Higher pension costs led Huntington Ingalls Industries [HII] to report lower income in its first quarter despite solid overall operating results at its business segments.
Net income fell 14 percent to $148 million, $3.68 earnings per share (EPS), from $172 million ($4.23 EPS) due to the higher pension costs. Excluding pension impacts, adjusted earnings were higher at $3.56 EPS, 93 cents higher than consensus estimates.
Operating income increased 22 percent to $191 million due mainly to strong double-digit gains at the Ingalls Shipbuilding segment and a swing to profit at the Technical Solutions segment.
At Ingalls, operating income was up due to higher risk retirement on the LHA-8 Bougainville amphibious assault ship and the improvement at Technical Solutions was due to better performance at the Defense & Federal Solutions, and Nuclear & Environmental Services businesses, and a gain on the sale of the oil and gas business. Work on the Bougainville reached the 25 percent complete mark during the quarter, allowing the company to retire some program risk.
The gains at Ingalls and Technical Solutions more than offset a slight decline in operating profit at the Newport News Shipbuilding segment on lower risk retirement on the refueling and complex overhaul of the aircraft carrier USS George Washington.
Segment operating margin was up 150 basis points to 8.4 percent.
Sales in the quarter were up less than a percent to $2.3 billion with increases at Newport News on aircraft carriers, Navy nuclear support services, and submarines, and at Ingalls on destroyers, largely offset by a decline at Technical Solutions due to the recent divestitures of an oil and gas business and a shipyard in San Diego, and lower volume in Defense and Federal Solutions.
HII maintained its guidance for 2021, with shipbuilding revenue projected to be between $8.2 billion and $8.4 billion and Technical Solutions at around $1 billion. Operating margin in the shipbuilding businesses is expected to be between 7 and 8 percent and between 3 and 5 percent at Technical Solutions.
Mike Petters, HII’s president and CEO, said on the company’s earnings call that during the next five years he expects to see the Navy’s budgets for unmanned systems grow faster than other accounts. HII has made several acquisitions within its Technical Solutions segment to give it a broad portfolio of unmanned maritime systems and Petters said that given this investment and portfolio, “it’s up to us to make sure that we capture that expansion” in the budget.
Orders in the quarter were a strong $5.3 billion, driving total backlog to a record $48.8 billion, up from $46 billion at the end of 2020. Free cash flow in the quarter was a $16 million outflow and the cash outlook for the year remains at achieving between $150 million and $250 million in positive free cash flow.
Petters also said that impacts to the company’s shipyards from the COVID-19 pandemic are largely in the rear-view mirror as absenteeism had returned to normal levels. Employment levels and program schedules have stabilized, he said.