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2: EX-10.1 Material Contract HTML 568K
3: EX-10.2 Material Contract HTML 504K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
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15: R2 Condensed Consolidated Statements Of Operations HTML 113K
and Comprehensive Income (Unaudited)
16: R3 Condensed Consolidated Statements Of Financial HTML 141K
Position (Unaudited)
17: R4 Condensed Consolidated Statements Of Financial HTML 37K
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Equity (Unaudited)
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Equity (Unaudited) (Parenthetical)
21: R8 Description of Business HTML 25K
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23: R10 Accounting Standards Updates HTML 30K
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29: R16 Inventoried Costs, Net HTML 30K
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock
iHII
iNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
Accelerated Filer
☒
Accelerated Filer
☐
Non-Accelerated Filer
☐
Smaller Reporting Company
i☐
Emerging
Growth Company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
Common
stock, $0.01 par value; 150 million shares authorized; i53.4 million shares issued and i40.2 million shares outstanding as of June 30, 2021, and 53.3 million shares issued and 40.5 million shares outstanding
as of December 31, 2020
i1
i1
Additional
paid-in capital
i1,977
i1,972
Retained
earnings
i3,718
i3,533
Treasury
stock
(i2,128)
(i2,058)
Accumulated
other comprehensive loss
(i1,501)
(i1,547)
Total
stockholders’ equity
i2,067
i1,901
Total
liabilities and stockholders’ equity
$
i8,132
$
i8,157
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. iDESCRIPTION
OF BUSINESS
Huntington Ingalls Industries, Inc. ("HII" or the "Company") is one of America’s largest military shipbuilding companies and a provider of professional services to partners in government and industry. HII is organized into ithree reportable segments: Ingalls Shipbuilding ("Ingalls"), Newport News Shipbuilding ("Newport News"), and Technical Solutions. For more than a century, the
Company's Ingalls segment in Mississippi and Newport News segment in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder. The Technical Solutions segment provides a range of services to government and commercial customers.
HII conducts most of its business with the U.S. Government, primarily the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, the Company participates in many high-priority U.S. defense programs. Through its Ingalls segment, HII is a builder of amphibious assault and expeditionary warfare ships for the U.S. Navy, the sole builder of National Security Cutters for the U.S. Coast Guard, and one of only two companies that builds the Navy's current fleet of Arleigh Burke class
(DDG 51) destroyers. Through its Newport News segment, HII is the nation's sole designer, builder, and refueler of nuclear-powered aircraft carriers, and one of only two companies currently designing and building nuclear-powered submarines for the U.S. Navy. The Technical Solutions segment provides a wide range of professional services and products, including defense and federal solutions ("DFS"), nuclear and environmental services, and unmanned systems.
2. iBASIS
OF PRESENTATION
i
Principles of Consolidation - The unaudited condensed consolidated financial statements of HII and its subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the instructions to Form 10-Q promulgated by the Securities and Exchange Commission ("SEC"). All intercompany transactions and balances are eliminated in consolidation. For classification of current assets
and liabilities related to its long-term production contracts, the Company uses the duration of these contracts as its operating cycle, which is generally longer than one year.
These unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature considered necessary by management for a fair presentation of the unaudited condensed consolidated financial position, results of operations, and cash flows and should be read in conjunction with the Company's audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2020.
iThe quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is management's long-standing practice to establish interim closing dates using a "fiscal" calendar, which requires the businesses to close their books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings
on business processes. The effects of this practice only exist for interim periods within a reporting year.
i
Accounting Estimates - The preparation of the Company's unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been
prepared on the basis of the most current and best available information, and actual results could differ materially from those estimates.
Additionally, the Company has incorporated realized and estimated future effects of the global outbreak of coronavirus disease 2019 (“COVID-19”), including, among other things, orders of civil authorities associated with COVID-19 and steps taken to mitigate the effects of COVID-19 (collectively, “COVID-19 Events”), with respect to contract costs and revenue recognition, effective income tax rates, and the fair values of the Company’s long-lived assets, financial instruments, intangible assets,
and goodwill recorded at our reporting units. While costs related to COVID-19 Events are allowable under U.S. Government contracts, the Company's estimates of the effects of COVID-19 Events reflect uncertainty regarding the Company's ability to recover the full costs related to COVID-19 Events under government relief actions such as the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and U.S. Department of Defense ("DoD") guidance.
Government Grants - The Company recognizes incentive grants, inclusive of transfers of depreciable assets, from federal, state, and local governments at fair value upon compliance with the conditions of their receipt and reasonable assurance that the grants will be received or the depreciable assets will be transferred. Grants in recognition of specific expenses are recognized in the same period as
an offset to those related expenses. Grants related to depreciable assets are recognized over the periods and in the proportions in which depreciation expense on those assets is recognized.
For the six months ended June 30, 2021, the Company recognized cash grant benefits of approximately $i2 million in other long-term liabilities in the unaudited condensed consolidated statements
of financial position. For the six months ended June 30, 2020, the Company recognized cash grant benefits of approximately $i9 million in other long-term liabilities in the unaudited condensed consolidated statements of financial position.
/
iFair
Value of Financial Instruments - Except for the Company's long-term debt, the carrying amounts of the Company's financial instruments recorded at historical cost approximate fair value due to the short-term nature of the instruments and low credit risk associated with the respective counterparties.
The Company maintains multiple grantor trusts to fund certain non-qualified pension plans. These trusts were valued at $i203
million and $i182 million as of June 30, 2021, and December 31, 2020, respectively, and are presented within miscellaneous other assets within the unaudited condensed consolidated statements of financial position. These trusts consist primarily of investments in marketable securities, which are held at fair value within Level 1 of the fair value hierarchy.
iLoan
Receivable - The Company holds a loan receivable in connection with a seller financed transaction involving its previously owned Avondale Shipyard facility. The receivable was carried at amortized cost of $i35 million, net of $i14
million of loan discount as of June 30, 2021, and at amortized cost of $i34 million, net of $i15 million of loan discount as
of December 31, 2020, which approximates fair value. The loan receivable is recorded in miscellaneous other assets on the unaudited condensed consolidated statements of financial position. Interest income is recognized on an accrual basis using the effective yield method. The discount is accreted into income using the effective yield method over the estimated life of the loan receivable./
iOther Current
Liabilities - Other current liabilities were $i447 million as of June 30, 2021, and $i462 million
as of December 31, 2020. Payroll taxes payable, which is a component of other current liabilities, was $i132 million as of June 30, 2021, and $i125
million as of December 31, 2020. No other component of other current liabilities was more than i5% of total current liabilities./
3. iACCOUNTING
STANDARDS UPDATES
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends and simplifies the requirements for income taxes. The ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The adoption did not result in a material impact to the Company's financial results or disclosures.
Accounting pronouncements issued but not effective until after December 31, 2021, are not expected to have a material impact
on the Company's consolidated financial position, results of operations, or cash flows.
4. iACQUISITIONS AND DIVESTITURES
Acquisitions
In
December 2020, the Company acquired the autonomy business of Spatial Integrated Systems, Inc. ("SIS"), a leading provider of autonomous technology, for approximately $i40 million in cash. The acquisition further expanded the Company's unmanned systems capabilities. In connection with this acquisition, the
Company preliminarily recorded $i40 million of goodwill, which included the value of SIS's workforce, all of which was allocated to the Company's Technical Solutions segment. For the six months ended June 30, 2021, the Company recorded a decrease in goodwill of $i13
million, due to a reallocation to intangible assets related to technology and existing contract backlog. The Company has not completed the purchase price allocation, because the fair value calculations for certain assets and liabilities have not been finalized. See Note 10: Goodwill and Other Intangible
Assets. The assets, liabilities, and results of operations of SIS are not material to the
Company’s consolidated financial position, results of operations, or cash flows.
In March 2020, the Company acquired Hydroid, Inc. ("Hydroid"), a leading provider of advanced marine robotics to the defense and maritime markets, for approximately $i377 million in cash, net of $i2
million of acquired cash. The acquisition expanded the Company's capabilities in the strategically important and rapidly growing autonomous and unmanned maritime systems market. In connection with this acquisition, the Company recorded $i239 million of goodwill, which included the value of Hydroid's workforce, and $i76
million of intangible assets related to technology and existing contract backlog. See Note 10: Goodwill and Other Intangible Assets. The assets, liabilities, and results of operations of Hydroid are not material to the Company’s consolidated financial position, results of operations, or cash flows.
The Company funded each of these acquisitions using cash on hand, issuances of commercial paper, or borrowings on its revolving credit facility. The acquisition costs incurred in connection with these acquisitions were not material. The operating results of these businesses have been included in the
Company’s consolidated results as of the respective closing dates of the acquisitions. In allocating the purchase prices of these businesses, the Company considered the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill. The total amount of goodwill resulting from these acquisitions is expected to be amortizable for tax purposes. These acquisitions are not material either individually or in the aggregate, and pro forma revenues and results of operations have therefore not been provided.
Divestitures
On February 1, 2021, the Company contributed its San
Diego Shipyard (“SDSY”) business to a joint venture in exchange for a non-controlling interest in Titan Acquisition Holdings, L.P. ("Titan"). Titan is a leading provider of ship repair and specialty fabrication services to government and commercial customers. The joint venture contribution was completed as part of the Company’s operating strategy. The Company recognized its interest in Titan at fair value, which approximates $i83
million. No gain or loss was recognized in the transaction. The contributed assets and liabilities were previously reported in assets and liabilities held for sale. For the six months ended June 30, 2021, the Company transferred $i22 million to Titan as part of the exchange.
On February 1, 2021, the
Company completed the sale of its oil and gas business. The divestiture was completed as part of the Company’s plan to exit this part of the oil and gas industry and focus on its core services and customers. The assets and liabilities divested were previously reported in assets and liabilities held for sale. In connection with the sale, the Company received $i25
million net cash and recorded a net pre-tax gain of $i3 million in other income and gains within operating income in the unaudited condensed consolidated statements of operations. For the three months ended June 30, 2021, the Company recognized a loss of $i2
million due to final purchase price adjustments. For the six months ended June 30, 2021, the Company recognized a gain on sale of $i1 million.
5. iSTOCKHOLDERS'
EQUITY
Treasury Stock - In November 2019, the Company's board of directors authorized an increase in the Company's stock repurchase program from $i2.2 billion to $i3.2
billion and an extension of the term of the program to October 31, 2024. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the six months ended June 30, 2021, the Company repurchased i386,463 shares at an aggregate cost of $i70
million. For the six months ended June 30, 2020, the Company repurchased i390,904 shares at an aggregate cost of $i84
million. The cost of purchased shares is recorded as treasury stock in the unaudited condensed consolidated statements of financial position.
Dividends - The Company declared cash dividends per share of $i1.14 and $i1.03
for the three months ended June 30, 2021 and 2020, respectively. The Company declared cash dividends per share of $i2.28 and $i2.06
for the six months ended June 30, 2021 and 2020, respectively. The Company paid cash dividends totaling $i92 million and $i84
million for the six months ended June 30, 2021 and 2020, respectively.
