This document concerns the analysis of Huntington Ingalls Industries’ Q3 report published on the 4th of November 2020. The publishing of this analytical document is in line with the International Military Review’s, commitment to delivering key information to aid in the undertaking of investments in the defence industry. This report also seeks to deliver our commitment to academic research by providing an insight into the shipbuilding industry of 2020. The statements made in this report are are based on information contained within Huntington Ingalls Industries’ Q3 report. Report data is only exact up to the date of its publication, 30th of September 2020.
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Huntington Ingalls Industries Overview
Huntington Ingalls Industries Background
Huntington Ingalls Industries was founded on March 31st 2011 from the former components of Northrop Grumman’s maritime arm. Northrop Grumman’s maritime arm, was formed from the purchase of Litton Industries and Newport News Shipbuilding in 2001. Litton Industries was a defence conglomerate containing Ingalls Shipbuilding, while Newport News Shipbuilding was acquired on its own. The acquisition of the two companies with a vision to form Northrop Grumman’s maritime arm, failed to generate profit and in 2011 the company decided to focus on its maritime speciality. The two ex-Northrop subsidiaries then merged into one to deliver shipbuilding services exclusively.
Huntington Ingalls Industries Composition
Huntington Ingalls Industries (HII) is currently the United States’ largest military shipbuilder. The company has 42,000 employees across the US as of 2020 and is headed up by CEO Mike Petters. The company is comprised of three divisions: Newport News Shipyards, Ingalls Shipbuilding and Technical Solutions. The Newport News and Ingalls Shipbuilding date from 1886 and 1938 respectively, while Technical Solutions was founded in 2016.
Newport News is HII’s oldest component, having been founded in 1886 and chief revenue earner achieving total 2020 Q1 – Q3 sales figures of $3.8 billion. The division’s shipyards are located in Newport News, Virginia which have been building US naval vessels since 1906, when it began to manufacture America’s dreadnoughts. The company is currently responsible for the production of large to super-large tonnage vessels, specializing in aircraft carriers and submarines. The specialism has led to the company being contracted to construct the 8,700 tonne Virginia-class nuclear attack submarine, 20,810 tonne Columbia-class nuclear ballistic submarine and the 100,000 tonne Gerald R. Ford-class nuclear aircraft carrier. Newport News’ capabilities to operate complex decade long projects have led it to be the main contractor for refuelling and overhaul orders for nuclear powered vessels.
The Ingalls Shipbuilding was founded in 1938 and is currently HII’s second division by total revenue, earning $1.9 billion over Q1 – Q3 2020. Ingalls Shipbuilding’s shipyards reside in Pascagoula on the mouth of the Mississippi river. The company began to fulfil naval contracts during the 1950s, with the beginning of its role in the US navy’s nuclear submarine programme. Ingalls Shipbuilding is currently responsible for the construction of small to large tonnage vessels, holding the contract for the construction of the US Coast Guard’s 4,600 tonne Legend-class patrol cutter, the US Navy’s 25,000 tonne San-Antonio amphibious transport docks, 44,971 amphibious support vessel and the restarted production of the 9,500 tonnes Arleigh Burke-class destroyer. The company is also the prime contractor on Arleigh Burke after-market services such as repairs and spares provisions.
The Technical Solutions division is the youngest component, founded in 2016 to be responsible for after-market services and unmanned marine systems development. The current after-market services provided by the division are IT support, mission support, naval logistics management and training. The segment also provides fleet maintenance and modernization programmes for vessels delivered by the company. The Technical Solutions division is also the smallest by revenue, achieving a total sales figure of $957 million from Q1 – Q3 2020.
