Bloomberg News

Huntington CEO Sees No Immediate Threat From U.S. Fiscal Cliff

November 16, 2012

Huntington Ingalls Industries Inc. (HII:US), the U.S. Navy’s sole builder of aircraft carriers, isn’t immediately threatened by the U.S. fiscal cliff, its chief executive officer said.

While shares of Huntington have dropped 11 percent since President Barack Obama’s re-election, CEO Mike Petters said the company is hiring more workers after winning contracts that will provide revenue for the next few years.

“I’m not so sure that we really see a cliff in the way that a lot of other people do,” he said in an interview with Bloomberg Television’s Peter Cook on “Capitol Gains” that will air Nov. 18. “It’s the debate over the next round of work and the timing of that work that’s going to matter.”

Defense spending is in the cross hairs as Congress and the White House try to avert a so-called fiscal cliff of automatic spending cuts and tax increases. The reductions, known as sequestration, would begin early next year and total $1.2 trillion over a decade, with half coming from national security programs.

Huntington fell 3.3 percent on Nov. 7, the day after Obama defeated Republican candidate Mitt Romney, who had proposed increasing military spending. The company slid another 5 percent on Nov. 8, after it reported third-quarter earnings that missed analysts’ expectations. It was the largest two-day drop since September 2011.

War Costs

The shares advanced less than 1 percent to close at $40.20 yesterday in New York. They have gained 29 percent this year.

Romney had proposed pegging military spending to 4 percent of U.S. gross domestic product, excluding war costs. He also wanted to boost shipbuilding to about 15 ships a year, up from nine ships a year.

His defeat was a loss for Huntington, which probably won’t escape a downturn in federal contracting, according to Kevin Brancato, a defense analyst at Bloomberg Government.

“Sequestration or even a compromise decreasing the budgets would likely slow down ship procurement, affecting the company’s bottom line,” Brancato said in an interview. “The company is in a bind, but it’s a long-term bind, not a short-term bind.”

Huntington is on schedule to deliver the last two of five amphibious ships to the Navy next year, Petters said. It will be negotiating several important contracts in the next several years to build, refuel and deactivate ships, he said.

‘Unleash That Investment’’

Any budget decision that shifts the timing of those negotiations will delay investment, increase costs and create challenges for suppliers, Petters said.

“A lot of suppliers and a lot of other companies around the country are talking about how they’re holding up on their investments until they know where we’re going,” he said. “Some clarity on where we’re going will unleash that investment.”

Analysts predict Huntington’s sales (HII:US) in 2012 will increase less than 1 percent to $6.59 billion, the average of 12 estimates compiled by Bloomberg.

The company has a funded backlog of $12.9 billion.

“That’s a pretty nice place to be,” Peter Skibitski, an analyst at Drexel Hamilton, said of the backlog. If a sequester hits, “they are better positioned than other companies,” he said in a telephone interview.

Huntington, which was spun off from Falls Church, Virginia- based Northrop Grumman Corp. (NOC:US) in 2011, is winding down naval operations at its Avondale shipyard in Louisiana, Petters said. He didn’t say what the company plans to do with the property, though he suggested the work may be commercial.

Government Dependence

“We are looking pretty aggressively to try to find ways to redeploy that,” he said. “It would certainly be, I think, healthy for our business to be involved in a business that’s not U.S. government.”

The company (HII:US) gets “substantially all” its revenue from the federal government, according to its annual report filed with the Securities and Exchange Commission.

Huntington this month announced its first quarterly dividend, at 10 cents a share, and plans to buy back as much as $150 million of shares over three years. The company wants to continue quarterly dividend payments, subject to board approval, Petters said.

“That was not a special dividend,” he said after the interview. “We are planning to return cash to shareholders. We’re actually doing that sooner than we thought we would.”

To contact the reporter on this story: Brendan McGarry in Washington at bmcgarry2@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net


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Companies Mentioned

  • HII
    (Huntington Ingalls Industries Inc)
    • $93.04 USD
    • 0.75
    • 0.81%
  • NOC
    (Northrop Grumman Corp)
    • $126.53 USD
    • 1.41
    • 1.11%
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