Huntington Ingalls Industries [HII] on Thursday reported higher earnings and sales driven by a favorable pension adjustment, better performance on its LPD amphibious ship programs, lower risk on attack submarine programs and the contribution from acquisitions.
Net income increased 20 percent to $96 million, $1.96 earnings per share (EPS), from $69 million ($1.36 EPS) a year ago, easily topping consensus estimates of $1.84 EPS. A swing to $21 million in pension income versus a $13 million loss a year ago paved the way for the income gain and operating income at both of the company’s shipbuilding segments also increased.
Sales increased 5 percent to $1.7 billion from $1.6 billion, primarily driven by the acquisition of the environmental and nuclear consulting firm S.M. Stoller earlier this year and the acquisition this summer of UniversalPegasus International (UPI), an engineering firm serving the oil and gas industry. UPI makes up HII’s third business segment, which had $61 million in sales in the quarter and a $5 million operating loss.
Results at the company’s core shipbuilding segments were solid, with both Ingalls and Newport News posting higher operating profits. Sales at Ingalls were down a percent to $559 million on less revenue from amphibious assault ships while operating income jumped 20 percent due to performance improvement and risk retirement on the LPD amphibious transport dock ship programs.
At Newport News sales climbed 2 percent to just below $1.1 billion due to the Stoller acquisition and operating income rose 5 percent to $101 million driven by high risk retirement on the
Virginia-class submarine program.
HII’s segment operating margins for the quarter were 8.8 percent and total margins were 10 percent.Mike Petters, the company’s president and CEO, said on an investor call that the third quarter results demonstrated continued strong performance in terms of operating margins and cash flow, “which are right in line with our expectations” and the company is “maintaining a relentless focus on program execution [and] risk retirement,” adding that he remains confident that HII will achieve its target of 9-plus percent operating margins for its shipbuilding divisions combined in 2015.
Margins in the quarter at Ingalls were 9.8 percent and at Newport News 9.2 percent.
However, Petters cautioned that there are clouds looming that could pressure margins, particularly in the Newport News division as the company waits to get started with new contracts as work winds down on existing ones.
Petters said that even though the Navy awarded HII a contract to defuel the CVN-73 George Washington aircraft carrier earlier this year, the company is still waiting for the larger refueling and complex overhaul (RCOH) contract for the ship contract that is expected during FY ’15 but is also dependent on final passage of defense appropriations bill for 2015. In addition to continued delays on beginning the RCOH on the George Washington, HII is also waiting to get under contract for the detailed design and construction of the CVN-70 John F. Kennedy carrier, all of which is “creating pressure on our programs at Newport News,” he said.
Petters also said that none of the work force at Newport News is “sitting on the bench waiting for a job to show up” but the timing of the new contracts and the related ramp up of the workforce to support this work combined with the end of work in 2016 on the RCOH for the CVN-72 Abraham Lincoln and expected completion of the CVN-78 Gerald R. Ford is critical.
“And so it’s not a matter of keeping people around waiting for the contract. It’s a matter of anticipating the timing of the contract so you can begin process of staffing to support that,” Petters said. “The real challenge is these things are usually timed pretty well, so that as we come off of one program we’re starting up on the next program so that people can move from one program to the next. This challenge that we’re getting into now is as people start to move off of the Ford and as people start to move off of the [CVN] 72 as they head toward the delivery, they need to have the work to go to and that’s why we need to get that work under contract and that’s the balance that we’re trying to deal with there. And that’s how it can get out of balance. If they have nowhere to go, then we’re forced to make some really tough decisions with the work force but then that affects our business base, which affects our rates, which then has a program affect.”
Orders in the quarter were $400 million and total backlog at the end of October stood at $22.8 billion, with $13.1 billion funded. Backlog at the end of 2013 was $18 billion, $12 billion of which was funded. Free cash flow in the quarter was $216 million.