Huntington Ingalls Industries Q3 Report
Huntington Ingalls Industries CEO Statement for Q3 2020
“We are very pleased with shipbuilding program execution in the quarter, particularly as we continue to navigate our way through the challenges posed by COVID-19. In addition to achieving a number of key shipbuilding program milestones during the quarter, we also broke ground on our Unmanned Systems Centre of Excellence, a facility purpose-built for unmanned systems prototyping, production and testing as we continue to invest in and expand our unmanned capabilities.”Mike Petters CEO Huntington Ingalls Industries
The CEO’s statement is definitively upbeat, enjoying a tone which signifies a quarter that has more than met corporate expectations. The mention of COVID-19 is fleeting, indicating that its impact on Huntington Ingalls’ operations has been relatively small. The company is clearly confident that their anti-COVID measures have been sufficient to continue operations at normal levels. The Unmanned Systems Centre of Excellence (USCE), is a significant driver optimism for HII as they embark on advancing their presence within the unmanned maritime market. The unmanned maritime market, is the market to watch for future nautical defence innovation, in line with a general defence move to autonomous platform provision. The Technical Solutions division, the author of the USCE will now be placed at the forefront of the shipbuilder’s attempts to achieve a cutting edge in unmanned vessels.
Huntington Ingalls Industries Company Health I: 2020 Q1 – Q4 Estimations
Huntington Ingalls Industries made two forecasts during 2020. The two forecasts examined the revenues and profit margins of Huntington Ingalls’ two services, shipbuilding and maritime services. The August 2020 forecast estimated an end of the year total revenue from shipbuilding at a low end of $7.6 billion to a high end of $7.9 billion. The November updated forecast, just a month to the close of year, indicate that the high end of this revenue prediction will be achieved.
The accomplishment of the $7.9 billion figure is a very good sign of HII’s performance for the year. The profit margin, i.e. the average percentage of profit made on each sale, was forecast in August 2020 to be from 5.5% – 6.5%. The company has achieved the high end of that prediction, obtaining a profit margin of 6.5%. The November estimated for the end of year performance of HLL in the arena of technical solutions either meets or exceeds the high end prediction.
The technical solutions profit margin came in at 2.6%, two points higher than the 2.4% high end prediction in August. The revenue level achieved also matched the higher end prediction, with $1.25 billion in total revenue. The across the board success in reaching the high end of the forecast, hints at a company whose production is mostly unaffected by the global down turn. One explanation behind the compliance with high end goals, is likely to be the complicated nature of maritime defence construction for the client. The timescale, resource allocation and sub-contracting are all unusually lengthy processes, essentially making client back-outs difficult if not impossible. The profit margin’s unchanging nature heavily supports this hypothesis as if there had been significant client direction changes one would begin to see reduced profit margins. Technical Solutions has exceeded expectations, likely due to the role it has played in remote IT systems, shielding it from the effects of government anti-close-proximity policy. The compliance, or exceeding of expectations see’s the company in a perceptively good position.
Huntington Ingalls Industries Company Health II: 2020/2019 Q3 Assets to Liabilities Sheets
Huntington Ingalls Industries company health is assessed in this report, through the combining of Huntington Ingalls Industries assets and contrasting of said assets with the company’s liabilities. The assets to liabilities ratio roughly correlates to determining the degree of freedom in which the company can act if, forced to undergo measures to protect itself from serious negative economic impacts. The impacts coming from either company specific issues or global issues.
Huntington Ingalls Industries Assets Sheet Q3 2020
|2020 Assets||Q3 2020|
|Cash & Cash Equivalents||$744mln|
|Assets Held for Sale||$154mln|
|Income Taxes Receivable||$163mln|
|Real Estate and Equipment||$2.9bn|
|Operating Lease Assets||$187mln|
|Deferred Tax Assets||$97mln|
The assets owned by Huntington Ingalls Industries identify the three main assets, real estate and equipment and goodwill. The contract assets category, referring to monies owed to Huntington Ingalls but not yet paid, comes in at $1.3 billion. The $1.3 billion is an indication of the immense expense incurred by multi-year naval projects. Shipbuilding project’s unusually high costs, typically allow customers to pay the price over the course of the contract. The price generally increases over time as more elements are added. The result is the maintenance of a significant level of assets within active contracts not finally paid in many cases, until the post-construction phase, having $1.3 billion not yet paid is therefore perfectly acceptable.
The second highest repository of company assets lies in Goodwill, coming in at $1.5 billion. The goodwill asset value, used to value a company by buyers, refers to the perceived worth of intangible assets associated with the company. Assets such as the company’s client base or brand value. The value relates to the esteem in which the company is held by others. HII has continuously delivered for the US navy, contains a component which has executed naval contracts since 1906 and is trusted with high secrecy projects, such as the nuclear submarine fleet. A goodwill value of $1.5 billion, two hundred million more than contract assets, is an important positive sign for the company in Q3 2020.
