COMPANY OUTLOOK

Huntington Ingalls looks ahead with 'Path to 2020' almost in the rear view

Huntington Ingalls Industries built an almost $1 billion government services segment first through a seven-way integration of businesses, then three more acquisitions including one announced earlier this month.

Further building its services business was a cornerstone of the shipbuilding giant's "Path to 2020" strategy it laid out in 2015. During HII's investor day event Tuesday, the company said it sees continued revenue growth in the Technical Solutions business at 5 percent through 2024 on a compound annual basis.

HII’s forecast for its services shop led to one inquisitive analyst essentially asking this: what is the plan for Technical Solutions to reach $2 billion-$2.5 billion in sales and what will that mean for the company’s overall profile?

Chief Financial Officer Chris Kastner told attendees that while there is no timing related to it, further acquisitions are of interest but any decisions will have this question in mind.

“We need to be very disciplined to ensure that we're going to create shareholder value and always test it against -- is it a better use of cash then provided the cash back to shareholders and share buybacks?,” Kastner said. “So we just need to remain disciplined when we do that.”

During his presentation, Chief Financial Officer Chris Kastner said that Technical Solutions eventually representing around 20-25 percent of total company revenue over the next five years is possible but added there is “no specific timetable” for that to happen.

CEO Mike Petters said that HII is seeing similar lofty valuations sellers are looking to fetch like many other publicly-traded government contractors have, so that is one reason they “pass on a lot of opportunities.”

“There are going to be more capabilities that we don't have that we're going to have to decide whether we want them or not, and it's going to be around a capability discussion rather than we need to go do ‘X’ amount of acquisitions every year because we have a some kind of a growth target out there. I think that's the way you get into -- you end up kind of overextending yourself a little bit,” Petters said.

Defense and federal technology solutions are two areas where they “have some discrete gaps with customers” and “probably have more gaps in terms of capabilities,” Petters added.

But excluding two acquisitions, HII Technical Solutions registered around 12-percent organic growth last year and a book-to-bill ratio of 1.1 to show the backlog grew faster than sales were booked against it -- an indicator of runway for expansion without deals.

One capability that HII identifies as key to the company’s strategy given its status as the U.S. military’s largest shipbuilder is the Navy's push for unmanned vehicles, an area Petters said the company has “all the access we need in.”

That footprint is set to grow more substantially thanks to HII’s acquisition of Hydroid announced earlier this month to add more offerings in not just the unmanned vehicles themselves but the technology to augment those vessels.

But the Navy’s path for integrating ships without sailors into its fleet -- and particularly unmanned underwater vehicles -- is likely to look different than how other branches have adopted aerial vehicles by comparison.

“UUVs present a significantly more complex set of physics problems, whether it's power generation, it's sensors, it's communications. It's just simply the corrosive effect of saltwater on the actual components,” Technical Solutions President Andy Green said. “There's just a lot of things that can create problems because you can't have constant communications like you can with the UAV. I mean, these vehicles are truly autonomous.”

The company is working on the control software and other issues surrounding UUVs both in its partnership with Boeing on the Orca Extra Large UUV program, as is the team at Hydroid. HII wants to both be a platform provider and “own and operate the brain of it,” Green said.

“We haven't made big technology bets around, say, strictly an autonomy software developer or a battery provider or a propulsion provider or a control system provider,” Green said. “We want to be the company that may provide some of those capabilities, depending on the platform, but at the end of the day we're integrating it and helping to customize it.

“As the technology evolves, we can be a little bit agnostic in some ways and very quickly insert the latest technologies into our platforms.”

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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