By Calvin Biesecker
Reporting its financial results for the first time as a public company, Huntington Ingalls Industries [HII] yesterday posted higher net income in its first quarter as lower taxes more than offset declines in operating earnings at its two shipbuilding segments.
Sales dipped nearly 2 percent to just under $1.7 billion from just over $1.7 billion due to a decline in revenues at HII’s Ingalls Shipbuilding segment, which more than offset an increase in revenues at the Newport News Shipbuilding segment.
Net income rose 10 percent to $45 million, 92 cents earnings per share (EPS), from $41 million (85 cents EPS), as federal income taxes declined by $11 million and general and administrative expenses were down $5 million. The lower taxes and expenses more than made up for margin decreases in the company’s two divisions.
The higher net income still missed consensus estimates of 98 cents EPS. The miss may have been due to about $9 million in charges HII recorded in the quarter, evenly split between a decision to build up reserves on the CVN-78 Gerald Ford aircraft carrier it is building for the Navy and a one-time impact from retention grants that were issued as part of the company’s spin-off from Northrop Grumman [NOC] in March.
Mike Petters, president and CEO of HII, said the company is just being “prudent” on increasing the estimate to complete CVN-78 because it is the first in the Ford class and because the company has struggled with first-in-class ships the past decade.
At the Newport News division, where CVN-78 is under construction, segment income fell 11 percent to $65 million mainly due to lower margins on work on Ford-class carrier. Sales in the division rose 4 percent to $940 million on aircraft carrier construction and Virginia-class submarine construction.
Operating income at Ingalls tumbled 29 percent to $17 million, mainly due to a tough comparison with a year ago when the division benefited from a $17 million insurance recovery for business interruption related to Hurricane Ike. Sales at the division fell 8 percent to $761 million due to lower volume on destroyers and the LPD amphibious transport ships.
The LPD ships along with the LHA-6 amphibious assault ship have had difficulties in construction and engineering and have forced Northrop Grumman to record millions of dollars in charges as a result. Petters said that operational processes instituted at Ingalls several years ago are helping to drive “good progress” on these ship programs but that “significant challenges” remain here for the next three years as work is completed on these “underperforming” contracts.
Another challenge at Ingalls is executing the planned shutdown at the Avondale, La., ship facilities, Petters said. That shutdown is in the early stages and two LPD vessels are still being built there. Northrop Grumman decided last year to close its Avondale facilities and consolidate work in Mississippi.
HII didn’t offer annual guidance and Petters said the company continues to discuss when to do so. However, he said that sales will remain relatively flat for the next five years–they were $6.7 billion in 2010–and that both divisions would be generating margins above 9 percent by the end of that period. Margins at Ingalls in the quarter were 2.2 percent and at Newport News 7.1 percent.
Petters offered his outlook on future year’s defense spending, saying it has become less predictable and that the national leadership’s focus on debt reduction will bring defense spending down overall.
Backlog at the end of the quarter was $17.4 billion and bookings in the quarter were $1.7 billion. Free cash was a $427 million outflow, including a $36 million one-time payment to reimburse the state of Louisiana for a cooperative investment it had made with the company in the Avondale shipyard.