The company’s most important asset, in terms of monetary value, lies in its real estate and equipment inventory. The vast sum of $2.9 billion represents the total worth of all HII properties, the number is not unusual in the maritime industry. The production of vessels, as previously discussed, is a significant endeavour and requires complex and often highly specialized machinery. The infrastructure of shipbuilding alone requires the manufacturing and acquisition of dry dock’s, unique facilities and floating docks to name but a few. The large-scale investment renders shipbuilding real-estate a solid source of emergency funds if destabilized by market conditions. The selling off of facilities, could provide a safety net for the company and should be seen as a future proofing quality the company currently possesses.
Huntington Ingalls Industries Liabilities Sheet Q3 2020
|2020 Current Liabilities||Q3 2020|
|Trade Accounts Payable||$429mln|
|Accrued Employee Compensation||$320mln|
|Liabilities Held for Sale||$86mln|
|Postretirement Plan Liabilities||$130mln|
|Works Compensation Liabilities||$233mln|
|Pension Plan Liabilities||$728mln|
|Misc Post-Retirement Liabilities||$374mln|
|Workers Compensation Liabilities||$470mln|
|Long-Term Lease Operations||$153mln|
|Misc. Long-Term Liabilities||$329mln|
The liabilities demonstrated on this sheet, show the root of those commitments which Huntington Ingalls Industries is unable to neglect. The chief liabilities for the company lie in its pension plan, contractual liabilities and long-term debt.
The company pension plan is the second source of liability. The cost of the pension commitment is not currently a significant drag on company resources however, coming in at an acceptable $728 million. The presence of the plan is also not likely to reduce company agility. The presentation of difficult periods could be handled without the pension plan becoming an issue to fulfil. The near certainty on this is due to the company’s significant assets (see above).
The contract liabilities i.e. monies held by Ingalls Industries paid by clients for services not yet received, total $604 million. The $604 million worth of prepayment monies to Ingalls Industries must be honoured in terms of what said customers were expecting. The in-execution contracts to which this sum is attached, are unable to be cancelled if they’ve reached stage where they have become liabilities. The act of being unable to fulfil said prepaid contracts, or their intentional cancellation would lead to legal consequences. The contract’s are likely to be salvageable even if challenges to the company present themselves, due to the potential ability to keep the orders running by selling off or calling on assets.
The debt liability, is unavoidable, standing at a large $2.2 billion, up a billion dollars on Q3 2019’s long term debt liability of $2.2 billion. Huntington Ingalls Industries must continue to service this debt, to not do so would expose the company to extreme risk. The debt liability is the largest liability on the company’s records and would hypothetically damage the company greatly if there was a collapse in the maritime defence market.
Assets v. Liabilities
The two sheets show a total of assets to liabilities of $8.4 billion in assets and $6.5 billion in liabilities. The gap between the two is $2.1 billion, the numerical space gives plenty of leeway for the company if there is an unforeseen shock. The assets would be perfectly capable of cushioning the fall, in the event that the liabilities expand into the realms of detrimentally impacting the company after an economic shock. The company appears to be in good health in respect of its ability to endure economic pressure, which in turn places it in an enviable position as a highly stable company.
Stock Price and Market Capitalization Comparison Q3 2020/2019
Huntington Ingalls Industries’ share price at the close of Q3 2020 stood at $140.75 per share. The company’s share price as of the same date in 2019, stood at $204.98 per share. The share price has come down 31.3%, seeing the company lose just over a quarter of its share value. The worst day for the company’s share price over Q3 2020, was the 10th of September 2020. The 10th saw the share price reach not just the lowest for the quarter but for the year as a whole. The final share price that day came to $137.83, which was the share price’s final resting place after a constant fall beginning on the 13th of February. The 2019 – 2020 reduction in share price is due to the economic downturn currently being experienced globally, with chronic uncertainty shaking the markets. The share price began to recover by the 30th of September 2020, and continues to do so, with the 23rd of November seeing the share price at $158.74. The company has been experiencing peak’s and troughs since the 30th forming a general upward trend, however HII has some way to go to restore it’s pre-COVID share price.
