Good and Bad News for Huntington Ingalls Industries (HII)

An F-35B Lightning II makes the first vertical landing on a flight deck at sea aboard the amphibious assault ship USS Wasp (LHD 1).

Late last year after Northrop Grumman (NOC) separated their ship building components from the main corporation. Rather then selling these to another defense contractor they decided to set up a new company with its own stock. This was Huntington Ingalls Shipyard(HII). HII owns yards in Louisiana, Mississippi, and the Hampton Roads area of Virginia. It builds carriers, destroyers, and amphibious warships.

Northrop Grumman along with General Dynamics (GD) were the two major naval ship builders in the United States. They were concerned that the long term ship construction plans for the Navy were so limited in the future due to budgetary pressures and requirements that they decided it was better to get out of the business. The U.S. Navy currently really doesn’t have enough funds to build the number of ships in their plans. They also restructured their plans by limiting the new destroyer, DDG-1000, to only three and continuing production of the previous Arliegh Burke class.

HII has continued to received contracts from the Navy and deliver ships although it is planning a restructuring of its capabilities and workforce most importantly by closing their yard at Avondale, LA. In its last quarter the company reported a loss of $248 million but adjusting for a charge it actually had a profit of over $1 a share. This was better then analysts expectations and the stock went up quite a bit last week. The company increased its backlog and is predicting by 2013 that the financial should show much improvement as it works off contracts from the Northrop era.

At the same time though word came the Navy penalized the company several million dollars on a recent destroyer contract due to failures in its accounting and management system. The Department of Defense utilizes Earned Value Management System (EVMS) to help understand the cost and schedule of contracts. In this case the audit found deficiencies in 19 of 32 guidelines. The DoD qualifies company’s EVMS and if it fails then they can withhold funds or limit future contract awards until the system passes.

HII is in a situation where things like this are not helpful in the long run. It is not uncommon for EVMS to fail at times and the DoD and Lockheed Martin (LMT) had a long running argument over that company’s system a few years ago. Eventually they get resolved and work continues. It can just effect earnings and revenue in the short run.

The U.S. shipbuilding industry is in for a rough time in the next decade or so as the U.S. works out its budget issues. If the mandatory cuts do come into force there would be significant reduction in new ships which would affect GD and HII very negatively. While ships take several years to complete they need a steady stream of orders to maintain their entire workforce and to use them effectively. If there is a time when no new ship is on the horizon then there will be layoffs and contractions.

HII latest results were a positive but it may be hard in the future to continue to maintain the level of orders and revenue.

Photo from Official U.S. Navy Imagery’s Flickr photostream.

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Northrop Grumman’s Shipbuilding Spinoff Proceeds Smoothly

The first major shake up in the U.S. defense industry since the implementation of the reforms by Secretary of Defense Robert Gates completed last Thursday as Northrop Grumman (NOC) spun off its shipbuilding arm to its shareholders. One of the biggest defense contractors in the world the company had announced last year that they were looking at leaving the business of building warships primarily for the U.S. Navy due to contraction in that service’s plans and expected budget reductions in the future.

As soon as the transfer of the assets to the new company, Huntington Ingalls Industries (HII), was complete the U.S. Navy followed up with the announcement of an order for the tenth San Antonio class amphibious assault ship, the U.S.S. John P. Murtha. The $1.5 billion ship is named for the former Congressman from Pennsylvania and Marine Corps veteran. Huntington has also inherited four other LPD-17 class ships already under construction at their Pascagoula, MS and Avondale, LA yards.

Prior to the decision to spinoff the business Nortrop had announced plans that they would consolidate their capabilities which would lead to the closing of the Avondale facility. This is still on track to be done by 2013 but the new company says there are opportunities to keep it open if viable work can be found for the shipyard. As well as the two Gulf Coast yards Huntington Ingalls now also operates Newport News shipbuilding which constructs aircraft carriers.

The decision by Northrop has led to rumors that the remaining company now separated from its services arm, TASC, and no longer building ships might be planning on merging with one of the other large defense contractors such as Boeing (BA), Lockheed Martin (LMT), General Dynamics (GD) or Raytheon (RTN). Moves like that were not uncommon in the Nineties when last the defense budget declined precipitously. This time around, though, the Pentagon has made it clear that it does not want to reduce industrial base capabilities and may not allow such mergers.