Accumulated Other Comprehensive Loss - Other comprehensive income (loss) refers to gains and losses recorded as an element of stockholders' equity but excluded from net earnings. The accumulated other comprehensive loss as of June 30, 2021, was comprised of unamortized benefit plan costs of $i1,502
million and other comprehensive income items of $i1 million. The accumulated other comprehensive loss as of December 31, 2020, was comprised of unamortized benefit plan costs of $i1,546
million and other comprehensive loss items of $i1 million.
1
These accumulated comprehensive loss components are included in the computation of net periodic benefit cost. See Note 15: Employee Pension and Other Postretirement Benefits. The tax benefit associated with amounts reclassified from accumulated other comprehensive loss for the three months ended June 30, 2021 and 2020, was $i8 million and $i6
million, respectively. The tax benefit associated with amounts reclassified from accumulated other comprehensive loss for the six months ended June 30, 2021 and 2020, was $i15 million and $i12
million, respectively.
iBasic
and diluted earnings per common share were calculated as follows:
Three Months Ended June 30
Six Months Ended June 30
(in millions, except per share
amounts)
2021
2020
2021
2020
Net earnings
$
i129
$
i53
$
i277
$
i225
Weighted-average
common shares outstanding
i40.3
i40.7
i40.3
i40.6
Net
dilutive effect of stock awards
—
—
—
—
Dilutive
weighted-average common shares outstanding
i40.3
i40.7
i40.3
i40.6
Earnings
per share - basic
$
i3.20
$
i1.30
$
i6.87
$
i5.54
Earnings
per share - diluted
$
i3.20
$
i1.30
$
i6.87
$
i5.54
/
Under
the treasury stock method, the Company has excluded from the diluted share amounts presented above the effects of i0.4 million and i0.3
million Restricted Performance Stock Rights ("RPSRs") for the three and six months endedJune 30, 2021 and 2020, respectively.
7. iREVENUE
The following is a description
of principal activities from which the Company generates its revenues. For more detailed information regarding reportable segments, see Note 8: Segment Information.
The Ingalls and Newport News segments generate revenue primarily from performance under multi-year contracts with the U.S. Government, generally the U.S. Navy and U.S. Coast Guard, or prime contractors to contracts with the U.S. Government, relating to the advance planning, design, construction, repair,
maintenance, refueling, overhaul, or inactivation of nuclear-powered ships and non-nuclear ships. The period over which the Company performs may extend past five years. The Technical Solutions segment also generates the majority of its revenue from contracts with the U.S. Government, including U.S. Government agencies. The Company generally invoices and receives related payments based upon performance progress no less frequently than monthly.
Shipbuilding - For most of the Company's shipbuilding contracts,
the customer contracts with the Company to provide a comprehensive service of designing, procuring long-lead-time materials, manufacturing, and integrating complex equipment and technologies into a single ship or project, often resulting in a single performance obligation. Contract modifications to account for changes in specifications and requirements are recognized when approved by the customer. In the majority of circumstances, modifications do not result in additional performance obligations that are distinct from the existing performance obligations in the contract and the effects of the modifications are
recognized as an adjustment to revenue on a cumulative catch-up basis. Alternatively, in instances where the performance obligations in the modifications are deemed distinct, contract modifications are accounted for prospectively.
The Company considers incentive and award fees to be variable consideration and includes in the transaction price at inception the consideration to which the Company expects to be entitled under the terms and conditions of the contract, generally estimated using a most likely amount approach. Transaction price is limited to the
extent of funding allotted by the customer and available for performance, and estimated revenues represent those amounts for which the Company believes a significant reversal of revenue is not probable.
The Company recognizes revenues related to shipbuilding contracts as it satisfies the related performance obligations over time using a cost-to-cost input method to measure performance progress, which best reflects the transfer of control to the customer.
Services - The Technical Solutions segment generates revenue primarily under U.S. Government contracts
from the provision of DFS services. Contracts generally are structured using either an Indefinite Delivery/Indefinite Quantity
("IDIQ") vehicle, under which orders are issued, or a standalone contract. Contracts may be fixed-price or cost-type, include variable consideration such as incentives and awards, and structured as task
orders under an IDIQ contract vehicle or requirements contract vehicle. In either case, the Company generally performs services over a shorter duration and may continue to perform upon exercise of related period of performance options that are also shorter in duration. The Company’s performance obligations vary in nature and may be stand-ready, in which case the Company responds to the customer’s needs on the basis of its demand, a recurring service, typically recurring maintenance services, or a single performance obligation that
does not comprise a series of distinct services.
In determining transaction price, the Company considers incentives and other contingencies to be variable consideration and includes in the initial transaction price the consideration to which the Company expects to be entitled under the terms and conditions of the contract, generally estimated using a most likely amount approach. Transaction price is limited to the extent of funding allotted by the customer and available for performance, and estimated revenues represent those amounts for which the Company believes
a significant reversal of revenue is not probable. Where a series of distinct services has been identified, the Company generally allocates variable consideration to distinct time increments of service.
The Company generally recognizes revenue as it satisfies the related performance obligations over time using a cost-to-cost input method to measure performance progress, because, even where the Company has identified a series of services, its cost incurrence pattern generally is not ratable given the complex nature of the services the Company provides. Invoices are
issued and related payments are received, on the basis of performance progress, no less frequently than monthly. In addition, many of the Company's U.S. Government services contracts are time and material arrangements. As a result, the Company often utilizes the practical expedient allowing the recognition of revenue in the amount the Company invoices, which corresponds with the value provided to the customer and to which the Company is entitled to payment for performance to date.
Revenues generated under commercial and state and local government agency contracts are primarily derived from the provision of nuclear and environmental services. Non-U.S. Government contracts typically are one or two years in duration.
In determining transaction price, the Company considers incentives and other contingencies to be variable consideration and includes in the initial transaction price the consideration to which the
Company expects to be entitled under the terms and conditions of the contract, generally estimated using a most likely amount approach. In the context of variable consideration, the Company limits the transaction price to amounts for which the Company believes a significant reversal of revenue is not probable. Such amounts may relate to transaction price in excess of funding, a lack of history with the customer, a lack of history with the goods or services being provided, or other items.
Revenue generally is recognized over time given the terms and conditions of the related contracts.
The Company generally utilizes a cost-to-cost input method to measure performance progress, which best depicts the transfer of control to the customer. The Company’s non-U.S. Government contract portfolio is comprised of a large number of time and material arrangements. As a result, the Company often utilizes the practical expedient allowing the recognition of revenue in the amount the Company invoices, which corresponds with the value provided to the customer and to which the
Company is entitled to payment for performance to date.
Disaggregation of Revenue
iThe following tables present revenues on a disaggregated basis, in a manner that reconciles with the Company's reportable segment disclosures, for the following categories: product versus service type, customer type, contract
type, and major program. The Company believes that this level of disaggregation provides investors with information to evaluate the Company’s financial performance and provides the Company with information to make capital allocation decisions in the most appropriate manner.
As
of June 30, 2021, the Company had $i47.7 billion of remaining performance obligations. The Company expects to recognize approximately i30%
of its remaining performance obligations as revenue through 2022, an additional i30% through 2024, and the balance thereafter.
Cumulative Catch-up Adjustments
For the three months ended June 30, 2021, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $i35
million and $i0.68, respectively. For the three months ended June 30, 2020, net cumulative catch-up adjustments decreased operating income and decreased diluted earnings per share by $i111
million and $i2.15, respectively. For the six months ended June 30, 2021, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $i85
million and $i1.66, respectively. For the six months ended June 30, 2020, net cumulative catch-up adjustments decreased operating income and decreased diluted earnings per share by $i79
million and $i1.53, respectively.
Cumulative catch-up adjustments for the three months ended June 30, 2021, included a favorable adjustment of $i14
million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $i0.28. Cumulative catch-up adjustments for the three months ended June 30, 2020, included a favorable adjustment of $i25
million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $i0.48.
For the three and six months ended June 30, 2021, no individual unfavorable adjustment was material
to the Company's unaudited condensed consolidated statements of operations and comprehensive income. Cumulative catch-up adjustments for the three and six months ended June 30, 2020, included unfavorable adjustments of $i111 million and $i120
million, respectively, relating to Block IV of the Virginia class (SSN 774) submarine program at the Company's Newport News segment, which decreased diluted earnings per share by $i2.15 and $i2.34,
respectively. While other unfavorable cumulative catch-up adjustments for the three and six months ended June 30, 2020, were not individually material, cost estimates for discrete delay and disruption from COVID-19 Events drove $i61 million of unfavorable cumulative catch-up adjustments across our contracts, including $i16
million relating to Block IV of the Virginia class (SSN 774) submarine program, which is included in the $i111 million and $i120
million unfavorable adjustments discussed above.
Contract balances include accounts receivable, contract assets, and contract liabilities associated with customer contracts. Accounts receivable represent an unconditional right to consideration and include amounts billed and currently due from customers. Contract
assets primarily relate to the Company's rights to consideration for work
completed but not billed as of the reporting date when the right to payment is not just subject to the passage of time. Fixed-price contracts are generally billed to the customer using either progress payments, whereby amounts are billed monthly as costs are incurred or work is completed, or performance based payments, which are based upon the achievement
of specific, measurable events or accomplishments defined and valued at contract inception. Cost-type contracts are typically billed to the customer on a monthly or semi-monthly basis. Contract liabilities relate to advance payments, billings in excess of revenues, and deferred revenue amounts.
The Company is organized into ithree
reportable segments: Ingalls, Newport News, and Technical Solutions, consistent with how management makes operating decisions and assesses performance.
iThe following table presents segment results for the three and six months ended June 30, 2021 and 2020:
Three
Months Ended June 30
Six Months Ended June 30
($ in millions)
2021
2020
2021
2020
Sales and Service Revenues
Ingalls
$
i670
$
i622
$
i1,319
$
i1,251
Newport
News
i1,363
i1,122
i2,770
i2,463
Technical
Solutions
i237
i320
i496
i637
Intersegment
eliminations
(i39)
(i37)
(i76)
(i61)
Sales
and service revenues
$
i2,231
$
i2,027
$
i4,509
$
i4,290
Operating
Income
Ingalls
$
i80
$
i55
$
i171
$
i123
Newport
News
i76
(i69)
i169
i26
Technical
Solutions
i13
i9
i20
i2
Segment
operating income
i169
(i5)
i360
i151
Non-segment
factors affecting operating income
Operating FAS/CAS Adjustment
(i37)
i63
(i77)
i126
Non-current
state income taxes
(i4)
(i1)
(i8)
(i5)
Operating
income
$
i128
$
i57
$
i275
$
i272
/
Operating
FAS/CAS Adjustment - The Operating FAS/CAS Adjustment represents the difference between the service cost component of our pension and other postretirement benefit plan expense determined in accordance with GAAP ("FAS") and our pension and other postretirement expense under CAS.
1
Includes amounts capitalized pursuant to applicable provisions of the FAR and CAS.
/
10. iGOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
HII
performs impairment tests for goodwill as of November 30 of each year and between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair values of the Company's reporting units below their carrying values.
