Huntington Ingalls Industries [HII] on Thursday posted lower fourth quarter earnings despite a strong increase in sales due in part to an impairment charge stemming from the company’s decision to put its oil and gas business up for sale.
Net income sank 30 percent to $149 million, $3.61 earnings per share (EPS), from $212 million ($4.94 ESP) a year ago, hampered by a pension headwind at the non-cash charge. Excluding the $35 million (75 cents EPS) charge, adjusted earnings of $4.36 EPS beat consensus estimates by 18 cents per share.
Sales increased nearly 10 percent to $2.4 billion from $2.2 billion.
Segment operating margins, excluding the pension headwinds and charge, were 8.4 percent versus 6.7 percent a year ago.
At the operating level, the Newport News Shipbuilding segment led the way, more than doubling operating earnings due to the award of the Navy’s Virginia-class Block V submarine and contract changes for support work on the Los Angeles-class submarine program. Sales in the segment were up 9 percent on work on the Block IV and Block V Virginia-class vessels and higher volume on the Columbia-class ballistic missile submarine.
Sales at the Ingalls Shipbuilding segment were flat and operating income slid on lower risk retirements on amphibious ships and gains a year ago on a favorable settlement.
HII’s Technical Solutions segment swung to a loss on the impairment charge while sales jumped on previous acquisitions and increased work for fleet support and the oil and gas industry.
HII recently agreed to acquire Hydroid Inc., a deal that will add products and capabilities in small and medium autonomous unmanned underwater vehicles (UUVs) to go with its existing know-how in large UUVs. The pending deal for Hydroid, combined with previous acquisitions that strengthened capabilities in cyber security and C5ISR, and the pending divestiture of the oil and gas division “create a sharpened focus in the Technical Solutions business and positions the team to capture growth opportunities in unmanned systems, defense and federal solutions, and nuclear and environmental services,” Mike Petters, HII’s president and CEO, said on the company’s analyst call.
Orders in the quarter were $9.7 billion, helping total backlog grow to a record $46.5 billion, just over double a year ago due to huge contract awards in the past year for submarines.
For 2019, sales increased 9 percent to a record $8.9 billion from $8.2 billion in 2018 and net income tumbled 34 percent to $549 million ($13.06 EPS) from $836 million ($19.09 EPS). Excluding the charge, 2019 earnings were $14.01 EPS. Free cash flow for 2019 was $460 million.
HII provided general guidance for 2020, with shipbuilding sales expected to be up between 3 and 5 percent and shipbuilding margins at 9 percent.
Technical Solutions is expected to generate about $1 billion in sales, down from $1.3 billion in 2019 due to the pending sale of the oil and gas business and the company’s ship repair yard in San Diego. The outlook for margin is between 5 and 7 percent.
Free cash flow in 2019 was about $50 to $60 million less than the company expected due to the timing of receipts, Christopher Kastner, HII’s chief financial officer, said on the analyst call.
With 2020 being the last year of a five-year plan in major capital investments in its shipyards, capital expenditures in 2021 will decline, which will bolster free cash flow in the coming years to around $700 million annually, Kastner said, adding that $700 million will become “the new normal” for the company.