HII also sees its roots in the future

HII emerged as a standalone shipbuilding company in 2011, and building ships for the Navy and other Maritime Government customers remains in its DNA.

But this year, the company adopted both this new three-letter name from its previous brand name, Huntington Ingalls Industries, and a new identity for its technology integration business.

During HII’s third-quarter earnings call with investors on Thursday, an analyst mentioned that one of his recent visits to the company’s website first showed images of an army soldier with a gun and other cyber-related photos.

This analyst wanted to know what the development of HII means for the shipbuilding business that has shaped its history since then-parent company Northrop Grumman spun off 11 years ago.

In his response, CEO Chris Kastner pointed out that shipbuilding’s share of the entire HII portfolio will trend downwards, but this is mainly due to the planned growth trajectory.

HII’s Mission Technologies segment is where all of the company’s acquisitions have taken place since the unit was formed in 2016 to house its software and data-centric offerings.

Last year’s acquisition of Alion Science and Technology demonstrated once again how HII aims to be more than just a shipbuilder.

“Make no mistake, shipbuilding will always be at the heart of this company and that’s what we’re focused on,” Kastner said. He then offered this observation on the Navy’s thinking: “I think they’re obviously going to reposition themselves a little bit because of technology.”

Kastner listed these technology areas in which HII has invested: artificial intelligence, machine learning, cybersecurity, live unmanned virtual constructive training, advanced synthetic training, and ISR – intelligence, surveillance and reconnaissance.

From HII’s point of view, these technologies and the associated techniques for using them go hand in hand with making ships and other large deployed platforms more efficient.

“These relate directly to defense priorities and apply to the future, so naturally they will grow,” Kastner said. “These are the Navy’s priorities and I can think of no better way to serve your customers than to answer their call regarding additional, more complicated missions they need to carry out.”

HII shares the complicated macroeconomic challenges its defense industry peers have cited as headwinds: rising costs from inflation, supply chain disruptions and tight labor markets.

When seeking new contracts, HII sees the biggest impact of inflation given what Kastner called the need to “get the bids straight from the supply chain and make sure the cost and schedule are correct” when submitting proposals.

The company has some buffer against the effects of inflation in contracts with economic adjustment clauses that require communication and paperwork, despite the slight change in Department of Defense policy on these measures.

However, the impact of inflation on workers’ salaries paints a different picture.

“When you think about our workforce and some of the increases we’ve had to provide for new hires from a salary perspective, that impacts our labor costs a bit,” Kastner said.

Revenue for the Mission Technologies segment totaled $595 million in the third quarter, up 51% year over year, primarily due to higher revenue from the Alion acquisition.

HII’s updated guidance for this year calls for Mission Technologies to reach $2.4 billion with a profit margin of 8.3% EBITDA (earnings before interest, taxes, depreciation and amortization).

This new revenue outlook implies that Mission Technologies would account for nearly 29% of the company’s revenue this year.


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