Accumulated goodwill impairment losses as of each of June 30, 2021, and December 31, 2020, were $i2,906
million. The accumulated goodwill impairment losses for Ingalls as of each of June 30, 2021, and December 31, 2020, were $i1,568 million. The accumulated goodwill impairment losses for Newport News as of each of June 30, 2021, and December 31, 2020, were $i1,187
million. The accumulated goodwill impairment losses for Technical Solutions as of each of June 30, 2021, and December 31, 2020, were $i151 million.
iFor
the six months ended June 30, 2021, the carrying amounts of goodwill changed as follows:
As
of June 30, 2021, the Company recorded goodwill adjustments of $i13 million relating to the acquisition of SIS, primarily related to allocations to intangible assets.
Other Intangible Assets
The
Company's purchased intangible assets are amortized on a straight-line basis or a method based on the pattern of benefits over their estimated useful lives. Net intangible assets consist primarily of amounts relating to nuclear-powered aircraft carrier and submarine program intangible assets, with an aggregate weighted-average useful life of i40 years based on the long life cycle of the related programs. Aggregate amortization expense was $i13
million and $i15 million for the three months ended June 30, 2021 and 2020, respectively. Aggregate amortization expense was $i26
million for each of the six months ended June 30, 2021 and 2020, respectively.
In connection with the SIS purchase in 2020, the Company recorded $i13
million of intangible assets pertaining to technology and existing contract backlog, which is being amortized using the pattern of benefits method over a weighted-average life of iten years.
In connection with the Hydroid purchase in 2020, the Company recorded $i76
million of intangible assets pertaining to existing contract backlog, customer relationships, and technology, which is being amortized using the pattern of benefits method over a weighted-average life of inine years.
The Company expects amortization expense for purchased intangible assets of approximately $i52
million in 2021, $i46 million in 2022, $i37 million in 2023,
$i28 million in 2024, and $i28 million in 2025.
11.
iINCOME TAXES
The Company's earnings are primarily domestic, and its effective income tax rates on earnings from operations for the three months ended June 30, 2021 and 2020, were i19.9%
and i18.5%, respectively. For the six months ended June 30, 2021 and 2020, the Company's effective income tax rates on earnings from operations were i17.1%
and i19.9%, respectively. The higher effective tax rate for the three months ended June 30, 2021, was primarily attributable to research and development tax credits for prior periods recorded in 2020. The lower effective tax rate for the six months ended June 30, 2021, was primarily attributable to a tax loss associated with the sale of the Company’s oil and gas business.
For
the three months ended June 30, 2021, the Company’s effective tax rate differed from the federal statutory tax rate primarily as a result of the research and development tax credit. For the six months ended June 30, 2021, the Company’s effective tax rate differed from the federal statutory tax rate primarily as a result of the tax loss associated with the sale of its oil and gas business. For the three and six months ended June 30, 2020, the Company’s effective tax rates differed from the federal statutory rate primarily as a result of research and development tax
credits for prior periods.
The Company's unrecognized tax benefits increased by $i2 million during the three months ended June 30, 2021. As of June 30, 2021, the estimated amounts of the Company's
unrecognized tax benefits, excluding interest and penalties, were liabilities of $i52 million. Assuming a sustainment of these tax positions, the reversal of $i37
million of the accrued amounts would favorably affect the Company's effective federal income tax rate in future periods.
The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. For the three and six months ended June 30, 2021, interest resulting from the unrecognized tax benefits noted above increased income tax expense less than $i1 million.
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in unrecognized state tax benefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.
Credit Facility - The Company's credit facility (the "Credit Facility") includes a revolving credit facility of $i1,250 million, which may be drawn upon during a period of ifive
years from November 22, 2017. The revolving credit facility includes a letter of credit subfacility of $i500 million.
The Credit Facility contains customary affirmative and negative covenants, as well as a financial covenant based on a maximum total leverage ratio. Each of the Company's existing and future material wholly owned domestic
subsidiaries, except those that are specifically designated as unrestricted subsidiaries, are and will be guarantors under the Credit Facility. See Note 17: Subsidiary Guarantors.
As of June 30, 2021, the Company had $i15
million in issued but undrawn letters of credit and $i1,235 million unutilized under the Credit Facility. The Company had unamortized debt issuance costs associated with its credit facilities of $i3
million and $i5 million as of June 30, 2021, and December 31, 2020, respectively.
The terms of the Company’s senior notes limit the Company’s ability and the ability of certain of its subsidiaries
to create liens, enter into sale and leaseback transactions, sell assets, and effect consolidations or mergers. The Company had unamortized debt issuance costs associated with its senior notes of $i13 million and $i14
million as of June 30, 2021, and December 31, 2020, respectively.
Under the Company's unsecured commercial paper program, the Company may issue up to $i1 billion of unsecured commercial paper notes.
The
Company's debt arrangements contain customary affirmative and negative covenants. The Company was in compliance with all debt covenants during the six months ended June 30, 2021.
The estimated fair values of the Company's total long-term debt as of June 30, 2021, and December 31, 2020, were $i1,892
million and $i1,943 million, respectively. The fair values of the Company's long-term debt were calculated based on recent trades of the Company's debt instruments in inactive markets, which fall within Level 2 under the fair value hierarchy.
As of June 30, 2021, the aggregate amounts of principal payments
due on long-term debt within the next five years consisted of $i84 million due in 2024 and $i500
million due in 2025.
13. iINVESTIGATIONS, CLAIMS, AND LITIGATION
The Company is involved in legal proceedings before various courts and administrative agencies, and is periodically subject to government examinations, inquiries and investigations. Pursuant
to FASB Accounting Standards Codification 450 Contingencies,the Company has accrued for losses associated with investigations, claims, and litigation when, and to the extent that, loss amounts related to the investigations, claims, and litigation are probable and can be reasonably estimated. The actual losses that might be incurred to resolve such investigations, claims, and litigation may be higher or lower than the amounts accrued. For matters where a material loss is probable or reasonably possible and the amount of loss cannot be reasonably estimated, but the Company is able to reasonably estimate a range of possible losses, the Company will disclose such estimated
range in these notes. This estimated range is based on information currently available to the Company and involves elements of judgment and significant uncertainties. Any estimated range of possible loss does not represent the Company's maximum possible loss exposure. For matters as to which the Company is not able to reasonably estimate a possible loss or range of loss, the Company will indicate the reasons why it is unable to estimate the possible loss or range of loss. For matters not specifically described in these notes, the Company does
not believe, based on information currently available to it, that it is reasonably possible that the liabilities, if any, arising from such investigations, claims, and litigation will have a material effect on its consolidated financial position, results of operations, or cash flows. The Company has, in certain cases, provided disclosure regarding certain matters for which the Company believes at this time that the likelihood of material loss is remote.
False Claims Act Complaint - In 2016, the Company was made aware that it is a defendant in a qui tam False Claims Act lawsuit pending
in the U.S. District Court for the Middle District of Florida related to the Company’s purchases of allegedly non-conforming parts from a supplier for use in connection with U.S. Government contracts. In August 2019, the Department of Justice (“DoJ”) declined to intervene in the lawsuit, and the lawsuit was unsealed. The court dismissed the complaint, but the plaintiff was permitted to refile the compliant and did so. The case is at an early stage, and the Company has filed a motion to dismiss the Second Amended Complaint. As a
result, the Company is unable to estimate an amount or range of reasonably possible loss or to express an opinion regarding the ultimate outcome of the matter.
Insurance Claims - In September 2020, the Company filed a complaint in the Superior Court, State of Vermont, Franklin Unit, seeking a judgment declaring that the Company's business interruption and other losses associated with COVID-19 are covered by the Company's property
insurance program. A total of i32 reinsurers are named as defendants in the complaint. The Company also has initiated arbitration proceedings against isix
other reinsurers seeking similar relief. Prior to filing the complaint and initiating the arbitration proceedings, the Company provided a notice of loss to the reinsurers, but, to date, none of the reinsurers have acknowledged coverage. The full extent of the Company's losses resulting from COVID-19 have not yet been determined, and the process of calculating losses is continuing. On July 30, 2021, the Vermont court issued its ruling on the reinsurers’ motion for judgment on the pleadings and the Company’s cross motion for judgment on the pleadings. The court granted the reinsurers’ motion, finding that, because the
Company continued to operate through the pandemic, the Company’s reduction of business not accompanied by a complete loss of use fell short of the required “direct physical loss or damage to property.”The Company has appealed the decision. Although the Company still believes its position is well-founded, no assurances can be provided regarding the ultimate resolution of this matter.
U.S. Government Investigations and Claims - Departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of the
Company, and the results of such investigations may lead to administrative, civil, or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory, treble, or other damages. U.S. Government regulations provide that certain findings against a contractor may also lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges. Any suspension or debarment would have a material effect on the Company because of its reliance on government contracts.
Asbestos Related Claims - HII and its predecessors-in-interest are defendants in a longstanding
series of cases that have been and continue to be filed in various jurisdictions around the country, wherein former and current employees and various third parties allege exposure to asbestos containing materials while on or associated with HII premises or while working on vessels constructed or repaired by HII. The cases allege various injuries, including those associated with pleural plaque disease, asbestosis, cancer, mesothelioma, and other alleged asbestos related conditions. In some cases, several of HII's former executive officers are also named as defendants. In some instances, partial or full insurance coverage is available to the Company for its liability and that of its former executive officers. The costs to resolve cases during the six months ended June 30, 2021 and 2020,
were immaterial individually and in the aggregate. The Company’s estimate of asbestos-related liabilities is subject to uncertainty because liabilities are influenced by numerous variables that are inherently difficult to predict. Key variables include the number and type of new claims, the litigation process from jurisdiction to jurisdiction and from case to case, reforms made by state and federal courts, and the passage of state or federal tort reform legislation. Although the Company believes the ultimate resolution of current cases will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances
regarding the ultimate outcome of asbestos related litigation.
Other Litigation - In March 2019, a new dry dock being transported for delivery to Ingalls by a heavy lift ship struck an Ingalls work barge, which in turn was pushed into USS Delbert D. Black (DDG 119) causing damage to USS Delbert D. Black (DDG 119), the work barge, and the new dry dock. At the time of the incident, responsibility for the new dry dock remained with the builder and the transport company. Repair work on USS Delbert D. Black (DDG 119) was completed at U.S. Navy direction. The Company is working with the U.S. Navy to ascertain whether third parties will pay for the repairs to USS Delbert
D. Black (DDG 119) or whether the repairs will be paid under the builder's risk insurance included in the USS Delbert D. Black (DDG 119) contract. Claims were tendered to the Company's insurers, and the Company has received all outstanding claim proceeds. In April 2019, the Company filed suit in the U.S. District Court for the Southern District of Mississippi seeking, among other relief, damages from negligent third parties. On July 20, 2021, an agreement was reached with the defendants to resolve the
Company’s remaining claims. We expect the settlement to be funded in the third quarter of 2021.
