HII reports modest inflation impact, stability in submarine programs

By Audrey Decker  / November 3, 2022

Shipbuilder and defense technology company HII reported moderate effects from inflation and touted strong visibility across its shipbuilding portfolio, especially for its submarine programs, during the company’s third quarter earnings call today.

The Virginia-class submarine program’s schedule is “very stable” and HII expects to deliver New Jersey (SSN-796) next year, according to Chris Kastner, the company’s president and chief executive officer.

“I will say the best indicator within the submarine program is: are you making your milestones [and] are your schedules stable? If they are, you're going to meet your cost objectives,” Kastner said.

HII, which builds the Virginia-class and Columbia-class submarine programs jointly with General Dynamics Electric Boat, is including the potential for a five-unit Columbia-class block-buy in its capacity planning, according to Kastner.

“We're just in [the] initial stages of kind of talking about it but it will definitely be part of our growth rate going forward,” Kastner said. “We have very good visibility and high confidence that we're going to be in a pretty good place over the next 10 to 15 years from a visibility standpoint. The important thing we need to do is focus on execution: make sure we get these bids correct and then get the ships delivered because the Navy needs them.”

HII’s revenue totaled $2.6 billion in the third quarter of 2022 -- 12% higher than 2021 -- primarily driven by the acquisition of technology company Alion and revenue growth at Newport News Shipbuilding, according to the company.

New contract awards during the quarter were approximately $2.1 billion, resulting in a $46.7 billion backlog for HII’s shipbuilding programs, Kastner said.

While some defense industry advocates have pushed for inflation relief from the Pentagon, Kastner said HII is “modestly” impacted by inflation and has “some protections” to prevent inflation from negatively impacting the company’s margin.

According to a recent letter sent by Pentagon acquisition chief Bill LaPlante to Sen. Elizabeth Warren (D-MA), DOD does not plan to enact a blanket policy to increase contract prices due to inflation but will assess requests on a case-by-case basis.

Kastner said that the “greatest risk” for HII regarding inflation is pricing new contracts.

“The biggest issue for inflation for us is going to be on our new contracts and ensuring that we get the bids right from the supply chain and ensure that the cost and schedule are correct when we put those in contract,” he said.

National defense requirements, Kastner said, are driving a strong shipbuilding demand and HII will “continue to urge Congress to proceed expeditiously and remain optimistic that the annual defense appropriations and authorization processes will be completed in the month ahead.”

“While final outcomes will depend on eventual, respective appropriations and authorization conference committee negotiations, we're pleased to see defense oversight committees provide strong support to shipbuilding to include recommendations for new DDG-51 multiyear procurement authority, additional funding for amphibious ships and requirements for not less than 31 amphibious warfare ships,” Kastner said.

The company announced its rebranding earlier this year, changing its name from Huntington Ingalls Industries to the abbreviated “HII,” amidst its effort to become a software and technology-focused firm, alongside its shipbuilding programs.

Looking to the future, Kastner said the company is making “really good investments” in its Mission Technologies division relating to national defense priorities such as artificial intelligence, machine learning, cyber, unmanned systems and intelligence, surveillance and reconnaissance.

“Shipbuilding will be less of a percentage of the portfolio. But make no mistake, shipbuilding will always kind of be at the heart of this company and we're focused on it, but I think we'll naturally reposition a little bit based on the technology,” he said.