Buoyed by strong operating performance combined with a pension tailwind and lower taxes, Huntington Ingalls Industries [HII] on Thursday reported strong earnings in its fourth quarter, trouncing consensus estimates.

Net income nearly quadrupled to $197 million, $4.20 earnings per share (EPS), from $50 million ($1.06 EPS) in the fourth quarter of 2015, driven by operating performance, pension and tax benefits, and a lower share count.

The National Security Cutter Munro completed builder's sea trials in August and is scheduled to be delivered to the Coast Guard in December. Photo: HII
The National Security Cutter Munro was delivered in the fourth quarter.. Work on the NSC Midgett contributed to higher sales  in the quarter. Photo: HII

Excluding the pension tailwind and the negative impacts of some impairment charges that dented fourth quarter earnings a year ago, adjusted net income in the quarter increased 87 percent to $172 million ($3.67 EPS), still crushing consensus estimates by $1.22 per share.

Sales in the quarter increased nearly a percent to $1.9 billon, driven by work on the Navy’s Arleigh Burke-class destroyers, the Coast Guard’s National Security Cutter (NSC), and one month of revenue from Camber Corp., which was acquired at the beginning of last December.

Overall operating margin was 13.9 percent in the fourth quarter versus 7.6 percent a year ago.

Mike Petters, president and CEO of HII, said on the company’s earnings call that “we are encouraged” by President Donald Trump’s “administration’s desire to increase the size and readiness of the fleet,” cautioning that moving out in this direction “is a multistep process that will span several budget cycles.”

Petters also said that to transition to a plan for a 350-ship Navy would mean continuing to build current classes of ships, “as opposed to go off on a whole new design program and design a new fleet. I think you’ll see mature programs expanded.”

HII’s current capital investment plans are in line with the Navy’s 30-year plan so if there is a significant expansion by the Navy for production of various assets “it would probably require more capital on our part to go and be able to meet that demand,” Petters said. If the government does move in this direction, HII will be ready before funding is even appropriated, he said.

The risks are likely downstream in the supply chain, Petters suggested.

“At the end of the day, if we don’t have the equipment from the supplier to build on time, that ends up impacting the ships,” Petters said. “So, this would be a big buildup, and it would require some pretty consistent messaging and some pretty consistent and persistent legislation over the next several years to actually achieve what you’re reading about right now.”

Current long-term budgets support a 308 ship Navy although the service has a new force structure plan for 355 ships. The Trump administration has said it wants a 350-ship Navy.

At the segment level, operating income was up at both the Ingalls Shipbuilding and Newport News Shipbuilding segments on risk retirements in amphibious assault ship, destroyer and NSC programs, and lower overhead, and a local incentive grant. HII’s new Technical Solutions segment, which includes Camber and other services businesses in the energy sector, swung to an operating profit of $1 million versus a $51 million loss a year ago, on improved performance in oil and gas work and fleet support.

Sales were up at Ingalls and Technical Solutions, and down at Newport News.

For the year HII’s net income was up 42 percent to $573 million ($12.14 EPS) from $404 million ($8.36 EPS) in 2015. Sales increased nearly a percent to $7.1 billion from $7 billion.

Orders in 2016 were $5.2 billion and total backlog stood at $21 billion. Free cash flow for the year was $537 million.

At the end of the day, if we don’t have the equipment from the suppliers to build on time, that ends up impacting the ships