The Company and its predecessor-in-interest have been in litigation with the Bolivarian Republic of Venezuela (the "Republic") since 2002 over a contract for the repair, refurbishment, and modernization at Ingalls of itwo
foreign-built frigates. In March 2014, the Company filed an arbitral statement of claim asserting breaches of the contract. The Republic denied the Company’s allegations and asserted counterclaims. In February 2018, the arbitral tribunal awarded the Company approximately $i151
million on its claims and awarded the Republic approximately $i22
million on its counterclaims. The Company is seeking to enforce and execute upon the award in
multiple jurisdictions. No assurances can be provided regarding the ultimate resolution of this matter.
The Company is party to various other claims, legal proceedings and investigations that arise in the ordinary course of business, including U.S. Government investigations that could result in administrative, civil, or criminal proceedings involving the Company. The Company is a contractor with the U.S. Government, and such proceedings can therefore include False Claims Act allegations against the Company. Although the
Company believes that the resolution of these other claims, legal proceedings and investigations will not have a material effect on its consolidated financial position, results of operations, or cash flows, the Company cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of these matters.
14. iCOMMITMENTS
AND CONTINGENCIES
Contract Performance Contingencies - Contract profit margins may include estimates of revenues for matters on which the customer and the Company have not reached agreement, such as settlements in the process of negotiation, contract changes, claims, and requests for equitable adjustment for unanticipated contract costs. These estimates are based upon management's best assessment of the underlying causal events and
circumstances and recognized to the extent of expected recovery based upon contractual entitlements and the probability of successful negotiation with the customer. As of June 30, 2021, amounts recognized in connection with claims and requests for equitable adjustment were not material individually or in the aggregate.
Guarantees of Performance Obligations - From time to time in the ordinary course of business, HII enters into joint ventures, teaming agreements, and other business arrangements in connection with the Company's products and services or to pursue strategic objectives. The Company attempts to limit its exposure under these arrangements to its investment
or the extent of obligations under the applicable contract. In some cases, however, HII may be required to guarantee performance of the arrangement's obligations and, in such cases, generally obtains cross-indemnification from the other members of the arrangement.
In the ordinary course of business, the Company may guarantee obligations of its subsidiaries under certain contracts. Generally, the Company is liable under such guarantees only if its subsidiary is unable
to perform its obligations. Historically, the Company has not incurred any substantial liabilities resulting from these guarantees. As of June 30, 2021, the Company was not aware of any existing event of default that would require it to satisfy any of these guarantees.
Environmental Matters - The estimated cost to complete environmental remediation has been accrued when it is probable that the Company will incur such costs in the future to address environmental conditions at currently or formerly owned or leased operating facilities, or at sites where it has been named a Potentially
Responsible Party ("PRP") by the Environmental Protection Agency or similarly designated by another environmental agency, and the related costs can be estimated by management. These accruals do not include any litigation costs related to environmental matters, nor do they include amounts recorded as asset retirement obligations. To assess the potential impact on the Company's consolidated financial statements, management estimates the range of reasonably possible remediation costs that could be incurred by the Company, taking into account currently available facts on each site, as well as the current state of technology and prior experience remediating contaminated sites. These estimates are reviewed periodically and adjusted to reflect changes in facts and technical and legal circumstances.
Management estimates that as of June 30, 2021, the probable estimable future cost for environmental remediation was immaterial. Factors that could result in changes to the Company's estimates include: modification of planned remedial actions, increases or decreases in the estimated time required to remediate, changes to the determination of legally responsible parties, discovery of more extensive contamination than anticipated, changes in laws and regulations affecting remediation requirements, and improvements in remediation technology. Should other PRPs not pay their allocable share of remediation costs, the Company may incur costs exceeding those already estimated and accrued. In addition, there are certain potential remediation sites where the
costs of remediation cannot be reasonably estimated. Although management cannot predict whether new information gained as remediation progresses will materially affect the estimated liability accrued, management does not believe that future remediation expenditures will have a material effect on the Company's consolidated financial position, results of operations, or cash flows.
Financial Arrangements - In the ordinary course of business, HII uses letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds
issued by insurance companies principally to support the Company's self-insured workers' compensation plans. As of June 30, 2021, the Company had $i15 million in issued but undrawn letters of credit, as indicated in Note 12: Debt,
and $i276 million of surety bonds outstanding.
U.S. Government Claims - From time to time, the U.S. Government communicates to the Company potential claims, disallowed costs, and penalties concerning prior costs incurred by the Company with which the U.S. Government disagrees. When such preliminary
findings are presented, the Company and U.S. Government representatives engage in discussions, from which the Company evaluates the merits of the claims and assesses the amounts being questioned. Although the Company believes that the resolution of any of these matters will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict the ultimate outcome of these matters.
Other Matters - In 1985, the Company and the U.S. Navy entered into a settlement agreement to resolve disputes
associated with billing and allocating to contracts the cost of workers’ compensation self-insurance, among other matters. In 2016, the Defense Contract Audit Agency ("DCAA") opined that the 1985 settlement agreement did not comply with certain CAS standards and referred the matter to a U.S. Navy Contracting Officer. In December 2020, the Contracting Officer issued a determination that the 1985 settlement agreement did not comply with CAS and directed the Company to develop and implement a different process to bill and allocate the cost of workers’ compensation self-insurance. Cumulatively, under the 1985 settlement agreement, the
Company has not recognized as allowable billable costs of approximately $i120 million due to the difference between CAS and U.S. GAAP Financial Accounting Standards ("FAS") treatment of workers’ compensation cost. Under the 1985 settlement agreement, these costs would be recognized as allowable billable costs in future periods. Though the Company believes the 1985 settlement agreement is CAS-compliant and cannot be unilaterally terminated, the
Company will seek to negotiate a resolution of the matter with the Contracting Officer. If a resolution results in the use of a different treatment or billing methodology that does not provide for the Company to recognize as allowable the CAS to FAS difference, the resolution could have a material effect on the Company’s consolidated financial position, results of operations, or cash flows, including an inability to recover any or all of the $i120
million of costs not yet billed to the customer.
Collective Bargaining Agreements - Of the Company's approximately i41,000 employees, approximately i50%
are covered by a total of ininecollective bargaining agreements and one site stabilization agreement. Newport News has ithree
collective bargaining agreements covering represented employees, which expire in November 2021, December 2022, and April 2024. The collective bargaining agreement that expires in November 2021 covers approximately i50% of Newport News employees. Newport News craft workers employed at the Kesselring Site near Saratoga Springs, New York are represented under an indefinite Department of Energy ("DoE") site agreement. Ingalls has ifive
collective bargaining agreements covering represented employees, all of which expire in March 2022. Approximately i15 Technical Solutions employees in Klamath Falls, Oregon are covered by a collective bargaining agreement that expires in June 2025. The Company believes its relationship with its employees is satisfactory.
Collective bargaining agreements generally expire after three to ifive
years and are subject to renegotiation at that time. The Company does not expect the results of these negotiations, either individually or in the aggregate, to have a material effect on the Company's consolidated results of operations.
Purchase Obligations - Periodically the Company enters into agreements to purchase goods or services that are enforceable and legally binding on the Company and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate
timing of the transaction. These obligations are primarily comprised of open purchase order commitments to vendors and subcontractors pertaining to funded contracts.
15. iEMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS
The
Company provides eligible employees defined benefit pension plans, other postretirement benefit plans, and defined contribution pension plans.
iThe costs of the
Company's defined benefit pension plans and other postretirement benefit plans for the three and six months ended June 30, 2021 and 2020, were as follows:
Three
Months Ended June 30
Six Months Ended June 30
Pension Benefits
Other Benefits
Pension Benefits
Other Benefits
($ in millions)
2021
2020
2021
2020
2021
2020
2021
2020
Components
of Net Periodic Benefit Cost
Service cost
$
i49
$
i45
$
i2
$
i3
$
i99
$
i90
$
i5
$
i5
Interest
cost
i60
i65
i4
i4
i120
i129
i7
i8
Expected
return on plan assets
(i138)
(i122)
—
—
(i276)
(i243)
—
—
Amortization
of prior service cost (credit)
i4
i3
(i1)
(i6)
i8
i6
(i2)
(i11)
Amortization
of net actuarial loss (gain)
i27
i27
—
(i1)
i54
i54
(i1)
(i3)
Net
periodic benefit cost
$
i2
$
i18
$
i5
$
—
$
i5
$
i36
$
i9
$
(i1)
/
iThe
Company made the following contributions to its defined benefit pension plans and other postretirement benefit plans for the six months ended June 30, 2021 and 2020:
Six Months Ended June 30
($ in millions)
2021
2020
Pension
plans
Discretionary
Qualified
$
i60
$
i65
Non-qualified
i4
i4
Other
benefit plans
i20
i17
Total
contributions
$
i84
$
i86
/
As
of June 30, 2021, the Company anticipates no further significant cash contributions to its qualified defined benefit pension plans in 2021.
Restricted Performance Stock Rights - For the six months ended June 30, 2021, the Company granted approximately i0.2
million RPSRs at a weighted average share price of $i179.21. These rights are subject to cliff vesting on December 31, 2023. For the six months ended June 30, 2020, the Company granted
approximately i0.1 million RPSRs at a weighted average share price of $i231.16.
These rights are subject to cliff vesting on December 31, 2022. All of the RPSRs are subject to the achievement of performance-based targets at the end of the respective vesting periods and will ultimately vest between i0% and i200%
of grant date value.
For each of the six months ended June 30, 2021 and 2020, approximately i0.1 million of stock awards vested, of which less than i0.1
million each year were transferred to the Company from employees in satisfaction of minimum tax withholding obligations.
iThe
following table summarizes the status of the Company's outstanding stock awards as of June 30, 2021:
Stock Awards (in thousands)
Weighted-Average Grant Date Fair Value
Weighted-Average
Remaining Contractual Term (in years)
Total stock awards
i462
$
i190.39
i1.4
/
Compensation
Expense
The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors for the three months ended June 30, 2021 and 2020, of $i3 million and $i6
million, respectively. The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors for the six months ended June 30, 2021 and 2020, of $i12 million and $i13
million, respectively.
The Company recorded tax benefits related to stock awards of less than $i1 million and $i1
million for the three months ended June 30, 2021 and 2020, respectively. The Company recorded tax benefits related to stock awards of $i2 million for each of the six months ended June 30, 2021 and 2020,
respectively. The Company recognized tax benefits associated with the issuance of stock in settlement of stock awards of less than $i1 million and $i1
million for the three months ended June 30, 2021 and 2020, respectively. The Company recognized tax benefits associated with the issuance of stock in settlement of stock awards of $i2 million and $i3
million for the six months ended June 30, 2021 and 2020, respectively.
Unrecognized Compensation Expense
As of June 30, 2021, the Company had less than $i1
million of unrecognized compensation expense associated with Restricted Stock Rights granted in 2021, 2020, and 2019, which will be recognized over a weighted average period of i0.9 years, and $i42
million of unrecognized compensation expense associated with RPSRs granted in 2021, 2020, and 2019, which will be recognized over a weighted average period of i1.6 years.
