HII [HII] on Thursday reported slightly higher earnings in its fourth quarter driven by a pension benefit while the company enjoyed solid gains in its top-line due to improvements across its operating segments.
Net income rose nearly 3 percent to $123 million, $3.07 earnings per share (EPS), from $120 million ($2.99 EPS) a year ago, well below consensus expectations of $3.30 per share. Sales increased 5 percent to a record $2.8 billion from $2.7 billion, driven primarily by volume at the Ingalls Shipbuilding segment and to a lesser degree by gains at the Newport News Shipbuilding and Mission Technologies segments.
At the operating level, segment income fell on declines at the Newport News Shipbuilding and Mission Technologies segments. Lower operating income at Newport News was due to reduced risk reduction on the Virginia Class Submarine program and work related to the USS John F. Kennedy
(CVN-79) aircraft carrier program. Mission Technologies was negatively impacted by a non-cash valuation adjustment related to an investment involved in a pending transaction.
Overall, in 2022 HII’s results were relatively strong. Net income rose 6 percent to $579 million ($14.44 EPS) from $544 million ($13.50 EPS) in 2021. Sales increased 12 percent to a record $10.7 billion from $9.5 billion.
Operating margin at the company’s two shipbuilding segments combined was 7.7 percent in 2021 versus 10.8 percent in 2021 due to various macroeconomic factors. Chris Kastner, HII’s president and CEO, said on the company’s earnings call that shipbuilding margins should eventually get back to 9 percent, which can be sustained over time.
As with the rest of the private sector, HII had to contend with labor, supply chain and inflation challenges throughout 2022. Kastner said that non-programmatic inflation related to things such as medical benefits, insurance and other overhead items impacted all programs.
Inflation headwinds are improving and labor and supply chain issues are stabilizing, Kastner said. There was a “generational change” in 2022 in the company’s shipbuilding workforce due to impacts from the COVID-19 pandemic and a lot of focus was put on training the workforce and related leadership, he said, adding that in 2023 HII is on track to deliver five ships, which represents “the greatest learning potential.”
Workforce hiring and development remains HII’s “top operational priority,” Kastner said.
The outlook for 2023 is overall sales between $10.9 billion and $11.1 billion, representing between 2 and 4 percent growth versus 2022. Sales in the shipbuilding segments are forecast to be flat to up about 2 percent. Mission Technologies is expected to generate around $2.5 billion in sales this year, up about 5 percent.
Shipbuilding margin is expected to be between 7.7 and 8 percent this year and Mission Technologies between 2.5 and 3 percent. Margin at Mission Technologies was 2.6 percent in 2022.
Free cash flow in 2022 was $494 million and is forecast to range between $400 million and $450 million in 2023. HII is maintaining its outlook for cumulative free cash flow of around $2.9 billion between 2020 and 2024.
HII tallied $3.2 billion in orders in the quarter and backlog at year-end stood at $47.1 billion, down 3 percent from $48.5 billion a year ago.