"Navy Shipbuilding Sees $5.7 Billion Surge in Labor Costs, Boosting Outlook for General Dynamics and Huntington Ingalls - TD Cowen"

TD Cowen analyst Roman Schweizer emphasized that Congress has reached an agreement on a Continuing Resolution (CR) that will fund the U.S. government until March 14, 2024, including a $100 billion emergency fund. Despite some opposition from the House Freedom Caucus, the bill is expected to pass. The legislation allocates $5.7 billion in emergency funds for Virginia-class submarines and authorizes funding for the Columbia-class submarine program during the CR period. This funding aims to cover additional non-managerial labor costs until 2029.

The House of Representatives and the Senate have reached a compromise on a complex package that combines a CR and emergency funding. This package includes provisions for two critical submarine programs for the Navy: the Virginia-class attack submarine and the Columbia-class ballistic missile submarine. This move is viewed positively for the programs and their primary contractors, General Dynamics and Huntington Ingalls.

The legislation grants the Navy $5.9 billion for Advance Procurement (AP) for the Columbia-class program and $2.9 billion for construction under the CR spending authorization. This amount exceeds what the Office of Management and Budget (OMB) requested. OMB had sought this authority to "prevent construction and delivery delays of strategic ballistic missile submarines between 828 and 837 by up to 20 months."

Additionally, the bill provides $5.7 billion in new emergency spending for the Virginia-class submarine program. This funding will be used for labor wages and non-managerial salary enhancements across various nuclear-powered vessel programs. The National Defense Authorization Act (NDAA) for Fiscal Year 2025 also permits phased funding use for submarine labor. OMB requested these funds to facilitate the procurement of two Virginia-class submarines for fiscal year 2024 and one Virginia-class submarine for fiscal year 2025, including wage increases at shipyards to improve the Submarine Industrial Base. Without this funding, the Department of Defense (DOD) would lack the necessary resources to sign contracts for these submarines and support wage increases, hindering other critical aspects of the Virginia-class program during the CR period.