17. iSUBSIDIARY
GUARANTORS
As described in Note 12: Debt, the Company issued senior notes through the consolidating parent company, HII. Performance of the Company's obligations under its senior notes outstanding as of June 30, 2021, and December 31, 2020, including any repurchase obligations resulting from a change of control, is fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by each of HII's existing and future material domestic subsidiaries ("Subsidiary Guarantors"). The Subsidiary Guarantors are i100%
owned by HII. Under SEC Regulation S-X Rule 3-10, each HII subsidiary that did not provide a guarantee ("Non-Guarantors") is minor and HII, as the parent company issuer, did not have independent assets or operations. There are no significant restrictions on the ability of the parent company and the Subsidiary Guarantors to obtain funds from their respective subsidiaries by dividend or loan, except those imposed by applicable law.
18. iSUBSEQUENT
EVENTS
On July 4, 2021, the Company entered into a Stock Purchase Agreement to acquire Alion Science and Technology (“Alion”) for $i1.65 billion in cash, subject to customary adjustments. Alion is a high value, technology-driven solutions provider for the global defense marketplace. The transaction is expected to close
in the second half of 2021, subject to customary closing conditions.
On August 2, 2021, the Company entered into a $i400 million 364-day delayed draw term loan and a $i650
million 3-year delayed draw term loan to finance a portion of the purchase price for Alion. Commitments under the 364-day facility, but not the 3-year facility, are subject to mandatory reduction upon the occurrence of certain events specified in the term loan credit agreement, including certain debt and equity issuances. Neither term loan requires principal amortization payments and each must be repaid prior to or at maturity, which is i364 days and i36
months, respectively, from the date of the initial draw. Each term loan has a variable interest rate on outstanding borrowings based on the London Interbank Offered Rate ("LIBOR"), plus a spread based upon the Company's credit rating, which may vary between i1.125% and i2.000%.
The current interest rate on drawn amounts would be i1.375% based
on the Company's current credit rating. The term
loans also have a commitment fee rate on unutilized amounts, currently i0.20%, which will begin accruing on September 2, 2021.
On August 2, 2021, the Company also amended and restated its existing $i1.25
billion Credit Facility, increasing the capacity thereunder to $i1.5 billion and extending the maturity date to five years from signing. The amended and restated revolving credit facility has a variable interest rate on outstanding borrowings based on LIBOR, plus a spread based upon the Company's credit rating, which may vary between i1.125%
and i2.000%. The current interest on drawn amounts would be i1.375% based on the
Company's current credit rating. The amended and restated revolving credit facility also has a commitment fee rate on unutilized amounts, currently i0.20%.
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Our
Business
Huntington Ingalls Industries, Inc. ("HII", "we", "us", or "our") is America’s largest military shipbuilding company and a provider of professional services to partners in government and industry. For more than a century, our Ingalls segment in Mississippi and Newport News segment in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder. Our Technical Solutions segment provides a range of services to government and commercial customers. Headquartered in Newport News, Virginia, HII employs approximately 41,000 people both domestically and internationally.
We conduct most of our business with the U.S. Government, primarily the DoD. As prime contractor, principal subcontractor, team member, or partner, we participate in many high-priority U.S. defense programs. Ingalls
includes our non-nuclear ship design, construction, repair, and maintenance businesses. Newport News includes all of our nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses. Our Technical Solutions segment provides a wide range of professional services and products, including defense and federal solutions ("DFS"), nuclear and environmental services, and unmanned systems.
The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2020.
Business Environment
COVID-19 Pandemic - The COVID-19
global pandemic has had wide ranging effects on the global health environment and disrupted the global and U.S. economies and financial markets, including impacts to our employees, customers, suppliers, and communities (collectively, “COVID-19 Events”). COVID-19 Events have also impacted our operations, and the extent of future impacts are uncertain. The most significant areas of impact have been the disruption of our employees’ ability to work effectively, disruption in our supply chain, disruption of the U.S. Government's and our other customers' abilities to perform their obligations, and impact on pension assets and other investment performance.
We have aggressively managed our response to the uncertainties regarding COVID-19 Events and we have incurred costs to respond to COVID-19 Events, including paid leave, quarantining employees, and recurring facility cleaning. Our shipyards and other facilities
remained open and productive, but we experienced temporary decreases in workforce attendance, which impacted our operations due to delay and disruption from a shortage of critical skills and out-of-sequence work. As of June 30, 2021, our workforce was operating at normal attendance rates.
Under Section 3610 of the CARES Act, contractors may submit claims for employee paid time off caused by restrictions from COVID-19 Events in circumstances where the employee could not work remotely. Such instances may include paid time off for employees to allow for plant decontamination, idle time due to social distancing restrictions, paid time off to take care of dependents impacted by government ordered school or day care closures, paid time for employee vaccinations or responding to side effects from vaccination, and employee quarantines due to travel restrictions or
coming into contact, being diagnosed, or taking care of someone diagnosed with COVID-19. We have taken steps to preserve our rights to pursue such claims for HII and our subcontractors, and we submitted an initial Section 3610 Reimbursement Request to the DoD for Ingalls and Newport News Shipbuilding. We
anticipate submitting supplemental requests for Section 3610 reimbursement for HII and our subcontractors into 2022. Reimbursements of our requests are contingent upon contracting officers making funding available, and most DoD contracting officers are awaiting supplemental appropriations from Congress before
approving such reimbursement requests. We have no assurance that Congress will appropriate sufficient funds to cover the reimbursement of costs contemplated by the CARES Act.
While costs related to COVID-19 Events are allowable under U.S. Government contracts, our contract estimates reflect margin impact uncertainty, because such costs may not result in equitable adjustments, particularly on firm fixed price and fixed price incentive contracts, or may not be adequately covered by insurance. Our reinsurers have failed to acknowledge coverage for various losses related to COVID-19, and we filed a complaint in state court in Vermont seeking
a judgment declaring that our business interruption and other losses associated with COVID-19 are covered by our property insurance program. We also initiated arbitration proceedings against other reinsurers seeking similar relief. Although we believe that our position is well-founded, no assurance can be provided regarding the ultimate resolution of this matter. See Note 13: Investigations, Claims, and Litigation.
We have also focused on actively supporting our customers, suppliers, and communities. We have been proactive in engaging with our U.S. Government customers regarding future contract adjustments. While there has been no change in contract terms or substantial degradation in timely payments from customers, we have experienced
delays in decisions on certain contract awards. We are unable to predict how our customers will allocate resources in the future as they react to the evolving demands of the COVID-19 response. We also accelerated payments to small business suppliers in an effort to minimize supply chain disruption.
We temporarily halted stock repurchases in the first quarter of 2020, but we resumed share repurchases during the first quarter of 2021. We also deferred certain payroll taxes in 2020 pursuant to the CARES Act, which increased our cash from operations in 2020, but will reduce cash from operations in 2021 and 2022.
U.S. Government Contracts - Long-term
uncertainty exists with respect to overall levels of defense spending across the future years' defense plan, and it is likely that U.S. Government discretionary spending levels will continue to be subject to significant pressure.
The Congressional markup process for fiscal year 2022 began following release of the President’s Budget Request in May 2021. The budget request continued recapitalization of the nation’s strategic ballistic missile submarine fleet and supported funding for Enterprise (CVN 80) and Doris Miller (CVN 81), two Virginia class (SSN 774) submarines, one Arleigh Burke (DDG 51) class destroyer, and LHA 9 (unnamed). While a bundled procurement of LHA 9 (unnamed), LPD 32 (unnamed) and LPD 33 (unnamed) was
authorized and appropriated by fiscal year 2021 legislation, the President's fiscal year 2022 budget request did not include funding to enable a bundled award. The DoD included a second Arleigh Burke (DDG 51) class destroyer in its fiscal year 2022 unfunded priority list, which was submitted to the Congress shortly after the release of the budget request.
Long-term funding for certain programs in which we participate may be reduced, delayed, or canceled. In addition, spending cuts and/or reprioritization of defense investment could adversely affect the viability of our suppliers, subcontractors, and employee base. Our contracts or subcontracts under programs in which we participate may be terminated or adjusted by the U.S. Government or the prime contractor as a result
of lack of government funding or reductions or delays in government funding. Significant reductions in the number of ships procured by the U.S. Navy or significant delays in funding our ship programs would have a material effect on our financial position, results of operations, or cash flows.
The budget environment remains a significant long-term risk. Considerable uncertainty exists regarding how future budget and program decisions will develop and what challenges budget changes will present for the defense industry. We believe continued budget pressures will have serious implications for defense discretionary spending, the defense industrial base, including HII, and the customers, employees, suppliers, subcontractors, investors, and communities that rely on companies in the defense industrial base. Although it is difficult to determine specific impacts, we expect that over the longer term, the budget environment
may result in fewer contract awards and lower revenues, profits, and cash flows from our U.S. Government contracts. It is likely budget and program decisions made in this environment will have long-term impacts on HII and the entire defense industry.
Critical Accounting Policies, Estimates, and Judgments
As discussed in our
Annual Report on Form 10-K for the year ended December 31, 2020, we consider our policies relating to the following matters to be critical accounting policies:
•Revenue recognition;
•Purchase accounting, goodwill, and intangible assets;
•Litigation, commitments, and contingencies;
•Retirement related benefit plans; and
•Workers' compensation.
As of June
30, 2021, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2020.
We have incorporated realized and estimated future effects of COVID-19 Events, based upon current conditions and our judgment of the future impacts of COVID-19 Events, with respect to contract costs and revenue recognition, effective income tax rates, and the fair values of our long-lived assets, financial instruments, intangible assets, and goodwill recorded at our reporting units. See Note 2: Basis of Presentation.
We
generate most of our revenues from long-term U.S. Government contracts for design, production, and support activities. Government contracts typically include the following cost elements: direct material, labor, and subcontracting costs, and certain indirect costs, including allowable general and administrative expenses. Unless otherwise specified in a contract, costs billed to contracts with the U.S. Government are treated as allowable and allocable costs under the Federal Acquisition Regulation ("FAR") and the U.S. Cost Accounting Standards ("CAS") regulations. Examples of costs incurred by
us that are not allowable under the FAR and CAS regulations include certain legal costs, lobbying costs, charitable donations, interest expense, organizational costs, including most merger and acquisition costs, and advertising costs.
We monitor our policies and procedures with respect to our contracts on a regular basis to ensure consistent application under similar terms and conditions, as well as compliance with all applicable government regulations. In addition, the Defense Contract Audit Agency routinely audits the costs we incur that are allocated to contracts with the U.S. Government.
Our
contracts typically fall into one of four categories: firm fixed-price, fixed-price incentive, cost-type, and time and materials. See Note 7: Revenue.
•Firm Fixed-Price Contracts- A firm fixed-price contract is a contract in which the specified scope of work is agreed to for a price that is predetermined by bid or negotiation and not generally subject to adjustment regardless of costs incurred by the contractor.
•Fixed-Price
Incentive Contracts- Fixed-price incentive contracts provide for reimbursement of the contractor's allowable costs, but are subject to a cost-share limit that affects profitability. Fixed-price incentive contracts effectively become firm fixed-price contracts once the cost-share limit is reached.
•Cost-Type Contracts- Cost-type contracts
provide for reimbursement of the contractor's allowable costs plus a fee that represents profit. Cost-type contracts generally require that the contractor use its reasonable efforts to accomplish the scope of the work within some specified time and some stated dollar limitation.
