Huntington Ingalls Industries [HII] yesterday posted lower net income in the first quarter as higher expenses weighed on an otherwise solid operating performance at the company’s two shipbuilding divisions.
Net income fell 27 percent to $33 million, 67 cents earnings per share (EPS), from $45 million (92 cents EPS), due higher expenses from pensions, deferred state taxes and interest. The result was inline with consensus estimates.
Sales were down 7 percent to $1.6 billion from $1.7 billion a year ago as revenues at both the company’s divisions dipped.
At Newport News Shipbuilding, sales fell 5 percent to $895 million on lower volume on a refueling and overhaul for the Navy’s CVN-71 Theodore Roosevelt aircraft carrier and lower volume on the SSN-774 Virginia-class submarine construction program.
Despite the sales decline, operating income in the segment jumped 21 percent to $81 million, boosted mainly by a favorable comparison to a year ago when the segment suffered a one-time $9 million charge related to performance on construction of the CVN-78 Gerald Ford. Performance improvements on the Virginia-class submarine program also aided segment profits at Newport News.
Revenues at the Ingalls Shipbuilding segment fell 9 percent to $692 million on lower sales related to the Coast Guard’s National Security Cutter program and Navy Amphibious Assault Ship programs following the delivery last December of the LPD-22 San Diego. Operating income at Ingalls was up nearly 18 percent to $20 million due to the absence of unfavorable adjustments on the LPD-22 program that crimped the segment in 2011.
Combined margins at the two segments rose 1.4 percent to 6.4 percent. Including the higher expenses, HII’s operating margins still climbed 5 basis points to 5.1 percent.
Backlog at the end of the quarter stood at $15.5 billion, down from $17.4 billion a year ago. In the coming two years, the company expects a substantial boost in backlog from various new programs including the LPD-27, LHA-7, CVN-79, at least nine Virginia-class Block IV submarines, construction of multiple DDG-51 destroyers and inactivation work on the CVN-65, Mike Petters, HII’s president and CEO, said on yesterday’s earnings call.
This coming summer continues to be critical for HII in terms of retiring risk on several ship programs as the company works toward sea trials this fall for the LPD-23 and LPD-24 ship programs and launch of the LPD-25 and LHA-6 programs, Petters said. If all goes well, HII is still targeting 2013 as in inflection point in terms of program risk retirement and expanding margins at Ingalls, he said.
With the potential for a sequestration of the defense budget looming, Petters said that HII’s business outlook is still fairly intact because most of the work in the next several years is under contract or about to be. Still, he said the potential for sequestration gives HII “pause” in terms of the investments it makes, particularly in training its workforce. He is also concerned about what it could mean for companies in HII’s supply chain and pointed out that reduced spending on future programs will only increase their costs.
It’s a “terrible way to run the country,” Petters said of sequestration if it goes into effect.