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, adjusted 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.
Revenue in the company’s Newport News Shipbuilding segment fell by 6.5 percent year over year, from nearly $1.2 billion to just under $1.1 billion, “due to lower volumes in Aircraft Carriers, Submarines and Energy,” HII said in its earnings presentation. That included “lower volumes associated with environmental remediation programs,” Huntington Ingalls spokeswoman Jerri Fuller Dickseski said by telephone. She said she did not have additional detail on the situation, and HII executives did not discuss the environmental cleanup side of their business during the company’s earnings conference call on Thursday.
Operating income for Newport News Shipbuilding dropped by $7 million year over year, from $109 million to $102 million.
The company did not disclose earnings figures for Stoller Newport News Nuclear (SN3), a Newport News Shipbuilding subsidiary that provides nuclear waste management and environmental services, among other capabilities. Huntington Ingalls acquired S.M. Stoller in 2014 and combined the company with its Newport News Nuclear subsidiary the following year.
Stoller Newport News Nuclear is one of the parent companies of Savannah River Nuclear Solutions (SRNS), the management and operations contractor for the Department of Energy’s Savannah River Site in South Carolina. SRNS’ responsibilities include management of some radioactive waste at the facility, including low-level and transuranic waste.
The Department of Energy on Thursday announced that it would extend SRNS’ contract by an additional 22 months, from Oct. 1, 2016, to July 31, 2018.
Stoller’s long history of waste management services for the DOE complex encompasses past and current operations at facilities including the Hanford Site in Washington state, Idaho National Laboratory, the Paducah Gaseous Diffusion Plant in Kentucky, and the Waste Isolation Pilot Plant in New Mexico.
Overall HII operating margin in the quarter was 12.8 percent, down from 15.4 percent a year ago but still robust, while segment operating margin was 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.
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 Gerald R. 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.”