•Time and Materials - Time and materials contracts specify a fixed hourly billing rate for each direct labor hour expended and reimbursement for allowable material costs and expenses.
Contract Fees - Negotiated
contract fee structures include: fixed fee amounts, cost sharing arrangements to reward or penalize contractors for under or over cost target performance, respectively, positive award fees, and negative
penalty arrangements. Profit margins may vary materially depending on the negotiated contract fee arrangements, percentage-of-completion of the contract,
the achievement of performance objectives, and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.
Award Fees - Certain contracts contain award fees based on performance criteria such as cost, schedule, quality, and technical performance. Award fees are determined and earned based on an evaluation by the customer of our performance against such negotiated criteria. We consider award fees to be variable consideration and generally include these fees in the transaction price using a most likely amount approach. Award fees are limited to the extent of funding allotted by the customer and available for performance and those
amounts for which a significant reversal of revenue is not probable.
Program Descriptions
For convenience, a brief description of certain programs discussed in this Quarterly Report on Form 10-Q is included in the "Glossary of Programs" in this section.
CONSOLIDATED OPERATING RESULTS
The following table presents selected financial highlights:
Three
Months Ended June 30
Six Months Ended June 30
2021 over 2020
2021 over 2020
($ in millions)
2021
2020
Dollars
Percent
2021
2020
Dollars
Percent
Sales
and service revenues
$
2,231
$
2,027
$
204
10
%
$
4,509
$
4,290
$
219
5
%
Cost
of product sales and service revenues
1,909
1,763
146
8
%
3,845
3,603
242
7
%
Income
from operating investments, net
12
7
5
71
%
20
13
7
54
%
Other
income and gains
(2)
—
(2)
—
%
1
—
1
—
%
General
and administrative expenses
204
214
(10)
(5)
%
410
428
(18)
(4)
%
Operating
income
128
57
71
125
%
275
272
3
1
%
Other
income (expense)
Interest expense
(18)
(25)
7
28
%
(39)
(41)
2
5
%
Non-operating
retirement benefit
44
30
14
47
%
90
60
30
50
%
Other,
net
7
3
4
133
%
8
(10)
18
180
%
Federal
and foreign income taxes
32
12
20
167
%
57
56
1
2
%
Net
earnings
$
129
$
53
$
76
143
%
$
277
$
225
$
52
23
%
Operating
Performance Assessment and Reporting
We manage and assess the performance of our business based on our performance on individual contracts and programs using the financial measures referred to below, with consideration given to the Critical Accounting Policies, Estimates, and Judgments referred to in this section. Our portfolio of long-term contracts is largely flexibly-priced. Therefore, sales tend to fluctuate in concert with costs across our large portfolio of active contracts, with operating income being a critical measure of operating performance. Under FAR rules that govern our business with the U.S. Government, most types of costs
are allowable, and we do not focus on individual cost groupings, such as cost of sales or general and administrative expenses, as much as we do on total contract costs, which are a key factor in determining contract operating income. As a result, in evaluating our operating performance, we look primarily at changes in sales and service revenues, as well as operating income, including the effects of significant changes in operating income as a result of changes in contract estimates and the use of the cumulative catch-up method of accounting in accordance with GAAP. This approach is consistent with the long-term life cycle of our contracts,
as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance in a similar manner through contract completion. Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing our business.
Cost of sales for both product sales and service revenues consists of materials, labor, and subcontracting costs, as well as an allocation of indirect costs for overhead. We manage the type and amount of costs at the contract level,
which is the basis for estimating our total costs at completion of our contracts. Unusual fluctuations in operating performance driven by changes in a specific cost element across multiple contracts are described in our analysis.
Sales and Service Revenues
Sales and service revenues were comprised as follows:
Three
Months Ended June 30
Six Months Ended June 30
2021 over 2020
2021 over 2020
($ in millions)
2021
2020
Dollars
Percent
2021
2020
Dollars
Percent
Product
sales
$
1,763
$
1,420
$
343
24
%
$
3,484
$
3,044
$
440
14
%
Service
revenues
468
607
(139)
(23)
%
1,025
1,246
(221)
(18)
%
Sales
and service revenues
$
2,231
$
2,027
$
204
10
%
$
4,509
$
4,290
$
219
5
%
Product
sales for the three months ended June 30, 2021, increased $343 million, or 24%, compared with the same period in 2020. Product sales for the six months ended June 30, 2021, increased $440 million, or 14%, compared with the same period in 2020. Ingalls product sales increased $60 million and $86 million for the three and six months ended June 30, 2021, respectively, primarily as a result of higher volumes in surface combatants and amphibious assault ships, partially offset by lower volume in the Legend class NSC program. Newport News product sales increased $285 million for the three months ended June 30, 2021, primarily as a result of higher volumes in submarines and aircraft carriers. Newport News product sales increased $340
million for the six months ended June 30, 2021, primarily as a result of higher volumes in aircraft carriers and submarines. Technical Solutions product sales decreased $2 million for the three months ended June 30, 2021, primarily as a result of lower volume in unmanned systems, partially offset by higher volumes in DFS. Technical Solutions product sales increased $14 million for the six months ended June 30, 2021, primarily as a result of higher volumes in DFS and unmanned systems.
Service revenues for the three months ended June 30, 2021, decreased $139 million, or 23%, compared with the same period in 2020. Service revenues for the six months ended June 30, 2021,
decreased $221 million, or 18%, compared with the same period in 2020. Ingalls service revenues decreased $16 million and $24 million for the three and six months ended June 30, 2021, respectively, primarily as a result of lower volumes in surface combatant and amphibious assault ship services. Newport News service revenues decreased $46 million for the three months ended June 30, 2021, primarily as a result of lower volumes in submarine and naval nuclear support services. Newport News service revenues decreased $35 million for the six months ended June 30, 2021, primarily as a result of lower volumes in submarine and naval nuclear support services, partially offset by higher volumes in aircraft carrier services. Technical Solutions service revenues decreased $77 million for the three months ended June
30, 2021, primarily as a result of the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture, partially offset by higher volumes in DFS services. Technical Solutions service revenues decreased $162 million for the six months ended June 30, 2021, primarily as a result of the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture, as well as lower volumes in DFS services.
Cost
of product sales, cost of service revenues, income from operating investments, net, and general and administrative expenses were as follows:
Three
Months Ended June 30
Six Months Ended June 30
2021 over 2020
2021 over 2020
($ in millions)
2021
2020
Dollars
Percent
2021
2020
Dollars
Percent
Cost
of product sales
$
1,495
$
1,253
$
242
19
%
$
2,949
$
2,543
$
406
16
%
%
of product sales
84.8
%
88.2
%
84.6
%
83.5
%
Cost of service revenues
414
510
(96)
(19)
%
896
1,060
(164)
(15)
%
%
of service revenues
88.5
%
84.0
%
87.4
%
85.1
%
Income from operating investments, net
12
7
5
71
%
20
13
7
54
%
Other
income and gains
(2)
—
(2)
—
%
1
—
1
—
%
General
and administrative expenses
204
214
(10)
(5)
%
410
428
(18)
(4)
%
%
of sales and service revenues
9.1
%
10.6
%
9.1
%
10.0
%
Cost
of sales and service revenues
$
2,103
$
1,970
$
133
7
%
$
4,234
$
4,018
$
216
5
%
Cost
of Product Sales
Cost of product sales for the three months ended June 30, 2021, increased $242 million, or 19%, compared with the same period in 2020. Cost of product sales for the six months ended June 30, 2021, increased $406 million, or 16%, compared with the same period in 2020. Ingalls cost of product sales increased $29 million for the three months ended June 30, 2021, primarily as a result of the higher volumes described above, partially offset by higher risk retirement on the San Antonio class (LPD 17) program. Ingalls cost of product sales increased $30 million for the six months ended June 30, 2021, primarily as a result of the higher
volumes described above, partially offset by higher risk retirement on Bougainville (LHA 8) and the San Antonio class (LPD 17) program. Newport News cost of product sales increased $129 million and $193 million for the three and six months ended June 30, 2021, respectively, primarily as a result of volume increases described above. Technical Solutions cost of product sales increased $2 million for the three months ended June 30, 2021, primarily as a result of the volume increases in DFS, partially offset by lower volume in unmanned systems and year-to-year variances in contract mix. Technical Solutions cost of product sales increased $17 million for the six months ended June
30, 2021, primarily as a result of the volume increases described above. Cost of product sales related to the Operating FAS/CAS Adjustment increased $82 million and $166 million for the three and six months ended June 30, 2021, respectively, as described below.
Cost of product sales as a percentage of product sales decreased from 88.2% for the three months ended June 30, 2020, to 84.8% for the three months ended June 30, 2021. The decrease was primarily due to impacts related to performance on the Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020, higher risk retirement on the San Antonio
class (LPD 17) program, and a contract incentive on Jack H. Lucas (DDG 125), partially offset by an unfavorable change in the Operating FAS/CAS Adjustment and lower risk retirement on USS Delbert D. Black (DDG 119) following its delivery. Cost of product sales as a percentage of product sales increased from 83.5% for the six months ended June 30, 2020, to 84.6% for the six months ended June 30, 2021. The increase was due to impacts related to performance on the Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020, an unfavorable change in the Operating FAS/CAS Adjustment,
and higher risk retirement on Bougainville (LHA 8) and the San Antonio class (LPD 17) program.
Cost of Service Revenues
Cost of service revenues for the three months ended June 30, 2021, decreased $96 million, or 19%, compared with the same period in 2020. Cost of service revenues for the six months ended June 30, 2021, decreased $164 million, or 15%, compared with the same period in 2020. Ingalls cost of service revenues decreased $12 million and $19 million for the three and six months ended June 30, 2021, respectively, primarily as a result of lower volumes described above. Newport
News cost of service revenues decreased $24 million and $10 million for the three and
six months ended June 30, 2021, respectively, due to lower volumes described above. Technical Solutions cost of service revenues decreased $78 million and $172 million for the three and six months ended June 30, 2021, respectively, primarily as a result of the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture, lower volumes in nuclear and environmental services, and year-to-year
variances in contract mix. Cost of service revenues related to the Operating FAS/CAS Adjustment increased $18 million and $37 million for the three and six months ended June 30, 2021, respectively, as described below.
Cost of service revenues as a percentage of service revenues increased from 84.0% for the three months ended June 30, 2020, to 88.5% for the three months ended June 30, 2021, primarily driven by an unfavorable change in the Operating FAS/CAS Adjustment, partially offset by improved performance on DFS services and year-to-year variances in contract mix. Cost of service
revenues as a percentage of service revenues increased from 85.1% for the six months ended June 30, 2020, to 87.4% for the six months ended June 30, 2021, primarily driven by an unfavorable change in the Operating FAS/CAS Adjustment, partially offset by improved performance on DFS and nuclear and environmental services and year-to-year variances in contract mix.
Income (Loss) from Operating Investments, Net
The activities of our operating investments are closely aligned with the operations of the segments holding the investments. We therefore record income related to earnings from equity method investments in our operating income.
