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Huntington Ingalls Industries, Inc. (NYSE: HII) - A Shipbuilding Giant Navigating Choppy Waters
Published on September 24, 2024 | Ticker: HII

Huntington Ingalls Industries, Inc. (HII) is a global, all-domain defense partner, building and delivering the world's most powerful, survivable naval ships and technologies that safeguard America's seas, sky, land, space, and cyber. As the nation's largest military shipbuilder, HII has a rich history of over 135 years in advancing U.S. national security. The company operates through three reportable segments: Ingalls, Newport News, and Mission Technologies.

Financials

In the latest fiscal year, HII reported annual revenue of $11,454 million and net income of $681 million. The company's annual operating cash flow stood at $970 million, while its free cash flow reached $678 million. These robust financial metrics underscore HII's strong market position and operational efficiency.

Looking at the quarterly performance, HII reported record first-quarter 2023 revenues of $2,805 million, up 4.9% from the same period in 2022. This growth was primarily driven by higher volumes at the Mission Technologies segment, which saw a 20% increase in revenues to $750 million. The Ingalls segment also contributed to the top-line expansion, with a 14% increase in revenues to $655 million, fueled by higher volumes in surface combatants and amphibious assault ships.

However, the Newport News segment experienced a 5% decline in revenues to $1,434 million, due to lower volumes in aircraft carriers and the Virginia-class submarine program. Despite the mixed performance at the segment level, HII's overall operating income for the quarter increased by 9.2% to $154 million, with a margin of 5.5%, compared to 5.3% in the same period last year.

The company's backlog remained robust, reaching $48.4 billion as of the end of the first quarter, of which $27 billion is currently funded. This substantial backlog provides strong visibility into HII's future revenue streams and underscores the sustained demand for the company's products and services.

Business Overview

Ingalls Segment

HII's Ingalls segment is a leader in the design and construction of large-deck amphibious assault ships, surface combatants, and Coast Guard cutters. The segment's operating income for the first quarter increased by 9% to $60 million, with a margin of 9.2%, primarily driven by the higher volumes in surface combatants and amphibious assault ships.

Newport News Segment

The Newport News segment is responsible for the design, construction, overhaul, refueling, and repair of nuclear-powered aircraft carriers and submarines. While the segment's revenues declined in the first quarter, its operating income of $82 million and margin of 5.7% remained relatively flat compared to the prior-year period.

Mission Technologies Segment

The Mission Technologies segment provides a wide range of services and products, including command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance (C5ISR) systems, defensive and offensive cyberspace strategies, and critical nuclear operations. This segment delivered a strong performance, with a 20% increase in revenues to $750 million and a 65% jump in operating income to $28 million, driven by higher volumes in C5ISR and cyber, electronic warfare, and space contracts.

Risks and Challenges

HII's management remains focused on addressing the persistent challenges in the industry, such as labor shortages, supply chain disruptions, and inflationary pressures. The company has hired over 1,700 craft personnel in the first quarter, putting it on track to achieve its full-year goal of approximately 6,000 new hires. Additionally, HII is working closely with its customers and state and local governments to find solutions to these issues.

Outlook

Looking ahead, HII has reaffirmed its 2023 outlook and its 5-year free cash flow outlook of $3.6 billion. The company expects its shipbuilding margins to improve in the second half of the year, as it delivers on key milestones, including the completion of the refueling and complex overhaul of the USS Harry S. Truman (CVN 75) aircraft carrier.

HII's geographic footprint is primarily domestic, with the majority of its revenues derived from the U.S. Government, particularly the Department of Defense. The company's international presence is limited, with only a small portion of its revenues coming from commercial and international customers.

Liquidity

In terms of liquidity, HII's financial position shows some potential challenges. The company's cash balance stood at $10 million as of the end of the first quarter. The company's current ratio of 0.96 and quick ratio of 0.89 indicate that it may face some pressure in meeting its short-term obligations. HII's long-term debt-to-capitalization ratio is 0.37, suggesting a balanced capital structure.

The company's financial ratios paint a mixed picture. While HII's gross profit margin of 14% and operating profit margin of 7% are respectable, its return on assets of 6% and return on equity of 18% are relatively modest. The company's dividend yield of 2% and payout ratio of 29% provide a moderate level of shareholder returns.

Conclusion

Huntington Ingalls Industries, Inc. is a leading player in the defense and shipbuilding industry, with a diverse portfolio of products and services. The company's strong backlog, robust financial performance, and strategic focus on addressing industry challenges position it well for the future. However, HII must continue to navigate the complexities of labor shortages, supply chain disruptions, and inflationary pressures to maintain its competitive edge and deliver value to its shareholders.

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