THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Wednesday, October 23, 1996 TAG: 9610230499
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: 91 lines
The learning curve has thrown Newport News Shipbuilding a hard ball.
The big Peninsula shipyard, which resumed building commercial ships last spring after 15 years, took a $31 million charge in the third quarter to cover expected losses on its first commercial contract.
The charge was disclosed Tuesday as the shipyard's parent company, Tenneco Inc., released its third quarter earnings. Tenneco's plans to spin the shipyard off to its shareholders in December are on track, officials said.
Tenneco and shipyard officials attribute the charge to learning how to build petroleum-product tankers, a series of basic ships it hopes to build for years to come.
``We're going through a big learning process as you always do on any lead ship in a series,'' said shipyard CEO William P. Fricks.
Combining the new charge with a $14 million charge the yard took a year ago, Newport News Shipbuilding has lost $45 million on a $152 million order for four tankers. And the first vessel hasn't been delivered.
In fact, the first tanker will be delivered to its Greek buyer six weeks late - in March instead of January, Fricks acknowledged.
The shipyard's performance on the contract is regarded as a bellwether for U.S. shipbuilding. U.S. shipyards have been out of international commercial ship construction for years and many wonder if they can compete after relying on Navy orders for so long.
The bad news on the tanker project overshadows what otherwise was a very good quarter for Newport News Shipbuilding. For the first time in two years, the shipyard actually posted a gain in quarterly earnings, despite the $31 million charge.
Newport News Shipbuilding made $36 million in the quarter ended Sept. 30, up from $35 million in the same quarter a year earlier. Without the charge for the expected tanker contract losses, it would have made $67 million, thanks largely to the ongoing overhaul of the aircraft carrier Dwight D. Eisenhower.
Tenneco and shipyard officials cautioned that the yard cannot sustain such high earnings. Profits will be closer to between $35 million and $45 million, depending on the cyclical nature of the business, said yard spokeswoman Jerri Fuller Dickseski.
The shipyard's third quarter revenues rose 17 percent to $522 million, from $445 million a year earlier.
The shipyard's $3.6 billion backlog on Sept. 30 included the carriers Harry S. Truman, christened in September and to be delivered in a couple of years, and Ronald Reagan, scheduled for delivery in 2002.
The shipyard's two orders for nine product tankers account for little more than 10 percent of the existing backlog.
The $31 million charge sets up a reserve to cover the yard's anticipated losses as it builds the first four tankers for Eletson Holdings, a Greek shipping line. The last Eletson tanker is scheduled to be delivered by March 1998.
``That's a lot of money, but everybody has problems like that on a new project,'' said James R. McCaul, a shipbuilding consultant and president of IMA Associates in Washington.
Newport News Shipbuilding had a similar problem with cost overruns when it started building Los Angeles-class attack submarines in the 1970s, but it was a very profitable program by the time it delivered the last one, the Cheyenne, this year.
The $31 million charge brings the cost of the first tanker contract to $197 million, or $49.25 million a tanker.
That's more in line with what the shipyard is getting for the second order for five tankers, which is worth $245.7 million, or $49.14 million a ship.
Newport News Shipbuilding will have a handle on the tankers' construction by the time it gets to the order for Hvide/Van Ommeren Tankers, officials said. Plus, the yard's automated steel-cutting and fabrication facility should be working by then, which will also reduce costs.
``We certainly don't anticipate anything like this at all on the Van Ommeren tankers,'' Tenneco Chairman Dana G. Mead said.
The shipyard expects its costs to fall as it builds more of the tankers.
``The reason they do is the learning curve,'' said Mark Underwood, a senior shipbuilding analyst with AMI International in Bremerton, Wash. ``They're figuring out manufacturing techniques, what materials to use, even how to put the ship together on the first ship. Once they get going, they've got all that stuff figured out and they're building ships a lot more cheaply.''
Shipyards expect to lose money on the first few vessels in a series, Underwood said.
``There's no question about it - that we can get down to the competitive range and be competitive for product tankers,'' Fricks said.
Among the problems the shipyard encountered were ``fit-up'' problems in which pieces of steel or assemblies don't quite fit because they were cut too short or too long, spokeswoman Dickseski said.
Some fit-up problems are normal, but not as many as the shipyard had, Dickseski said. ILLUSTRATION: Newport News Shipbuilding confirmed it will deliver
its first petroleum product tanker six weeks late - in March instead
of January.
KEYWORDS: EARNINGS by CNB