Huntington Ingalls Industries [HII] on Thursday posted a big drop in net income in its first quarter due to less favorable pension adjustments, but the company’s top line growth was strong and the outlook for further growth in the coming years was buoyed by strong orders and a record backlog.

Net income sank 24 percent to $118 million, $2.85 earnings per share (EPS), from $156 million ($3.48 EPS) a year ago, missing consensus estimates by 43 cents a share. In addition to the pension headwinds, lower operating income in the Ingalls Shipbuilding segment contributed to a decline in earnings.

Operating margin fell to 7.7 percent from 10.2 percent a year ago and at the company’s shipbuilding segments, Newport News Shipbuilding and Ingalls, combined margins were just under 7 percent–about the same as a year ago.

Refueling and Complex Overhaul of the USS George Washington (CVN 73) aircraft carrier contributed to HII’s strong sales. Photo: HII

Shipbuilding margins this year are still expected to be in the 7 to 9 percent range and return to the 9 to 10 percent range in 2020, Chris Kastner, HII’s chief financial officer, said on the company’s earnings call.

Margin slipped at Ingalls on lower risk retirements in various programs, but the company expects more program risk to be retired as 2019 goes on, boosting margin later in the year. Maturing work at Newport News will also help bolster margins in 2020, he said.

HII’s sales increased 11 percent to $2.1 billion from $1.9 billion a year ago, led by its Newport News Shipbuilding segment and $20 million in revenue from two acquisitions, and support to the oil and gas industry in its Technical Solutions segment. Sales were flat at Ingalls.

Sales at Newport News were driven by work on aircraft carriers and naval nuclear support services, and to a lesser extent by the Virginia-class attack submarine program.

The company tallied $19.6 billion in orders in the quarter, mainly due to the $15.2 billion block buy contract from the Navy for two Gerald R. Ford-class aircraft carriers, raising total backlog to a record $40.6 billion. About $20 billion of the backlog is funded, HII President and CEO Mike Petters said on the call with analysts.

Petters said the orders driving the backlog represent a “historic moment” for one quarter and provide the company with stability for the “next 10 years.” The programs contained in the orders will “slowly ramp up,” adding later in the call that the expectation with the two-carrier buy is that efficiencies gained from the work under the contract will lead to operating margin improvements.

Petters was asked on the call about the company’s capacity to pursue the Navy’s Future Frigate program. He responded that investments “in footprint” have been made at Ingalls to support construction of the ship and winning the program would dovetail well with winddown of construction of the Coast Guard’s National Security Cutters.

The production line at Ingalls is “pretty warm,” adding that the company has a “ready workforce” to take on the frigate.

Free cash flow in the quarter was an outflow of $63 million.

Petters said he doesn’t know what the Navy’s final acquisition plans will be for the next-generation frigate but expects HII to be “competitive” when it begins.