HII’s market capitalization has dropped in parallel with the share price. The company’s market capitalization at the close of Q3 2020 was $5.7 billion compared to $8.4 billion at the close of Q3 2019. The reduction during the intervening year comes to 32.14%. The drop in the market value roughly parallel’s the share price fall of 31.3%, save the reduction is 1.11% greater. The 10th of September saw the company achieve its lowest Q3 2020 market value at, $5.6 billion, the same day the share price experienced it’s worst day and a difference of $100 million for the final Q3 2020 figure. The market capitalization, like the share price, began recovering two days after the close of Q3, reaching $5.9 billion on the 2nd of October. The market value, unsurprisingly, has followed the peaks and troughs pattern established by HII’s share price. The market value, as in the case of the share price, still has a long way to go to restore its market situation to pre-COVID levels.
The company is demonstrating to be highly robust to wild market fluctuations, prompted by the governmental response to COVID. The company has achieved this through obtaining protection through it’s practice of only producing vessels for military clients. The military maritime sector, akin to the military aviation sector has been mostly sheltered from the global economic storm. The recovery has recently stumbled into a plateau and appears to be on the edge of developing into a trough. The final depth of this trough remains to be seen, but if it follows the same trough – peak pattern experienced throughout Q4 and Q3, then it’s likely that HII’s Q4 and close of year reports will be reporting a continually increasing trend.
Orders and Bookings Report for Q3 2020
Huntington Ingalls Industries Q3 report states an order backlog of $45.3 billion. The term ‘backlog’ refers to orders currently being executed but not yet completed or paid for. The presence of a large backlog is an indication of a healthy company. Companies with large backlog’s are typically receiving continual orders, making sudden order cut-offs unlikely. The maritime construction sector has particular unique peculiarities in the realms of judging backlogs and orders. The construction of ships and particularly military ships, is an endeavour which most often requires large sums of money, multiple small subcontractors, high manpower levels and often multi-company collaboration between large, sometimes nationalized corporations. The result is an industry which runs small but potentially decade long back logs on orders, which are usually far more expensive than aviation or land orders. Maritime industry participants will therefore, have typically fewer orders but at a greater price per order. HII’s Q3 report does not contain specific order financing breakdowns, the following section will instead look at what has been ordered.
Legend-Class National Security Cutter Programme
Huntington Ingalls Industries is the prime contractor on the construction of Legend-class national security cutters. The Legend-class programme began in 2008 as part of the US Coast Guard’s Integrated Deepwater System Programme to modernize the US Coast Guard’s equipment roster. The initial eleven strong order for the vessel’s from Huntington Ingalls Industries is nearly complete with eight vessels currently active. The company’s shipyards are still manufacturing two Legend-class cutters, the USS Stone and USS Calhoun. The Huntington Ingalls Industries’ shipyards currently has one Legend-class, the USS Friedman, awaiting further construction as part of HII’s order backlog. Q3 2020 saw the USS Stone complete its sea trials and HII saw an increase in orders stemming from both the USS Stone and USS Calhoun. Orders on the still-in-construction USS Friedman have slowed down and are judged to have failed company expectations.
Arleigh Burke-Class Restart Programme
Huntington Ingalls Industries is the current private sector partner of the US Navy’s Arleigh Bukre restart programme. The programme is designed to reintroduce mainstream production of Arleigh Burke-class destroyers. The programme is to deliver modernized and new vessels, to be in service until 2040. The programme is the result of the abandonment of the US Navy’s Zumwalt-class, considered too expensive to become the main vessel of the US Navy. Q3 2020 has seen Huntington Ingalls continue work on the USS Ted Stevens, USS Jeremiah Denton, USS Thad Cochran and the USS George M. Neal. The work on new vessels is going ahead as planned. The modernization orders within the programme have slowed down however, producing an unforeseen reduction in revenues for the programme. HII also possesses the contract to supply after-market services for the Arleigh Burke-class, including repairs, an obligation currently being exercised by the USS Fitzgerald Arleigh Burke-class destroyer after its collision with the MV ACX Crystal in Q2 2017.