Huntington Ingalls must compete with primarily General Dynamics for a small shipbuilding budget for cruisers, destroyers and larger amphibious ships. The Navy is building at least twenty Littoral Combat Ships (LCS) over the next several years but these are smaller combatants made in smaller yards owned by Austal America and Marinette Marine. The U.S. if it wants to preserve industrial base must award enough ships to keep both companies going and their yards open.

Photo from surfaceforces’ flickr photostream.

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Effort to Add EADS Subsidies Consideration to Defense Authorization Bill Fails

Senator Murray (D-WA) and Senator Brownback (R-KS) attempted to attach an amendment to the Senate’s 2011 Defense Authorization Bill today that would force the Defense Department and U.S. Air Force to take into account the World Trade Organization (WTO) ruling on subsidies to EADS (EADS:P) by European governments. Due to the fact that the bill did not win enough votes to advance mainly due to the attempt by the Democratic leadership to add the repeal of “Don’t Ask/Don’t Tell” policy on gays in the military the amendment wasn’t considered.

The two whose states stand to gain several thousand jobs if Boeing (BA) wins the KC-X contract will have to wait for this bill to be re-considered or add the amendment to another one. Certainly there are Senators from Alabama and other Southern states who favor EADS who might try to work against the amendment.

Currently the U.S. military cannot consider these kind of trade disputes and rulings in their source selection which is why the attempt was made to add the rule.

This continues to show that the fight for this contract will continue in Congress, the media and across the internet.

Northrop Gains by Subtraction

Northrop Grumman (NOC) announced that they are considering selling their shipbuilding unit or even setting it up as a separate company. This news drove their stock to a recent high yesterday. The company has already separated a major part of their company with last year’s sale of TASC, its SETA branch and now seems willing to give up another part.

As part of the announcement the company also said that it would close one major and two minor yards in Louisiana and transfer all of their work to the Pascagoula yard in Mississippi.

The trend over the last twenty years had been consolidation of the defense industry in the United States. Companies used mergers and acquisitions to build their business and expand their product lines. Part of this was driven by the decline of the U.S. defense budget in the Nineties that led to less major programs and contracts which then supported fewer suppliers. Since 9/11 the large growth in defense spending has seen non-U.S. companies enter the market in large numbers to provide the necessary competition and capability. These companies like BAE Systems (BAE:L) and EADS (EADS:P) often established U.S. subsidiaries or acquired U.S. companies to allow market penetration.

It has been expected that the defense M&A market would start picking up due to the expected decline in the U.S. defense budgets. While there have been some deals this activity has not been at a high level yet.

This move by Northrop to divest its ship building may be a sign that such activity might be picking up. It is clear by the effect on the share price that the market feels this is a good move for the company.

Northrop faces a reduced market as the U.S. Navy finishes some products such as the LPD 17 amphibious assault ships and has limited near term future. The Navy will build the Littoral Combat Ship (LCS) but will choose between Lockheed Martin (LMT) and General Dynamics (GD) for that product. The new destroyer and cruiser were canceled with the focus being on the DDG-51 continuation. Northrop builds that ship along with General Dynamics.

Because the U.S. ship building market looks bleak it might be hard for another defense contractor to acquire Northrop’s group and it might end up as a separate company.

The U.S. defense industry looks like it is entering a phase of re-structuring similar to what happened twenty years ago and which is not unexpected. The questions will be the long term effects on the U.S. economy and industrial base.

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EADS Discussing Teaming With U.S. Defense Contractors

Reports are starting to emerge that EADS (EADS:P) and its subsidiary, EADS-North America, are discussing teaming arrangements with other defense contractors to support bidding on the KC-X RFP. The deadline has now been extended until July by the Department of Defense. Supposedly L-3 Communications (L3) is considered the front runner for this work. There is still no definite confirmation that EADS will launch a bid after previous partner Northrop Grumman (NOC) decided not to participate in this the third round of bidding for the Air Force’s new aerial tanker.