Income
from operating investments, net for the three and six months ended June 30, 2021, increased $5 million and $7 million, respectively, from the same periods in 2020, primarily due to higher equity income from our ship repair and specialty fabrication joint venture and nuclear and environmental joint ventures.
Other Income and Gains
For the three months ended June 30, 2021, we recognized a loss of $2 million, primarily due to final purchase price adjustment to a gain on the sale of our oil and gas business. For the six months ended June 30, 2021, we recognized a gain of $1 million, primarily due to the sale of our oil and gas business.
General
and Administrative Expenses
In accordance with industry practice and the regulations that govern the cost accounting requirements for government contracts, most general and administrative expenses are considered allowable and allocable costs on government contracts. These costs are allocated to contracts in progress on a systematic basis, and contract performance factors include this cost component as an element of cost.
General and administrative expenses for the three and six months
ended June 30, 2021, decreased $10 million and $18 million, respectively, from the same periods in 2020, primarily driven by favorable changes in current state income tax expense and lower overhead costs.
Operating Income
We consider operating income to be an important measure for evaluating our operating performance, and, consistent with industry practice, we define operating income as revenues less the related cost of producing the revenues and general and administrative expenses.
We internally manage our operations by reference to "segment operating income," which is defined as operating income before the Operating FAS/CAS Adjustment and non-current state income taxes, neither of which affects segment performance. Segment operating
income is not a recognized measure under GAAP. When analyzing our operating performance, investors should use segment operating income in addition to, and not as an alternative for, operating income or any other performance measure presented in accordance with GAAP. It is a measure we use to evaluate our core operating performance. We believe segment operating income reflects an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. We believe the measure is used by investors and is a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income may not be comparable to similarly titled measures of other companies.
The following table reconciles operating income to segment operating income:
Three
Months Ended June 30
Six Months Ended June 30
2021 over 2020
2021 over 2020
($ in millions)
2021
2020
Dollars
Percent
2021
2020
Dollars
Percent
Operating
income
$
128
$
57
$
71
125
%
$
275
$
272
$
3
1
%
Operating
FAS/CAS Adjustment
37
(63)
100
159
%
77
(126)
203
161
%
Non-current
state income taxes
4
1
3
300
%
8
5
3
60
%
Segment
operating income
$
169
$
(5)
$
174
3,480
%
$
360
$
151
$
209
138
%
Segment
Operating Income
Segment operating income for the three months ended June 30, 2021, was $169 million, compared with a segment operating loss of $5 million for the same period in 2020. The increase was primarily due to impacts related to performance on the Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020, a contract incentive on Jack H. Lucas (DDG 125), higher risk retirement on Richard M. McCool Jr. (LPD 29) and Fort Lauderdale (LPD 28), partially offset by lower risk retirement on USS Delbert
D. Black (DDG 119) following its delivery. Segment operating income for the six months ended June 30, 2021, was $360 million, compared with segment operating income of $151 million for the same period in 2020. The increase was primarily due to impacts related to performance on the Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020, higher risk retirement on Bougainville (LHA 8), a contract incentive on Jack H. Lucas (DDG 125), and higher risk retirement on Fort Lauderdale (LPD 28), partially offset by lower risk retirement on USS Delbert
D. Black (DDG 119) following its delivery.
Activity within each segment is discussed in Segment Operating Results below.
FAS/CAS Adjustment and Operating FAS/CAS Adjustment
The FAS/CAS Adjustment reflects the difference between expenses for pension and other postretirement benefits determined in accordance with GAAP ("FAS") and the expenses for these items included in segment operating income in accordance with U.S. Cost Accounting Standards ("CAS"). The Operating FAS/CAS Adjustment excludes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.
Effective
January 1, 2021, we adopted the Safe Harbor methodology used in determining CAS pension costs. Under the new methodology, the interest rates used to calculate pension liabilities under CAS are consistent with
those used in the determination of minimum funding requirements under the Employee Retirement Income Security Act of 1974 ("ERISA").
The components of the Operating FAS/CAS Adjustment were as follows:
Three
Months Ended June 30
Six Months Ended June 30
2021 over 2020
2021 over 2020
($ in millions)
2021
2020
Dollars
Percent
2021
2020
Dollars
Percent
FAS
expense
$
(7)
$
(18)
$
11
61
%
$
(14)
$
(35)
$
21
60
%
CAS
cost
14
111
(97)
(87)
%
27
221
(194)
(88)
%
FAS/CAS
Adjustment
7
93
(86)
(92)
%
13
186
(173)
(93)
%
Non-operating
retirement benefit
(44)
(30)
(14)
(47)
%
(90)
(60)
(30)
(50)
%
Operating
FAS/CAS Adjustment
$
(37)
$
63
$
(100)
(159)
%
$
(77)
$
126
$
(203)
(161)
%
The
Operating FAS/CAS Adjustment was a net expense of $37 million and a net benefit of $63 million for the three months ended June 30, 2021 and 2020, respectively. The Operating FAS/CAS Adjustment was a net expense of $77 million and a net benefit of $126 million for the six months ended June 30, 2021 and 2020, respectively. The unfavorable changes in the Operating FAS/CAS Adjustment of $100 million and $203 million for the three and six
months
ended June 30, 2021, respectively, were primarily driven by the more immediate recognition of higher interest rates under CAS.
Non-current State Income Taxes
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in state unrecognized tax benefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.
Non-current state income tax expense for
the three months ended June 30, 2021, was $4 million, compared to non-current state income tax expense of $1 million for the same period in 2020. The unfavorable change in non-current state income taxes was driven by an increase in deferred state income tax expense, primarily attributable to a decrease in expenses not currently deductible for income tax purposes. Non-current state income tax expense for the six months ended June 30, 2021, was $8 million, compared to non-current state income tax expense of $5 million for the same period in 2020. The unfavorable change in non-current state income taxes was driven by an increase in deferred state income tax expense, primarily attributable to a decrease in expenses not currently deductible for income tax purposes.
Interest Expense
Interest
expense for the three and six months ended June 30, 2021, decreased $7 million and $2 million, respectively, compared with the same periods in 2020, primarily due to the early redemption of our senior notes in the fourth quarter of 2020.
Non-Operating Retirement Benefit
The non-operating retirement benefit includes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects. For the three and six months ended June 30, 2021, the favorable changes in the non-operating retirement benefit of $14 million and $30 million, respectively, were primarily driven by higher 2020 returns on plan assets.
Other,
Net
Other, net income increased $4 million for the three months ended June 30, 2021, compared with the same period in 2020, primarily driven by an impairment of a loan receivable in 2020, partially offset by a decrease in gains on investments in marketable securities. Other, net income increased $18 million for the six months ended June 30, 2021, compared with the same period in 2020, primarily driven by gains on investments in marketable securities and an impairment of a loan receivable in the second quarter of 2020.
Federal and Foreign Income Taxes
Our effective income tax rates on earnings from operations for the three months ended June
30, 2021 and 2020, were 19.9% and 18.5%, respectively. Our effective income tax rates on earnings from operations for the six months ended June 30, 2021 and 2020, were 17.1% and 19.9%, respectively. The higher effective tax rate for the three months ended June 30, 2021, was primarily attributable to research and development tax credits for prior periods recorded in 2020. The lower effective tax rate for the six months ended June 30, 2021, was primarily attributable to a tax loss associated with the sale of our oil and gas business.
For the three months ended June 30, 2021, our effective tax rate differed from
the federal statutory tax rate primarily as a result of the research and development tax credit. For the six months ended June 30, 2021, our effective tax rate differed from the federal statutory tax rate primarily as a result of the tax loss associated with the sale of our oil and gas business. For the three and six months ended June 30, 2020, our effective tax rates differed from the federal statutory tax rate primarily as a result of research and development tax credits for prior periods. See Note 11: Income Taxes.
We are aligned into three reportable segments: Ingalls, Newport News, and Technical Solutions.
The following table presents segment operating results:
Three
Months Ended June 30
Six Months Ended June 30
2021 over 2020
2021 over 2020
($ in millions)
2021
2020
Dollars
Percent
2021
2020
Dollars
Percent
Sales
and Service Revenues
Ingalls
$
670
$
622
$
48
8
%
$
1,319
$
1,251
$
68
5
%
Newport
News
1,363
1,122
241
21
%
2,770
2,463
307
12
%
Technical
Solutions
237
320
(83)
(26)
%
496
637
(141)
(22)
%
Intersegment
eliminations
(39)
(37)
(2)
(5)
%
(76)
(61)
(15)
(25)
%
Sales
and service revenues
$
2,231
$
2,027
$
204
10
%
$
4,509
$
4,290
$
219
5
%
Operating
Income
Ingalls
$
80
$
55
$
25
45
%
$
171
$
123
$
48
39
%
Newport
News
76
(69)
145
210
%
169
26
143
550
%
Technical
Solutions
13
9
4
44
%
20
2
18
900
%
Segment
operating income (loss)
169
(5)
174
3,480
%
360
151
209
138
%
Non-segment
factors affecting operating income (loss)
Operating FAS/CAS Adjustment
(37)
63
(100)
(159)
%
(77)
126
(203)
(161)
%
Non-current
state income taxes
(4)
(1)
(3)
(300)
%
(8)
(5)
(3)
(60)
%
Operating
income
$
128
$
57
$
71
125
%
$
275
$
272
$
3
1
%
KEY
SEGMENT FINANCIAL MEASURES
Sales and Service Revenues
Period-to-period revenues reflect performance under new and ongoing contracts. Changes in sales and service revenues are typically expressed in terms of volume. Unless otherwise described, volume generally refers to increases (or decreases) in reported revenues due to varying production activity levels, delivery rates, or service levels on individual contracts. Volume changes will typically carry a corresponding income change based on the margin rate for a particular contract.
Segment
Operating Income (Loss)
Segment operating income reflects the aggregate performance results of contracts within a segment. Excluded from this measure are certain costs not directly associated with contract performance, such as the Operating FAS/CAS Adjustment and non-current state income taxes. Changes in segment operating income are typically expressed in terms of volume, as discussed above, or performance. Performance refers to changes in contract margin rates. These changes typically relate to profit recognition associated with revisions to estimated costs at completion ("EAC") that reflect improved or deteriorated operating
performance on that contract. Operating income changes are accounted for on a cumulative to date basis at the time an EAC change is recorded. Segment operating income may also be affected by, among other things, contract performance, the effects of workforce stoppages, the effects of natural disasters such as hurricanes, resolution of disputed items with the customer, recovery of insurance proceeds, and other discrete events. At the completion of a long-term contract, any originally estimated costs not incurred or reserves not fully utilized, such as warranty reserves, could also impact contract earnings.
Where such items have occurred and the effects are material, a separate description is provided.
For the three and six months ended June 30, 2021 and 2020, favorable and unfavorable cumulative catch-up margin adjustments were as follows:
Three
Months Ended June 30
Six Months Ended June 30
($ in millions)
2021
2020
2021
2020
Gross favorable adjustments
$
62
$
56
$
148
$
117
Gross
unfavorable adjustments
(27)
(167)
(63)
(196)
Net adjustments
$
35
$
(111)
$
85
$
(79)
For
the three months ended June 30, 2021, favorable cumulative catch-up adjustments included a contract incentive on Jack H. Lucas (DDG 125) and risk retirement on Richard M. McCool Jr. (LPD 29) and Fort Lauderdale (LPD 28). During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.