America-Class Amphibious Assault Support Vessel
The America-class amphibious assault support vessel production was handed to Huntington Ingalls Industries in 2012. The vessel is designed to augment the United States Marine Corps’ (USMC) amphibious operations capabilities. The US Navy originally requested eleven America-class vessels, with production commencing in 2008 through Northrop Grumman’s maritime wing. The orders were inherited by HII from Northrop Grumman’s maritime business in 2012, a commitment which has seen HII produce the USS America and the USS Tripoli America-class support ships. The USS Tripoli, launched in early Q3 2020 is still tied to Huntington Ingalls for after-market services but orders relating to those services have seen an unexpected Q3 slowdown.
San Antonio-Class Amphibious Transport Dock Vessel
The San Antonio-class amphibious transport dock vessel production is wholly undertaken by Huntington Ingalls Industries. The San Antonio-class vessels are support ships whose role is to provide safe launching positions for aircraft, land vehicles and small vessels such as landing craft. The class is designed to support the USMC. The US Navy’s force planning currently requires the construction of twenty six total vessels. The current number of active San Antonio-class vessels stands at eleven, nearly half of the requested amount. HII is currently constructing two San Antonio-class ships, the USS Harrisburg and the USS Richard M. McCool Jr. Orders on the USS Richard M. McCool Jr. have slowed in Q3 2020, whilst Q3 2020 orders related to the construction of the USS Harrisburg have increased.
Virginia-Class Nuclear Attack Submarine
The Virginia-class nuclear attack submarine project is jointly executed by General Dynamic Electric Boat and Huntington Ingalls. The US Navy previously placed an order for sixty six submarines, to be ready for launch by 2004. The construction of the vessels began in 2000 and nineteen are in active service with the navy. The two companies are currently building eleven Virginia-class submarines across their shipyards, with a further six in the company’s backlog. The Virginia-class has been built in blocks over two decades, with the block five being the newest. The block five submarines presently form the company’s greatest source of orders. The volume of after-market orders related to previously constructed block III vessels, have unexpectedly declined.
Gerald R. Ford-Class Nuclear Powered Aircraft Carrier
Huntington Ingalls Industries since 2017 has been charged with the design and construction of the US Navy’s new Gerald R. Ford-class aircraft carriers. The company is currently preparing to begin construction on on the USS Enterprise and USS Doris Miller. Huntington Ingalls has reported that these projects are creating a consistent increase in orders based around obtaining the materials for construction. The USS Enterprise is expected to begin construction Q1 of 2026 and be launched by Q4 2029.
Nimitz-Class Refuel & Complex Overhauling
Huntington Ingalls Industries continues to execute its role as the US Navy’s primary deliverer of modernization and upgrades, as part of this the company is currently performing life-extension operations on the USS George Washington, USS John F. Kennedy and USS Gerald R. Ford. The orders related to these renewal projects have been lower than expected for Q3 2020.
Logistics Support Services
Huntington Ingalls is currently processing an unspecified number of contracts to decommission and remove obsolete nuclear powered vessels. The contracts are to be executed over the course of ten years with a maximum price ceiling of $3 billion. HII has also received an order to provide logistical support to the US Navy’s Naval Expeditionary Logistics Support Group or NAVELSG, an organization providing logistics capabilities for US Naval operations.
Huntington Ingalls Industries Component Performance Q3 2020
The performance graph to the right reflects the performance of each sector of Huntington Ingalls Industries. The performance is judged on operating profit. The most impressive performer within HII is Newport News Shipbuilding. The Newport News segment has returned pure sales i.e. sales post-expenses, of $79 million. Ingalls Shipbuilding came as the second best performer with a pure sales return of $62 million. The least effective performer on paper is Technical Solutions. The reason behind Technical Solution’s seemingly poor relative performance, lies in the greater prices clients pay for shipbuilding as opposed to multi-year IT services administration contracts. The young age of the division contributes too, as it has been unable yet to build up its name, or capital.
Newport News Shipbuilding 2020 Q3 Performance in Detail
Newport News shipbuilding in Q3 2020 is the company’s strongest element. The division specializes in Huntington Ingalls Industries’ largest projects, notably the construction of submarines and aircraft carriers. The division is the lead producer of the Columbia and Virginia class submarines, the Gerald R. Ford class aircraft carrier and all orders related to the life-extension programmes pertaining to last century’s Nimitz class aircraft carrier.
