Huntington Ingalls Industries [HII] on Thursday reported mixed results in its third quarter, with sales up on acquisitions and work in its nuclear shipyard while earnings fell due to lower operating income from its shipbuilding and a less favorable adjustment in pension income versus a year ago.
Net income sank 33 percent to $154 million, $3.74 earnings per share (EPS), from $229 million ($5.29 EPS) a year ago, still topping consensus estimates by 11 cents per share. Operating margin fell to 9.6 percent from 13.9 percent a year ago. Sales increased nearly 7 percent to $2.2 billion from $2.1 billion.
Free cash flow in the quarter was $250 million and HII remains confident that in 2020 it will return just about all of its free cash flow to shareholders. That confidence was demonstrated earlier this week when HII’s board announced a 20 percent increase in the quarterly dividend to $1.03 per share and a $1 billion increase in the share repurchase program to $3.2 billion through October 2024, a two-year extension of the term.
Operating income at HII’s two shipbuilding segments, Ingalls Shipbuilding and Newport News Shipbuilding, was down on lower risk retirement on the Coast Guard’s National Security Cutter program, a hefty workers compensation benefit that boosted earnings a year ago, and contract changes related to support services for the Navy’s Los Angeles-class attack submarines. The declines at the shipbuilding segments were partially offset by an increase at the Technical Solutions segment due to improved performance on nuclear and environmental contracts.
Margins in the shipbuilding business were nearly 9 percent in the quarter and nearly 8 percent for the first three quarters in 2019. Company officials said on Thursday’s earnings call that the outlook for shipbuilding margin in 2020 remains between 9 and 10 percent.
HII’s top line results were driven primarily by strong double-digit sales increases at Technical Solutions, primarily due to previous acquisitions, as well as revenue growth in fleet support, and oil and gas.
In the shipbuilding segments, Newport News posted solid growth on most of its aircraft carrier and submarine programs. Growth at Newport News was partially offset by a decline at Ingalls, which was down on less work on the NSC program and Navy amphibious assault ships.
Orders in the quarter were $2.1 billion and total backlog stood at $39.2 billion, down $200 million from the end of the second quarter.
Asked by one analyst on the earnings call about a review of some execution issues that dinged the company in the second quarter, Mike Petters, HII’s president and CEO, replied that a “deep dive” showed that parts of the business were executing well and others weren’t, revealing “inconsistencies.”
He said HII is “developing a comprehensive operating system that would be the standard protocol for all the programs we have in the company,” adding that the company has structures in place but that “when it gets all the way to the waterfront it starts to move around a little bit and so we’re going to put some more discipline and starch into that and we’re on track for it.”
Petters said the company is “very pleased” with the execution of the company’s shipbuilding programs in the quarter.