Fitch Ratings has upgraded
Fitch has also upgraded HII's long-term ratings on its senior unsecured notes, revolver and term loan to 'BBB' from 'BBB-', and short-term CP rating to 'F2' and 'F3'. The Rating Outlook is Stable.
The upgrade was driven by HII's executed debt reduction plan, which resulted in EBITDA leverage sustained around 2.0x. HII's ratings are further supported by the company's
The company also holds a strategically important position as the sole
Rating concerns include execution risk, program concentration, and potential cash flow variability related to the timing of revenue generation and program development costs. Changes in
Key Rating Drivers
EBITDA Leverage Below 2.0x: Fitch projects HII's EBITDA leverage will remain below 2.0x over the next several years following more than
Fitch believes the company's leverage of around 2.0x is consistent with defense contractors in the mid-to-high 'BBB' category. HII's exposure to program execution risks have historically constrained the company's credit ratings. The company has required stronger-than-average credit metrics and financial flexibility compared with similarly rated aerospace & defense companies in order to sustain an investment grade rating. However, increasing program, revenue and cash flow diversification and visibility help moderate these risks and lessens the company's sensitivity to future program development costs.
Diversification Improving: Fitch believes HII's diversification has improved over the past several years to a level where Mission Technologies and sustainment work helps mitigate individual program and operational risks. Fitch expects HII will continue to diversify by capitalizing on new revenue streams, such as C5ISR, cybersecurity, and electronic warfare, which became part of HII's product portfolio through the Alion acquisition in 2021, and should experience increasing demand over the next decade.
Long-term Revenue Visibility Supports >2% FCF: Fitch considers HII's backlog of
The majority of the company's products have a significant role in the
HII could be modestly vulnerable to changes in plans regarding the fleet needs of the
Shipbuilding Strategic Importance: Fitch views HII's position as one of the two main shipbuilders for the
Long-term International Opportunities: HII was selected as a partner on one of the first collaborations under the trilateral AUKUS agreement between
Although Fitch expects HII's revenue generation will remain heavily skewed towards the
Derivation Summary
HII does not have a like-sized peer with a similar operating profile, but with limited-but-improving customer, geographic and product diversification compared to peers. General
The lack of diversification has historically been a constraint on HII's ratings but was mitigated by solid leverage metrics, which have been stronger than those of its peers rated in the 'BBB' category. HII's diversification has moderately improved following the acquisition of Alion and growth in the Mission Technologies segment over the past few years.
HII's peers differ from the company for significant reasons; as an example,
LHX generates significantly stronger FCF margins, regularly greater than 5% per year, though its revenues are somewhat less predictable due to the shorter-cycle nature of many of its IDIQ contracts. NOC is a large prime contractor, which has similar EBITDA margins in the low double digits and weaker leverage metrics but greater diversification by product offering and stronger financial flexibility.
Key Assumptions
Flattish revenue in 2024, followed by low-to-mid-single-digit annual revenue growth through 2026; low-to mid-single digit revenue growth in each the Mission Technologies and shipbuilding segments through 2026;
Revenue could be lumpier than projections depending on project completion and delivery;
EBITDA margins trending around 10% over the forecasted horizon as margins modestly expand in both Mission Technologies and Newport News; offset by flattish margins at Ingalls;
Company refinances most maturities after 2024, while allocating a modest amount to share repurchases and dividends over the forecasted horizon;
Annual capex elevated above 3% through 2026, trending towards 2.5% over the next few years;
No material shift in long-term
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Financial and capital allocation policy and EBITDA growth that supports sustained EBITDA leverage below 1.75x;
Further improved product diversification and backlog visibility that would lessen the cash flow sensitivity to potential future program development costs or execution risks.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Deviation from stated financial policy with EBITDA leverage sustained above 2.25x in conjunction with deterioration to the company's operational profile;
Operational deterioration could occur from either weakened program diversification, cost overruns or loss of contracts heightening the cash flow risk profile.
Liquidity and Debt Structure
Fitch believes HII's liquidity is adequate to cover the company's working capital fluctuations, capex spending plans, and debt servicing. Fitch estimates total liquidity will remain around
Issuer Profile
Huntington Ingalls is the nation's sole industrial designer, builder, and refueler of nuclear-powered aircraft carriers and one of only two companies capable of designing and building nuclear-powered submarines for the
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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