Huntington Ingalls Industries [HII] on Thursday posted strong first quarter earnings on a huge improvement in operating margins at its Ingalls Shipbuilding division and pension recovery on government contracts while the company’s sales edged up slightly.
Sales were relatively flat at Ingalls at $547 million but operating income leaped 79 percent to $43 million due to risk retirement on the Navy LPD-17 amphibious transport dock and Coast Guard National Security Cutter programs. Operating margin at the division soared 3.5 percent to 7.9 percent, part of an ongoing trend there of “improving performance,” Mike Petters, president and CEO of HII, said on the earnings call.
Net income more than doubled to $90 million, $1.81 earnings per share (EPS), from $44 million (87 cents EPS), beating analysts’ estimates of $1.63 EPS. Operating income was off slightly at the Newport News Shipbuilding division, due to lower risk retirement on the
Virginia-class submarine program and less work on the refueling and complex overhaul (RCOH) for the carrier CVN-71 Theodore Roosevelt, which was partially offset by improved performance on the CVN-78 Gerald R. Ford construction contract.
Sales increased 2 percent to $1.6 billion from nearly $1.6 billion a year ago with the gain driven mainly by $25 million in revenue through the recent acquisition of The S.M. Stoller Corp. and to a lesser degree by more work on aircraft carrier programs.
Total operating margins in the quarter were 10 percent, versus 6.1 percent a year ago, and Petters said the company is on track to achieving its goal sustained margins of 9-plus percent in 2015. He eventually expects the company’s operating margins to settle in the 9 to 10 percent range.
Looking ahead, Petters warned of some potential headwinds, including the prospect that sequestration could resurface after 2015.
At the outset of his prepared remarks, Petters said the defense budget environment remains plagued with “continuing uncertainty whether sequestration will remain and it becomes clearer each day that this is not the best way to run our government.”
The HII chief also said ongoing discussions within the government related to either conducting an RCOH for the CVN-73 George Washington or inactivating the carrier remain unresolved and the fact that there is no money requested in the proposed FY ’15 budget for the RCOH, which currently stands as the program of record, means planning for the overhaul will be impacted.
“Now this is not the ideal situation as it creates unnecessary churn and makes it difficult to plan and schedule the work on all of our other contracts,” Petters said.
The House Armed Services Committee approved its version of the FY ’15 Defense Authorization Bill that includes funding for the CVN-73 RCOH and another LPD-class ship, which would help bridge the gap to when the Navy hopes to begin buying a new class of amphibious transport dock vessels dubbed LXR.
On the positive side, following the delivery of the LHA-6 America amphibious assault ship in April, the last of the five underperforming contracts that has been a drag on the company’s earnings extending back to when it was part of Northrop Grumman [NOC] are behind it, helping clear the way for margin growth.
The company in the second quarter will also book its share of a potential $17.8 billion contract the Navy awarded to General Dynamics [GD] for 10 Virginia-class attack submarines (Defense Daily, April 28). HII is a partner with GD on the program.
Orders in the first quarter were a strong $2.2 billion and total backlog grew $700 million to $18 billion since the close of 2013. Funded backlog stood at $13 billion. Free cash flow was a $238 million outflow in the quarter.