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Huntington Ingalls (HII) to Acquire Camber for $380 Million

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Huntington Ingalls Industries, Inc. (HII - Free Report) has entered into a definitive agreement to acquire Camber Corporation, a government services company headquartered in Huntsville, AL. The acquisition is intended to diversify Huntington Ingalls’ revenue stream and add new information technology work with the U.S. defense, intelligence and civilian agencies.

The acquisition has been approved by Huntington Ingalls’ board of directors. It is expected to close by the year end, subject to certain regulatory approvals and customary closing conditions.

Purchase Consideration

The transaction is valued at $380.0 million, including tax benefits of approximately $25 million that depend on customary closing adjustments.

The transaction is expected to boost Huntington Ingalls’ bottom line and cash flow in the first full year and the company will finance the deal with cash available.

Post-Acquisition Scenario

Once the transaction is complete, Huntington Ingalls will restructure its service businesses. The company will create a new reportable segment, HII Technical Solutions, comprising Camber and its subsidiaries − AMSEC, Continental Maritime of San Diego, Newport News Industrial, SN3, Undersea Solutions Group and Universal Pegasus International.

The newly formed segment will improve strategic and operational alignment among the services businesses, develop opportunities for growth and enhance performance transparency. The segment is expected to generate around $1.0 billion in combined revenues in fiscal 2017, with operating margin in the low single digits, which will expand 5–7% by 2020.

About Camber

Camber is a pure-play provider of sophisticated mission-based and information technology solutions. It has a revenue generating capacity of $364.0 million. Cambers’ major customers include the U.S. Navy and the Army, Federal and civilian customers like the Administrative Office of the U.S. Courts and the U.S. Postal Service, and the intelligence community.

Camber’s market position and capabilities in growth areas, like agile software and network engineering, modeling simulation and training, unmanned systems, systems engineering, and data analytics, will enhance Huntington Ingalls’ existing service offerings and customer base.

According to Mike Petters, Huntington Ingalls’ present president and CEO, the acquisition is in sync with its Path to 2020 strategy to optimize and boost the services portfolio, while the company continues to invest in the shipbuilding business and returning all free cash flow to shareholders.

Divestures in the Defense Space

Recently, a couple of other major defense companies like Lockheed Martin Corp. (LMT - Free Report) and L-3 Communications Holdings Inc. (LLL - Free Report) has divested their lower-margin government services businesses to focus on the more profitable technology and platform manufacturing work.

3Q16 Earnings Update

Yesterday, Huntington Ingalls reported third-quarter 2016 adjusted earnings of $2.27 per share, missing the Zacks Consensus Estimate of $2.39 by 5%. Reported earnings also declined 3.4% from $2.35 per share in the year-ago quarter. The downside was primarily due to lower contribution from its Newport News Shipbuilding and Ingalls Shipbuilding divisions.

Zacks Rank & a Key Pick

Huntington Ingalls currently has a Zacks Rank #3 (Hold). A better-ranked stock in the aerospace and defense space is Engility Holdings, Inc. (EGL - Free Report) . The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Engility has witnessed a 32.5% rise in its stock price in the past six months. On an average, the company has delivered a positive earnings surprise of 23.19% in the trailing four quarters.

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