Top 100: Where does Huntington Ingalls take its services business from here?

Among many post-acquisition integrations in the government services market, one could argue that military shipbuilder Huntington Ingalls Industries undertook the most complex process of them all.

During 2017, Huntington Ingalls carried out a seven-way integration that pulled together services businesses dispersed across its two shipbuilding divisions to form what is now Technical Solutions. That included Camber Corp., the late 2016 acquisition that spurred the formation of Technical Solutions.

With that integration behind it, Huntington Ingalls has returned to buying mode in recent months with a pair of transactions to add cyber and other technology services work for defense and intelligence agencies: first for G2 in December of last year, then Fulcrum in late February of this year.

The company is ranked No. 72 on the 2019 Washington Technology Top 100 with $294.8 million in prime contract obligations.

Before looking ahead, it is also useful to again look back at what Huntington Ingalls’ services portfolio looked like pre-integration and how it got to become Technical Solutions.

How was it before? “Seven entities operating almost as independent, wholly-owned subsidiaries,” segment president Andy Green told me at HII’s Fairfax, Virginia office. “Small-to-medium sized businesses that Huntington Ingalls had acquired in some way over its history.”

Fast forward to 2017 and HII “really made a push to get rid of the old brand names and go to market as Huntington Ingalls Industries,” Green said.

That meant not just integrating back office and other functions supporting the business, plus standardizing policies and employee compensation packages.The push also meant Huntington Ingalls presenting itself “as an ($8 billion) company that has the breadth of capability to deliver solutions to customers that an $8 billion company can deliver,” Green said.

The $8 billion figure represents Huntington Ingalls’ total revenue last year, of which Technical Solutions represents slightly more than $1 billion. Green said that just under 6,000 of the company’s nearly 40,000 employees work in Technical Solutions.

Huntington Ingalls finds plenty to like in services because unlike shipbuilding that requires heavy upfront capital expenditures in shipyards and materials, services work does not require as much investment and generates quicker cash flows.

“You get to where we are now and that... set the parameters for acquiring and integrating G2 and Fulcrum,” he added.

Those parameters include lessons learned from the seven-way integration to make the onboarding of G2 and Fulcrum quicker and more seamless than before.

G2 added to Huntington Ingalls a greater presence in digital security programs and 130 employees that a majority of whom hold high-end clearances and advanced education degrees. Fulcrum focuses on software development, data analytics and cyber work with military and intelligence customers plus civilian agencies.

“Fulcrum brings a very interesting set of deep relationships… that we thought would be very valuable,” Green said. “They obviously had experienced a lot of growth recently and I think that was evidence of their performance with their existing customers.”

Boyne Capital and Grindstone partners -- the former private equity co-owners of Fulcrum -- acquired the company in 2010 when its sales were $22 million. Revenue for 2018 by comparison exceeded $160 million and that period included Fulcrum’s recent graduation from small business status to the world of full-and-open contracts that strategic buyers prize, particularly with customers whose barriers to entry are high.

Fulcrum still had an amount of small business revenue at the time of closure, but Green said firmly of the timing of the company’s graduation: “that’s okay with us.”

“With any business of that size… you always have the possibility that there’s going to be small business exposure there,” Green said.

The potential exposure would come up in the instance of a recompete of a contract in whether it stays for small businesses only or becomes full-and-open. In most instances, that set-aside revenue does not go away at once after an acquisition.

“We felt like the risk there was not significant, and the level of small business was not significant,” Green said. “Because of the strength of the success of the relationships and the performance.”

Huntington Ingalls did its homework on that aspect during the due diligence process.

“You’ve literally got to look contact by contract, because some of these contracts, depending on which small (business) contract you’re talking about, some of them have always been small business set-aside and always will be,” Green said. “Others have been full-and-open, then went small, then went back full-and-open, stayed full-and-open then maybe went small.”

Green would not tip his hand on what a possible future acquisition would look like for Technical Solutions -- he declined to comment in fact -- but did share his view on how the business thinks about scale, which has driven much of the government services market’s deal activity in recent years.

“We feel comfortable where we are, competing where we are, with our customer set and in the markets where we are,” Green said. “Generically, scale for scale sake: that means a lot of different things to a lot of different people, and I would say that’s not something that we’re solely focused on.”

“As far as there being a minimal size that I think we need to be in total, I wouldn’t put a number on that.”

The business Green leads is a key cog in Huntington Ingalls’ push to become a leader in the unmanned sea vehicle market and already is part of one key program. Technical Solutions is a partner with prime contractor Boeing on the Navy’s “Orca” initiative to build prototype large unmanned underwater vehicles.

Like many other observers I have spoken with about the subject, Green cited communications as a significant technical challenge with UUVs.

But he also said “it feels like we’re approaching an inflection point” not unlike the unmanned aircraft market in the last decade.

“We view it as a critical enabling technology for our Navy customer, as well as some potential other customers,” Green said.