Supposedly EADS talked to Raytheon (RTN) and BAE Systems (BAE:L) about this contract. Both of these companies reportedly expressed little interest. BAE Systems is already a partner in EADS as a whole and would stand to gain some work if the A330 made by Airbus is selected by the Air Force. Raytheon has not led an effort to make a large aircraft like this but obviously has strong system integration and engineering experience. L-3 does work on aircraft and purchased Raytheon’s aircraft integration unit several years ago.

If EADS is going to bid teaming with another large, preferably American, contractor makes the most sense. They will help work with the customer using their experience with the U.S. military. That is why the original plan with Nothrop made so much sense.

Reports of Other Bidders for KC-X Emerge?

Over the weekend it was reported that the Russian state owned aircraft company, United Aircraft, might be interested in bidding on the KC-X proposal. With Northrop now planning on not participating with EADS only Boeing was left as a confirmed bidder. Russia was about the only other country that had the capability to submit a proposal as they have already made tankers for themselves, India and other users. The thought though of Il-76 based tankers fueling F-22 is sort of hard to imagine. Documents provided to the Seattle Times show that United Aircraft would team with a World Aviation Maintenance to form a new company to bid. The proposal would be based on the Il-96 airliner rather then the older transport tanker already in service.

At the same time there are reports that EADS may submit a bid with themselves as the prime. Earlier this month the company said that it was not confident of being able to do this. EADS-North America could certainly be used as a prime contractor. The time needed for the company to prepare a proposal of this magnitude is why there is talk of extending the deadline three months.

It would be good for the U.S. Defense Department and Air Force to have some form of competition in the latest attempt to award this contract. Whether the Russian or EADS based bids would be viable is another matter. It is going to be difficult though to award what amounts to a sole-source contract with the mood in Congress of many Northrop and EADS supporters.

CONG. John Murtha (D-PA) Dies, Backed Split Tanker Buy

Congressman John Murtha (D-PA) a senior Democratic Representative and the Chair of the Defense Appropriations Subcommittee died yesterday from surgery complications. Murtha had at one time pushed the idea of awarding KC-X contracts to both Boeing (BA) and the Northrop Grumman (NOC) and EADS (EADS:P) teams as a way to rapidly replace the aging KC-135 aircraft. He eventually gave up on the idea.

The rationale for the split buy is that it builds the aircraft quicker while also removing the uncertainty of a protest over a single award. The U.S. Air Force and Department of Defense have made it clear that they do not want to do this due to the increased logistical cost associated with operating two different aircraft. The systems might complement each other with the bigger, longer range KC-30 being based further back in the U.S. and its more permanent bases overseas with the KC-767 flying forward and supporting operations in-and-around South West Asia.

The dual award would also mean that Northrop and EADS will be guaranteed work so their threat not to participate in the latest round would not need to be carried out. That is why organizations like the Aerospace Alliance representing Mississippi, Alabama and Florida support they idea. Some work in Mobile, AL is better then none.

The chances of a split buy are fairly remote but there are still those who want it.

Navistar To Provide More Trucks To U.S. Army

The United States military has expended a great deal of logistics and support vehicles in Iraq and Afghanistan. These trucks have taken a beating both from heavy use and enemy attacks. The Army has let several contracts recently to repair, reset and replace them. Yesterday it was announced that Navistar would be awarded a contract to provide tanker trucks, wreckers and generic troop transport vehicles. The value of this contract is over $400 million.

Navistar was disappointed that it did not win a portion of the MRAP-ATV contract to provide the lighter vehicles for use in Afghanistan. That contract went to Oshkosh. This contract will offset some of the losses from not contributing to that effort. It also demonstrates that the U.S. has been able to grow a decent industrial base when it comes to logistic support vehicles.

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Alabama And Mississippi To Unite For Aerospace Lobbying, KC-X

The Governors of Alabama and Mississippi, Bob Riley and Haley Barbour, have launched an effort to establish a non-profit organization to lobby for aerospace in the Gulf Coast area. The two Republicans hope that Florida and Louisiana will join their efforts to “create a world-class aerospace, space and aviation corridor from Panama City, Fla., to Louisiana.” Those four state already have a great deal invested in support to NASA. The hope is that the organization will help gain more contracts and investment in the area for aerospace. Their first target is the KC-X tanker contract which will be assembled in Mobile, AL if Northrop-Grumman and EADS win.

