Huntington Ingalls Industries [HII] on Thursday posted strong third quarter financial results on the back of its Ingalls Shipbuilding division, which benefited from higher sales of Navy destroyers and improved operating performance, including a favorable contract adjustment on a large deck amphibious ship that has already been delivered.

Net income increased 16 percent to $11 million, $2.29 earning per share (EPS), from $96 million ($1.96 EPS), topping consensus estimates by 16 cents per share. Segment operating margins in the company’s were 9.6 percent, up 80 basis points from a year ago. Stripping out business that provides services to the oil and gas industry, operating margins in the two shipbuilding segments were 10 percent.

A composite photo illustration representing the Ford-class aircraft carrier, USS John F. Kennedy (CVN 79). Constructio of the Kennedy is underway, one reason the long-term outlook at the Newport News segment is bright. Illustration: Huntington Ingalls.
A composite photo illustration representing the Ford-class aircraft carrier, USS John F. Kennedy (CVN 79). Construction of the Kennedy is underway, one reason the long-term outlook at the Newport News segment is bright. Illustration: Huntington Ingalls.

“We remain on track to achieve our 9-plus percent shipbuilding operating margin target for 2015,” Mike Petters, HII president and CEO, said in a statement.

The company’s earnings also benefited from a modest pension tailwind.

Sales increased 5 percent to $1.8 billion from $1.7 billion a year ago as higher sales in the shipbuilding segment more than offset a continued decline in the company’s businesses that provide services to the oil and gas industry.

Operating income soared 50 percent to $77 million on the favorable adjustments in the LHA-6 America amphibious assault ship that was delivered to the Navy in 2014 and improved performance on the LPD-17 San Antonio-class of amphibious transport dock programs. Sales in the segment increased 6 percent to $593 million on higher volume in the Arleigh Burke-class DDG destroyer program.

Operating income at the nuclear shipbuilding business, Newport News, slipped one percent to $100 million on “increased vendor services costs required to support troubleshooting and repair of various systems during the test program” on the CVN-78 Gerald R. Ford aircraft carrier program, Petters said on the analyst call. However, he said, the test program continues to support delivery of the carrier in the first half of 2016.

Sales at Newport News were up 7 percent to $1.2 billion on work on the Virginia-class Block IV submarine program and fleet support services for aircraft carriers.

In HII’s “other” segment, which is the business that serves the oil and gas industry, the operating loss was level with a year ago at $5 million and sales plummeted 51 percent to $30 million.

Despite a blowout quarter at Ingalls, Petters said the longer term outlook for this segment is murky as the end may be nearing for three of the four ship classes under construction there, given uncertainty regarding follow-on programs. He said that while the outlook for DDG destroyers “is in reasonably good shape,” there isn’t clarity on future production for the company of the Navy’s next-generation transport dock ship, the LX(R); the next large deck amphibious assault ship, the LHA-8; the T-AO(X) fleet replacement oiler, and the Coast Guard’s National Security Cutter (NSC).

The Coast Guard program calls for ending the NSC program after eight vessels, although Senate appropriators have recommended adding one more ship the buy. The Navy has funded the LPD-28 ship purchase as a bridge to the LX(R) program but that the next-generation ship needs to be accelerated to create stability in the program, Petters said. He also said the competition for LHA-8 and the T-AO(X) programs needs to be settled. Petters also noted that the Coast Guard is looking into building a new heavy duty icebreaker.

On the other hand, at Newport News, the outlook five to 10 years from now is perhaps “the brightest” for any business in the shipbuilding industry “because the demand for the product that they have out there is higher,” Petters said. That demand comes in the form of a new aircraft carrier, the CVN-79 John F. Kennedy, continued work on the Virginia-class submarine program, work on the future replacement for the Ohio-class nuclear missile submarines, and future refueling and overhauls of the Nimitz-class of aircraft carriers.

In “five years, Newport News is going to be in great shape,” Petters said. “It’s a little bit harder to pin down where Ingalls is going to be in five or 10 years than it is to pin down Newport News and [its] a little bit more dynamic environment at Ingalls and a lot of their success in the future depends on how well they do the work they’re doing today and we’re very, very pleased with where we stand.”

HII booked $800 million in new business in the third quarter and backlog stood at $23.3 billion, $1 billion less than at the end of the second quarter. Funded backlog at the end of the third quarter was $12.5 billion, down $1.2 billion from the second quarter. Free cash flow was $217 million.