon budget cuts could thin the shipbuilder’s supplier base and make its ships and submarines more expensive.
The potential for automatic cuts in the Defense budget under the so-called sequestration process has left big U.S. contractors wrestling with the future shape of their businesses and has led to stark warnings of job losses and threats to national security.
Mike Petters, chief executive of Huntington Ingalls, opened a new front in the debate with his warning that such cuts could inflate procurement costs. Contractors may be left relying on more single-source suppliers as lack of business forces smaller companies out of business.
Petters said on a post-earnings call that more than half of the company’s 5,000 suppliers were already its sole source of particular parts and services. “If you step back and think about what sequestration could do to that, the 60% that are sole source, that number could go up,” he said.
Huntington Ingalls was spun out of Northrop Grumman Corp. (NOC) last year and is viewed as more resilient to budget cuts than peers after the Pentagon prioritized many naval projects as part of efforts to boost the U.S. military presence in the Pacific.
Petters said the company’s existing order book gave it relative stability for three to five years. “A lot of the folks in our industry do not have that ability and a lot of the folks in our supply chains do not have that ability,” he said.
Other defense contractors with more exposure to Army and Air Force equipment have said they are starting to feel the impact of the funding uncertainty, though most don’t expect any clarity until there is further movement on the broader federal budget impasse after the presidential election in November.
Huntington Ingalls’s shares slid in the wake of first-quarter earnings that fell short of expectations, though Petters said he was happy with its execution and efforts to boost efficiency as several large programs move into a key phase over the summer.
The company reported a profit of $33 million, compared with $45 million a year earlier, while per-share earnings dipped to 67 cents from 92 cents. Revenue dropped 6.9% to $1.57 billion.
New business awards for the quarter were about $800 million, bringing total backlog to $15.5 billion as of March 31, down from $16.3 billion at the end of the fourth quarter.
Its shares were down 6.6% at $36.75 in recent trading Wednesday but have climbed almost 20% so far this year.
-By Doug Cameron, Dow Jones Newswires
Shares closed Tuesday at $39.34 and were inactive premarket. The stock has gained 26% since the beginning of the year.
Copyright © 2012 Dow Jones & Company, Inc.
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