Follow On MRAP-ATV Contract Awarded To Oshkosh

At the end of June Oshkosh won the initial MRAP-ATV contract from the U.S. Department of Defense. This one billion dollar contract was for over two thousand of the lighter and more maneuverable Mine Resistant Ambush Protected (MRAP) vehicles for use in Afghanistan. The DoD conducted a contest between a variety of companies that included a “drive off” to demonstrate capability. While it was thought that more then one company would win contracts only Oshkosh received an order.

Now it was announced today that Oshkosh won a follow on order for another seventeen hundred vehicles for another billion dollars. The company already had to invest in expanding its workforce and capability to meet the first one. Part of any contract award by the Defense Department is based on the winner’s demonstration that they are able to meet the production and quantity requirements so Oshkosh should be able to build these. The follow on award though will deal a further blow to Navistar, BAE Systems and Force Protection efforts in the MRAP business.

The U.S. had rapidly purchased a variety of different MRAP vehicles for about four years to provide protection for troops as they moved around Iraq. There is an on-going struggle how to fit these vehicles into their tactical formations now that those operations are winding down. The MRAP are big, road optimized vehicles and are not designed for use in rough terrain or combat. This is part of the reason that the Future Combat System (FCS) vehicle portion was canceled. There may soon be an end to the purchase of any large numbers of MRAP as future more tactical combat vehicles are purchased.

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MRAP-ATV Fallout Leads To Navistar Layoffs

Oshkosh won the MRAP-ATV contract for a new vehicle for use in Afghanistan. One of the losing bidders was Navistar who had sold several thousand MRAP vehicles for use in Iraq to the U.S. Department of Defense.

Now with the fact that they did not win the contract to build the new vehicles for use in Afghanistan the company has announced layoffs at their Mississippi plant. This illustrates one of the problems with defense contracting. If you don’t continue to win contracts to provide systems or services you will eventually wither. Defense acquisition is normally for a certain number of units or for a period of time that will end. Companies win or lose contracts and that leads to contractions or expansions in work forces.

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Navys Orders Long Lead Items for Next LPD

The U.S. Navy awarded Northrop Grumman Shipbuilding’s Pascagoula yard a contract to procure the long lead items for LPD-26. The Mississippi Press reports that the $10 million contract will begin the process of building the ship. The actual time line to award the full production contract has not yet been set. In the past the production contract has cost upwards of $1 billion. The Pascagoula yard has built or is building LPD 22 and 24. LPD 17-20 of the San Antonio class have been completed.

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Navistar Gets Contract for More MRAP Vehicles for Afghanistan

The US DoD awarded Navistar a $360 million contract to build 400 more lighter MRAP vehicles for use in Afghanistan. MarketWatch.com has the press release. This is on top of an order for 800 vehicles earlier this year. The MaxxPro Dash vehicles will be used while the new MRAP-ATV is developed and goes into production. Afghanistan is requiring vehicles with better off road performance due to its rougher terrain then in Iraq. MRAP vehicles tend to be tall and heavy and more suited for use on roads.

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Marines buy more MRAP vehicles

The USMC awarded Navistar a contract to purchase more of their new, lighter vehicles. The contract is worth about $750 M and will buy 800 or so vehicles. The trend in recent MRAP buys has been to get smaller and less bulky vehicles for service in Iraq and Afghanistan. The Marines especially have cut back on MRAP buys and moved away from the original vehicles.

Navistar makes the MRAP in Mississippi and the press release can be found at The Wall Street Journal’s MarketWatch.com site here.

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The South celebrates the KC-45

As reported here in the Atlanta Journal Constitution, Northrop Grumman continues to point out that the KC-45 contract if it survives the Boeing protest will bring lots of jobs to the US. Especially to the South. Not only is the main plant going to be at Mobile, AL; but this article shows that parts and components will be made at various Northrop plants in Georgia. A lot of the work will also be accomplished in Florida. Read more

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