Huntington Ingalls Industries [HII] on Thursday reported mixed financial results for its fourth quarter, with net income higher on lower taxes despite a big dip in operating income at its business segments while sales were strong.
Net income soared 231 percent to $212 million, $4.94 earnings per share (EPS), from $64 million ($1.41 EPS) a year ago, crushing consensus estimates by 43 cents per share. Sales increased 10 percent to a record $2.2 billion from $2 billion a year ago.
At the operating level, income was down primarily due to a drop at the Newport News Shipbuilding segment, which was impacted by lower performance on the Navy’s Virginia-class submarine program and a difficult comparison from a year ago when the segment benefited from higher risk retirements for the refueling and complex overhaul on two aircraft carriers. Profit at Newport News slid 46 percent to $57 million.
The hiccup in the submarine program cost the company $20 million in higher costs in the quarter.
Costs were higher than expected for the final Block III submarine, the SSN 791 Delaware, and the first ship in the Block IV buy, the SSN 794 Montana, Mike Petters, HII’s president and CEO, said on the company’s earnings call. The charge also accounts for impacts from the remaining Block IV submarines, he said.
Referring to the charge, Petters said that “while the situation is very disappointing, the team has bound the problem and taken the necessary actions to minimize these impacts,” adding later that “they recognize how they got here and they recognize the approach to get through it.”
Profit was also down at the company’s Technical Solutions segment, albeit just $1 million lower to $6 million, on a decrease in fleet support performance.
HII’s Ingalls Shipbuilding segment posted a handsome increase in operating profit, up 12 percent to $84 million on higher sales and risk retirements in the Navy’s DDG destroyer and Coast Guard’s National Security Cutter programs.
Overall segment operating margin was 6.7 percent versus 9.5 percent a year ago.
All three segments delivered double-digit sales gains, with Newport News up 12 percent to $1.3 billion on aircraft carrier work and Naval nuclear support services. Ingalls was up 10 percent to $699 million on amphibious assault ships and destroyers, while Technical Solutions was up 10 percent to $267 million due to support for the oil and gas industry and mission solutions for government customers.
Orders in the quarter were $3.3 billion bringing total backlog at the end of 2018 to $23 billion, $17 billion of which is funded. On top of that, at the end of January the Navy awarded HII a $15 billion contract for detail design and construction of two aircraft carriers, the USS Enterprise and another still to be named.
The new carrier contract, combined with strong orders in the fourth quarter for surface ships at Ingalls, and forthcoming contracts on the Block V Virginia-class submarines and additional amphibious assault ships “are forming the foundation to support this business for the next 10 to 15 years,” Petters said.
The carrier contract will allow the ships to be built more efficiently and affordably by stabilizing the workforce at Newport News, allows for higher quantity purchases of production materials, and provides clarity for the supply chain to be more efficient as well, Petters said.
For 2018, net income rose 75 percent to $836 million ($19.09 EPS) from $479 million ($10.46 EPS) on the back of lower taxes. Sales increased 10 percent to a record $8.2 billion from $7.4 billion in 2017.
Petters said margins for the shipbuilding business in 2018 were 8.6 percent and will be between 7 and 9 percent in 2019 before climbing to between 9 and 10 percent in 2020.
Free cash flow for the year was $512 million.