The result of these projects have been the achievement of sales reaching $1.3 billion in total Q3 sales. The sales of up to $1.3 billion has been subject to a Q3 operating margin of 5.8%, producing a post-sales expenses income of $79 million. The company’s sales, operating margin and post-expenses income is all down from 2019’s Q3. The interesting point to note however, comes in the form of the profit margin difference and its relation to total revenues. The total revenues for Q3 2020 were $1.3 billion, one hundred million up from 2019’s Q3 total revenues of $1.2 billion, the 8% increase in raw income does not correlate with the drastic cut in profit margin afflicting the firm’s order volume.
The Q3 2020 profit margin demonstrably declined from 9.5% to 5.8%, a reduction of 39%, while the pure profit sum for Q3 fell by 34%. The data would then, appear to show that Q3 2020’s projects have been more costly to the client but more expensive to fulfil. This is a potential result of the economic crisis linked to issues with suppliers and increased workplace absence during Q3 2020. The overriding consequence has been the difficulty to fulfil the flow of orders into the company.
The Q3 2020 data pattern also occurs, when one compares the Q1 – Q3 performance for 2020 and 2019. The total revenues are once again unchanged, yet the operating margin differs wildly with a 7.1% margin in 2019 compared to 2.7% in 2020, a 61% decrease, a 20% increase in the reduction experienced in Q3 2020 alone. Once more we see the same total order value but a deep decrease in the profits rendered from each order upon completion. The same conclusion must be drawn for the whole year then, that the orders are getting more expensive to fulfil, but not declining in volume. The issue would then be on the builder’s end not the client’s, leading to a wider hypothesis that Newport News’ issue is not direct market conditions, but the conditions within their supplier and labour marketplaces. The profit margin is unlikely to increase unless market conditions improve alongside improvements in the domestic situation for many employees, something out of HII’s control.
Ingalls Shipbuilders 2020 Q3 Performance in Detail
Ingalls Shipbuilding in Q3 is Huntington Ingalls second best performer. The company executes the construction of small to medium sized maritime construction projects. The present programme’s within the remit of Ingalls Shipbuilding are: the Arleigh-Burke restart programme, the Legend-class cutter programme and the construction of the San-Antonio and America class amphibious support vessels.
The results from these projects as of Q3 2020 have been total sales of $675 million. The $675 million in sales have been subjected to a Q3 operating margin of 9.2%, producing a post-sales expenses income of $62 million. The division’s performance contradicts that of Ingalls Shipbuilding with all indicators increasing on 2019’s results. 2019 produced a total sales figure of $647 million, $28 million lower than 2020’s. The post-sales expenses income for Q3 2019, came in at $61 million, a million dollars less than in 2020.
Q3 2020’s profit margin comparison reverses the trend of increases from 2019 – 2020 with 2020’s profit margin coming to 9.2% to 2019’s profit margin of 9.4%. The situation presented by the profit margin differential, shows that in Ingalls’ case the orders are increasing but the profit delivered from them is decreasing.
The production costs are likely increasing akin to the situation found in Newport News Shipbuilding’s figures. The culprits are likely identical to those afflicting Newport News Shipbuilding, i.e. unstable labour costs, component acquisition costs and an unstable supplier situation, factors closely linked to the global economic downturn. The chief difference with Newport News Shipbuilding is the reduced scale of change. The percentage decrease in the operating margins for 2020 for example, stood at 2% in comparison to 39% for Newport News Shipbuilding from Q3 2020’s figure to Q3 2019’s figure. The reduction in impact is likely as a result of smaller, more adaptable, contracts being trusted to Ingalls Shipbuilding in comparison to the larger more unwieldly contracts gifted to Newport News Shipbuilding.
