HII [HII] on Thursday reported lower earnings in the second quarter on a steep drop in operating income at two of its business segments despite a solid increase in sales.
Net income fell 27 percent to $130 million, $3.27 earnings per share (EPS), from $178 million ($4.44 EPS) a year ago, beating consensus estimates by 15 cents per share. Sales increased 5 percent to a record $2.8 billion from $2.7 billion a year ago.
The results were similar to the first quarter when net income dropped 8 percent amid a 4 percent sales gain.
Earnings were led lower by declines at the Ingalls Shipbuilding and Mission Technologies segments. At Ingalls, operating income fell 39 percent on lower favorable changes in contract estimates related to facilities capital and economic price adjustment clause and lower risk retirement on the LPD-30 Harrisburg amphibious transport dock ship scheduled for launch in 2024.
A year ago, Mission Technologies benefited from a $15 million non-recurring gain from the sale of a ship repair joint venture that boosted the bottom-line. In the second quarter of 2023, the segment had a negative $6 million equity method adjustment related to the sale of the joint venture.
Mission Technologies and the Newport News Shipbuilding segments led the higher sales with growth in C5ISR, cyber and electronic warfare, live, virtual and constructive training, the
Columbia and Virginia-class submarine programs, and aircraft carrier construction. Ingalls eked out a slight top-line gain on Arleigh Burke-class destroyer work for the Navy.
During the company’s earnings call, one analyst asked about the obstacles for HII to eventually get to the production objective of two Block V Virginia-class submarines annually. Chris Kastner, HII’s president and CEO, said labor is the “largest risk.”
Overall, HII has hired more than 3,200 shipbuilding employees this year toward its goal of 5,000, but attrition rates remain high, Kastner said. The biggest challenge with retaining employees is with “walk-ins” as opposed to those that come in through the company’s Apprentice School and other local community college and high school programs, he said.
The walk-in employees “really aren’t prepared for the rigors of shipbuilding,” Kastner said, adding, “And what we’re finding is the days of hiring someone, training them, and sending them down to the deck plate are really over.” The company needs to “shepherd” them for 12 to 18 months “to make them understand that this is a good career and there’s opportunity for growth and stability,” he said.
HII left its financial guidance for the year intact.
The company tallied $2.6 billion in orders and backlog stood at $46.9 billion, down $200 million from the end of 2022. Free cash flow in the quarter was $14 million.
Shipbuilding operating margin was 7.4 percent and the company is still targeting 7.7 to 8 percent for the year.