Huntington Ingalls Industries [HII] on Thursday posted a huge increase in second quarter earnings driven by an insurance litigation settlement and a favorable pension adjustment that more than offset a charge related to continued weakness in the company’s oil and gas-related business.
The insurance settlement related to Hurricane Katrina in 2005 added $1.80 earnings per share (EPS) to the bottom line while the pension adjustment provided a 37 cents EPS tailwind. The goodwill impairment charge cost the company 96 cents EPS and is due to further decline in expected oil and gas prices, cutbacks in spending plans by customers, and more project delays by customers.
Net income increased 56 percent to $156 million ($3.20 EPS) from $100 million ($2.04 EPS). Excluding the insurance, pension and impairment adjustments, adjusted income rose 17 percent to $97 million (1.99 EPS), 13 cents EPS below consensus estimates.
Sales increased nearly 2 percent to more than $1.7 billion, driven by growth at its nuclear shipyard and its “other” segment, which does work for the oil and gas industry.
Mike Petters, HII’s president and CEO, said on an analyst call that if Congress can’t agree on a budget this fall for FY ’16 and the government shuts down as a result, that would be “very disruptive to our industry.”
At the Newport News Shipbuilding segment, sales increased 3 percent to $1.2 billion on higher revenues on the volume in the Virginia-class Block IV submarine program and fleet support services for aircraft carriers. Operating income increased 5 percent to $109 million on performance improvement and risk retirement in the Virginia-class program.
Ingalls Shipbuilding posted a 236 percent increase in operating income to $198 million due to the $136 million gain from the insurance settlement. Excluding the insurance benefit, operating income increased 5 percent to $62 million on risk retirement for the Navy’s DDG-113 John Finn destroyer and the Coast Guard’s National Security Cutter James and Munro programs.
Sales at Ingalls fell 5 percent to $546 million related to amphibious assault ships for the Navy, the NSC program, and $13 million from the insurance settlement.
Adjusted operating margins in the shipbuilding segments combined were 9.4 percent and company officials said shipbuilding is on track to achieve 9-plus percent margins for the year.
HII’s other segment posted $64 million operating loss, most of it due to the $59 million non-cash goodwill impairment charge. Petters said it is still too difficult to predict a turnaround in the oil and gas market.
Orders in the quarter totaled $4.5 billion, which included the $3.4 billion detail design and construction contract for the Navy’s CVN-79 John F. Kennedy aircraft carrier, and total backlog stood at $24.3 billion of which $13.7 billion is funded. Free cash flow was $137 million.