The counter posing of the Q3 2020/2019 data onto the Q1 – Q3 data from 2020 and 2019, would appear to show Q3 2020/2019 as an outlier for Ingalls Shipbuilding. The company’s figures for the whole year has shown a general decline in post-sales expenditure income from 2019 and a corresponding decline in the profit margin. Only the total revenues adhere to the same unchanging pattern demonstrated in the Q3 2020/2019 breakdown. The 2019 whole year profit margin came in at 7.1% while 2020’s whole year margin’s were 2.7% representing a profit margin decrease of 62%. The whole year decrease matches the margin decrease for Newport News Shipyards i.e. a 61% over the same period and thus, Q3 2020 bucks the year-long trend. Q3 2020 for Ingalls Shipbuilding should not then, be considered as indicative of a general trend for Ingalls Shipbuilding into the next quarter. Q4’s figures will potentially continue the increasing trend in revenue seen in Q3, which will lead to a flattening of the decline experienced from Q1 – Q2 unto a Q3 – Q4 recovery. The potential however, is likely 50/50 and the decline trend experienced from Q1 – Q2 2020 could return to affect Ingalls Shipbuilding till the end of Q4.
Technical Solutions 2020 Q3 Performance in Detail
Technical Solutions is Huntington Ingalls Industries’ third best performer. The division undertakes the development of HII’s unmanned systems facilities and after-market technical support. The aftermarket technical support comes in the shape of mission systems support IT support, naval logistics, logistics management and training. The division’s position as the third ranked component by revenue, is through no direct fault of the division itself. The sector’s small total revenues of $320 million, compared to $1.3 billion for Newport News and $675 million for Ingalls Shipbuilding, is due to the division’s services and products being incomparably cheaper than shipbuilding.
Technical Solutions has experienced a 6.6% profit margin on each contract acquired in Q3 2020. The result has been that of a total revenue of $320 million, the income post-sales expenses amounts to $21 million. The profit margin comparison from Q3 2019 to Q3 2020, shows that in Q3 2019 a profit margin of 2.8% had been achieved. The figure is 3.8% less than than Q3 2020’s 6.6%, meaning that Technical Solutions has followed Ingalls Shipbuilding, in increasing its financial health in Q3 2020.
The comparison of post-expenses pure profit figures for Technical Solutions in both Q3 2019 and Q3 2020 show that Technical Solutions brought in the exact same pure profits for Q3 in both years. The meaning being that Technical solutions is becoming more effective at extracting more pure income from less material. Technical Solutions in Q3 2020 has followed the Ingalls Shipbuilding trend, presenting a potential to generate a continuing profit increase into Q4 2020 and unto 2021.
The division separates from its similarity to Ingalls Shipbuilding by bucking the Q1 – Q2 2020 decline trend, seen in the figures in both Ingalls Shipbuilders and Newport News Shipbuilding from Q1 – Q2 2020. Q1 – Q2 for 2020 in the Technical Solutions component has seen a rise across all indicators. The segment profit margin from Q1 – Q2, came up from 1.1% in 2019 to 2.4% in 2020, total revenues of $957 million in 2020 compared to $887 in 2019 and a post-expenses sales volume of $9 million for Q1 – Q2 2019 compared to $23 million in 2020. The continuation of this recovery trend into Q4 and 2021, would be good news for the company as a whole, leaving just Newport Shipbuilding as a cause for concern, as a potential drag on the company.
Huntington Ingalls-Industries is in a strong position with a good assets to liabilities ratio, an excellent selection of contracts and what looks like the beginnings of a recovery in two out of three divisions. The good news for the company continues when looking at the end of year estimate revision, where the HII looks as if it will achieve the high end of forecast revenues and profit margins. The firm’s assets to liabilities ratio is currently excellent with a $2.1 billion difference in favour of assets against liabilities, providing good protections against economic shocks. The company’s longest lasting contract, the Arleigh Burke-class destroyer, will continue far into the future and is highly stable. The contract’s to provide submarines will also continue into the long-term delivering lasting protections against market place demand changes. The performance of the Technical Solutions and Ingalls Shipbuilding divisions, have produced recovery like indications in Q3 in terms of revenue and pure profit figures. Newport News Shipbuilding is not seeing the same recovery signs in terms of pure profits but total revenues are stable. The stock price and marketplace capitalization has recovered to some degree over Q3 from Q1 and Q2’s economic shock due to the global COVID outbreak. The recovery however, looks like it might be moving into a trough after a plateau, it is unclear whether this will be a usual trough entry, or whether it will grow unabated into a Q4 decline into the new year. On the whole, company CEO Mike Petters statement, opening the report has been justified in its upbeat tone as he look to be delivering the company into a stable Q4 and potentially the beginnings of a consistent recovery.