Huntington Ingalls Industries [HII] on Thursday reported lower earnings in its second quarter due to a favorable litigation settlement that inflated the bottom line a year ago but the company’s operating results were still strong and earnings beat consensus estimates.
Net income slid 15 percent to $133 million, $2.80 earnings per share (EPS), from $156 million ($3.20 EPS) a year ago, topping consensus estimates by 48 cents EPS. Excluding the insurance settlement and an impairment charge in the second quarter a year ago, adjusting income results were up 13 percent to $217 million ($2.32 EPS). Earnings in the quarter benefited from a pension tailwind that added 48 cents EPS to the bottom line.
At the operating level, income at HII’s Ingalls Shipbuilding segment was down 56 percent to $88 million due to the $136 million insurance settlement last year. Excluding the settlement, operating income would have been up 42 percent due to higher risk retirement on the LPD amphibious transport dock program with the delivery of the LPD-26 John P. Murtha to the Navy.
At Newport News Shipbuilding, operating income dipped 6 percent to $102 million on lower risk retirement on the Virginia-class submarine (VCS) program and less work on the CVN-78 Gerald R. Ford aircraft carrier construction contract, work for the refueling and complex overhaul of the CVN-79 Abraham Lincoln carrier.
Overall operating margin in the quarter was 12.8 percent, down from 15.4 percent a year ago but still robust, while segment operating margin were a healthy 10.8 percent versus 13.9 percent a year ago. HII is targeting segment margin between 9 and 10 percent over the next five years.
Sales in the quarter dipped 3 percent to $1.7 billion from just over $1.7 billion a year ago.
Pressure on the top line was due to a decline in sales at the Newport News Shipbuilding segment, which posted 7 percent lower revenue to $1.1 billion. Sales were down at the segment on decreased volume on the CVN-78 and CVN-79 contracts, less work on production of Block III VCS, and less volume in the company’s environmental remediation business.
At Ingalls sales were up 7 percent to $585 million on work on DDG Aegis destroyers and amphibious assault ships.
Orders in the quarter were $900 million and the company’s total backlog at the end of June stood at $20.5 billion, down $1.5 billion since the end of 2015. The company said $13 billion of the backlog was funded.
Free cash flow in the quarter was $121 million.
HII doesn’t provide financial guidance but the company said the second half of the year will have its challenges as it works through the test program on the Ford carrier to ready it for sea trials and delivery, and on delivering the Navy’s DDG-113 John Finn destroyer and the sixth Coast Guard National Security Cutter Munro.
Christopher Kastner, HII’s chief financial officer, said on the company’s earnings call that HII has asked the Navy for a decision related to reimbursement of contractor costs related to the closure of HII’s former Avondale, La., shipyard in 2014. Kastner said the company either wants a decision on the reimbursements or a reply as to when a decision will be made.
Mike Petters, HII’s president and CEO, said that based on congressional budget deliberations this year on the Navy’s and Coast Guard’s FY ’17 requests for shipbuilding, the company is “encouraged” with the bipartisan support but is concerned about the potential for a long-term continuing resolution to fund the government beginning in October and return of a budget sequestration that negatively impacts defense spending.
Sequestration would impact “broad array” of Navy shipbuilding and repair programs, Petters said.
Petters said that for now the company believes shipbuilding revenue out to 2020 will be “relatively flat.”