By Cal Biesecker
Defense Daily

A pension benefit combined with strong operating results at its shipbuilding businesses drove a strong first quarter at Huntington Ingalls Industries, although workforce impacts at the company’s shipyards led it to forecast sales this year at the low end of prior guidance and company officials signaled uncertainty going forward.

Net income increased 46% to $172 million, $4.23 earnings a share, versus $118 million, or $2.85 a share, a year ago. That was $0.27 shy of consensus projections. Sales increased 9% to a record $2.3 billion from $2.1 billion.

There were no material impacts from COVID-19 in the quarter, but lower employee attendance at the company’s shipyards in Mississippi and Virginia due to the pandemic will impact shipbuilding sales. They are now forecast to be around 3% higher in 2020 versus the prior outlook of 3% to 5% growth.

Huntington Ingalls is a key subcontractor to General Dynamics Electric Boat for production of 12 Columbia-class ballistic missile submarines, which starting in 2031 will replace the Ohio-class submarine fleet. In late 2018, the company’s Newport News Shipbuilding subsidiary took home a $200 million subcontract modification to provide long-lead components for the Columbia-class subs.

The company also works at several Department of Energy nuclear facilities, including as an integrated subcontractor for Triad National Security, manager of the Los Alamos National Laboratory in New Mexico, and a partner in lab legacy cleanup contractor N3B.

Huntington Ingalls for now is holding to its forecast of 9% shipbuilding operating margin this year, but cautioned that puts and takes could impact profits. On the minus side is the ongoing labor challenges in shipbuilding and also uncertainty whether disruptions and delays associated with the pandemic will be recoverable, company executives said on Thursday’s earnings call.

Decreased employee attendance “will likely impact program schedules and efficiency and increase ship estimates to complete, the materiality of which we will not know until we get greater clarity regarding the return to normal staffing levels and have a full reconciliation of supplier material delivery schedules,” according to Chief Financial Officer Chris Kastner.

So far, HII’s suppliers for the most part have experienced minimal to no disruptions, said President and CEO Mike Petters. However, he qualified suppliers’ responses with a “yet,” adding later that in the “medium- to long-term, wait and see.”

Accelerated progress payments by the Navy have been passed to suppliers, particularly small and disadvantaged businesses, which has helped, Kastner said. Petters said the “Navy has really leaned forward during this crisis,” highlighting that contract payments have been consistent; that, combined with the accelerated award in April of an amphibious transport dock ship contract, provided “stability, liquidity and business continuity.”

On the plus side, Petters and Kastner said, HII is meeting its shipbuilding milestones and is saving money by not spending on activities that it would if the pandemic wasn’t happening. Huntington Ingalls also stopped the repurchase of its stock on March 11 until “volatility related to COVID-19 subsides,” Kastner said.

He also said the company is “confident” that costs it has incurred in responding to COVID-19 are allowable under its contracts. The company is working with its customers to understand how it can treat these costs and will update investors later in the year.

While the company is holding its margin outlook steady for now, interest expense, state income taxes, and depreciation and amortization costs are all expected to be higher than expected this year. Huntington Ingalls strengthened its balance sheet early in the second quarter by issuing $1 billion in new notes and entered into a $500 million credit facility, Kastner said.

Shipbuilding operating margin in the quarter was 8.2%.

In the quarter, sales increases were driven by work on amphibious transport dock ships and destroyers, Block V Virginia-class submarines, and development of the new Columbia-class ballistic missile submarine, volume on certain aircraft carriers, and acquisitions and services in the Technical Solutions segment.

Earnings benefited from operating income gains due to risk retirements on the amphibious ships, destroyers, and Virginia-class submarines, and overhaul work on an aircraft carrier.

Orders in the quarter were about $900 million and total backlog stood at $45.2 billion, down from $46.5 billion at the end of 2019. Free cash flow was $2 million in the quarter.

This story first appeared in Nuclear Security & Deterrence Monitor affiliate publication Defense Daily.