HII [HII] on Thursday reported lower net income in the first quarter due to lower operating income in its Mississippi-based shipbuilding segment and a pension adjustment despite a solid increase in sales.
Net income fell 8 percent to $129 million, $3.23 earnings per share (EPS), from $140 million ($3.50 EPS) a year ago. The results were still 31 cents per share above consensus estimates.
Sales increased 4 percent to a record $2.7 billion from $2.6 billion a year ago.
At the operating level, the bottom-line results were weighed down by lower income at the Ingalls Shipbuilding segment due to lower risk retirements on two amphibious ships. The decline at Ingalls more than offset improved profits at the Newport News Shipbuilding segment, which benefited from higher sales, and the Mission Technologies segment, which gained on better performance.
Shipbuilding margin in the quarter was 6.7 percent, off from the expected 7 percent. The company is still forecasting 7 percent margins this year—given a number of shipbuilding milestones are planned for the second half of 2023—improvement in 2024 with the long-term expectations exceeding 9 percent.
Most of the margin shortfall in shipbuilding was due to an unfavorable risk retirement adjustment on the USS Enterprise (CVN-80)
Ford-class aircraft carrier under construction. Tom Stiehle, HII’s chief financial officer, said during the company’s earnings call that due to “time, capacity and throughput” needs, Newport News is having to outsource unit and panel work.
HII President and CEO Chris Kastner said on the call the company and Navy are discussing a change to USS John F. Kennedy (CVN-79) delivery to bring forward baseline work from the post-shakedown availability into construction, which will give the Navy more capability and less risk when the aircraft carrier is delivered. Delivery of the ship is currently planned for 2024.
Stiehle said the pending changes to the CVN-79 contract “will be margin and cash neutral for the next few years through the delivery of that ship.”
Newport News and Mission Technologies led the top-line growth due to work on aircraft carriers and the Virginia and Columbia-class submarines, mission-based solutions and fleet sustainment.
HII scored well in hiring shipbuilders during the quarter, bringing on 1,500 new employees, 30 percent of its full-year goal of 5,000, Kastner said.
“This solid pace for hiring reflects continued recovery and stability in rebuilding our labor workforce post-COVID,” he said.
Lead times for suppliers to get product delivered to HII have also stabilized but are higher than pre-COVID levels, Kastner said.
“It is important that we not only manage the risk this creates for our current programs, but also reflect these increased lead times in our future contracting activity,” he said.
Overall, the first quarter was generally in-line with HII’s expectations and the outlook for 2023 is unchanged.
Free cash flow in the quarter was a $49 million outflow and bookings totaled $2.6 billion. Backlog at the end of the quarter was $47 billion versus $47.1 billion at the end of 2022.