For the six months ended June 30, 2021, favorable cumulative catch-up adjustments included risk retirement on Bougainville (LHA 8), a contract
incentive on Jack H. Lucas (DDG 125), and risk retirement on Block IV of the Virginiaclass (SSN 774) submarine program and Fort Lauderdale (LPD 28). During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.
For the three months ended June 30, 2020, favorable cumulative catch-up adjustments included risk retirement on USS Delbert D. Black (DDG 119) in connection with its delivery and a capital expenditure contract incentive, and other individually insignificant adjustments. During the same period, unfavorable
cumulative catch-up adjustments were primarily driven by $111 million on the Block IV boats of the Virginia class (SSN 774) submarine program, including $95 million for cost and schedule performance and updates to our assumptions for future program efficiencies and performance as a result of cost and schedule trends. Our risk retirement assumptions on Block IV boats anticipated boat-to-boat cost and schedule improvements working down the learning curve, but performance trends, exacerbated by the COVID-19 Events, made those improvements less likely to occur. Unfavorable cumulative catch-up adjustments on the Block IV boats of the Virginia class (SSN 774) submarine program also included $16 million from delay and disruption directly attributable to COVID-19 Events due to lower employee attendance, shortage of critical skills, and out-of-sequence work. Unfavorable cumulative catch-up
adjustments across all programs resulting from delay and disruption cost estimates for discrete COVID-19 Events were $61 million, including $16 million in relation to the Block IV boats of the Virginia class (SSN 774) submarine program, discussed above.
For the six months ended June 30, 2020, favorable cumulative catch-up adjustments included risk retirement on USS Delbert D. Black (DDG 119) in connection with its delivery and a capital expenditure contract incentive, and risk retirement on the San Antonio class (LPD 17) program. During the same period, unfavorable cumulative catch-up adjustments were primarily driven by the Block
IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events, discussed above for the three months ended June 30, 2020.
Ingalls
Three
Months Ended June 30
Six Months Ended June 30
2021 over 2020
2021 over 2020
($ in millions)
2021
2020
Dollars
Percent
2021
2020
Dollars
Percent
Sales
and service revenues
$
670
$
622
$
48
8
%
$
1,319
$
1,251
$
68
5
%
Segment
operating income
80
55
25
45
%
171
123
48
39
%
As
a percentage of segment sales
11.9
%
8.8
%
13.0
%
9.8
%
Sales and Service Revenues
Ingalls revenues for the three months ended June 30, 2021, increased $48 million, or 8%, from the same period in 2020, primarily driven by higher revenues in surface combatants and amphibious assault ships, partially offset by lower revenues in the Legend class NSC program. Surface combatant revenues increased due to higher volumes
on Jack H. Lucas (DDG 125), Jeremiah Denton
(DDG 129) and Ted Stevens (DDG 128), partially offset by lower volumes on USS Delbert D. Black (DDG 119) following its delivery and USS Fitzgerald (DDG 62) restoration and modernization following its redelivery. Amphibious assault ship revenues increased due to higher volumes on Pittsburgh (LPD 31), LHA 9 (unnamed), and Bougainville (LHA 8), partially offset by lower volume on Fort Lauderdale (LPD 28). Revenues on the Legend class NSC program decreased due to lower volumes on Stone (NSC 9) following its delivery and Calhoun (NSC 10).
Ingalls
revenues for the six months ended June 30, 2021, increased $68 million, or 5%, from the same period in 2020, primarily driven by higher revenues in surface combatants and amphibious assault ships, partially offset by lower revenues in the Legend class NSC program. Surface combatant revenues increased due to higher volumes on Jack H. Lucas (DDG 125), Jeremiah Denton (DDG 129), and George M. Neal (DDG 131), partially offset by lower volumes on USS Fitzgerald (DDG 62) restoration and modernization following its redelivery and USS Delbert D. Black (DDG 119) following its delivery. Amphibious assault ship revenues increased due to higher volumes
on Pittsburgh (LPD 31), Bougainville (LHA 8), and LHA 9 (unnamed), partially offset by lower volumes on Fort Lauderdale (LPD 28) and Richard M. McCool Jr. (LPD 29). Revenues on the Legend class NSC program decreased due to lower volumes on Stone (NSC 9) following its delivery and Calhoun (NSC 10).
Segment Operating Income
Ingalls segment operating income for the three months ended June 30, 2021, was $80 million, compared with $55 million for the same period in 2020. The increase was primarily driven by a contract
incentive on Jack H. Lucas (DDG 125), and higher risk retirement on Bougainville (LHA 8), Richard M. McCool Jr. (LPD 29), and Fort Lauderdale (LPD 28), partially offset by lower risk retirement on USS Delbert D. Black (DDG 119) following its delivery.
Ingalls segment operating income for the six months ended June 30, 2021, was $171 million, compared with $123 million for the same period in 2020. The increase was primarily driven by higher risk retirement on Bougainville (LHA 8), a contract
incentive on Jack H. Lucas (DDG 125), and higher risk retirement on Fort Lauderdale (LPD 28), partially offset by lower risk retirement on USS Delbert D. Black (DDG 119) following its delivery.
Newport News
Three
Months Ended June 30
Six Months Ended June 30
2021 over 2020
2021 over 2020
($ in millions)
2021
2020
Dollars
Percent
2021
2020
Dollars
Percent
Sales
and service revenues
$
1,363
$
1,122
$
241
21
%
$
2,770
$
2,463
$
307
12
%
Segment
operating income (loss)
76
(69)
145
210
%
169
26
143
550
%
As
a percentage of segment sales
5.6
%
(6.1)
%
6.1
%
1.1
%
Sales and Service Revenues
Newport
News revenues for the three months ended June 30, 2021, increased $241 million, or 21%, from the same period in 2020, primarily driven by higher revenues in submarines and aircraft carriers. Submarine revenues increased primarily as a result of higher volumes on Block IV and Block V boats of the Virginia class (SSN 774) submarine program and the Columbia class submarine program. Aircraft carrier revenues increased primarily as a result of higher volumes on Enterprise (CVN 80), the RCOH of USS John C. Stennis (CVN 74), and Doris Miller (CVN 81), partially offset by lower volumes on John F. Kennedy (CVN 79) and the RCOH of USS George
Washington (CVN 73).
Newport News revenues for the six months ended June 30, 2021, increased $307 million, or 12%, from the same period in 2020, primarily driven by higher revenues in submarines and aircraft carriers. Submarine revenues increased primarily as a result of higher volumes on the Columbia class submarine program and the Virginia class (SSN 774) submarine program. The higher volume on the Virginia class (SSN 774) andthe Columbia class submarine program was due to higher volumes on Block IV and Block V boats. Aircraft carrier revenues increased primarily as a result of higher volumes on Enterprise
(CVN 80), the RCOH of USS John C. Stennis (CVN 74), and Doris Miller (CVN 81), partially offset by lower volumes on John F. Kennedy (CVN 79) and the RCOH of USS George Washington (CVN 73).
Newport News segment operating income for the three months ended June 30,
2021, was $76 million, compared with a segment operating loss of $69 million for the same period in 2020. The increase was primarily due to impacts related to performance on the Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020.
Newport News segment operating income for the six months ended June 30, 2021, was $169 million, compared with segment operating income of $26 million for the same period in 2020. The increase was primarily due to impacts related to performance on the Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020.
Technical
Solutions
Three
Months Ended June 30
Six Months Ended June 30
2021 over 2020
2021 over 2020
($ in millions)
2021
2020
Dollars
Percent
2021
2020
Dollars
Percent
Sales
and service revenues
$
237
$
320
$
(83)
(26)
%
$
496
$
637
$
(141)
(22)
%
Segment
operating income
13
9
4
44
%
20
2
18
900
%
As
a percentage of segment sales
5.5
%
2.8
%
4.0
%
0.3
%
Sales and Service Revenues
Technical
Solutions revenues for the three months ended June 30, 2021, decreased $83 million, or 26%, from the same period in 2020, primarily due to the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture, as well as lower volumes in unmanned systems, partially offset by increased volumes in DFS.
Technical Solutions revenues for the six months ended June 30, 2021, decreased $141 million, or 22%, from the same period in 2020, primarily due to the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture, partially offset by the acquisition of Hydroid in March 2020 and higher volumes in DFS.
Segment Operating Income
Technical
Solutions segment operating income for the three months ended June 30, 2021, was $13 million, compared with segment operating income of $9 million for the same period in 2020. The increase was primarily driven by higher equity income in our ship repair and specialty fabrication joint venture and improved performance on DFS services and nuclear and environmental services, partially offset by lower volume in unmanned systems.
Technical Solutions segment operating income for the six months ended June 30, 2021, was $20 million, compared with segment operating income of $2 million for the same period in 2020. The increase was primarily driven by higher equity income in our ship repair and specialty fabrication joint venture and improved performance in DFS services and nuclear and environmental services, partially
offset by lower volume in unmanned systems.
BACKLOG
Total backlog as of June 30, 2021, and December 31, 2020, was approximately $47.7 billion and $46.0 billion, respectively. Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer). Backlog excludes unexercised contract options and unfunded IDIQ orders. For contracts
having no stated contract values, backlog includes only the amounts committed by the customer.
Approximately
16% of the $46.0 billion total backlog as of December 31, 2020, is expected to be converted into sales in 2021. U.S. Government orders comprised substantially all of the backlog as of June 30, 2021, and December 31, 2020.
Awards
The value of new contract awards during the six months ended June 30, 2021, was approximately $6.5 billion, comprised primarily of awards for the RCOH of the USS John C. Stennis (CVN 74), construction of a 10th boat of the Virginia class (SSN
774) submarine program, and construction of John F. Lehman (DDG 137) and Thad Cochran (DDG 135).
LIQUIDITY AND CAPITAL RESOURCES
We seek to efficiently convert operating results into cash for deployment in operating our businesses, implementing our business strategy, and maximizing stockholder value. We use various financial measures to assist in capital deployment decision making, including net cash provided by operating activities and free cash flow. We believe these measures are useful to investors in assessing our financial performance.
The following table summarizes
key components of cash flow provided by operating activities:
Six Months Ended June 30
2021 over 2020
($
in millions)
2021
2020
Dollars
Net earnings
$
277
$
225
$
52
Depreciation
and amortization
131
121
10
Provision for doubtful accounts
—
6
(6)
Stock-based
compensation
12
13
(1)
Deferred income taxes
31
21
10
Loss
(gain) on investments in marketable securities
(12)
5
(17)
Retiree benefit funding less than (in excess of) expense
(70)
(50)
(20)
Trade
working capital decrease (increase)
(230)
(72)
(158)
Net cash provided by operating activities
$
139
$
269
$
(130)
Cash
Flows
We discuss below our significant operating, investing, and financing activities affecting cash flows for the six months ended June 30, 2021 and 2020, as classified on our unaudited condensed consolidated statements of cash flows.
Operating Activities
Cash provided by operating activities for the six months ended June 30, 2021, was $139 million, compared with $269 million provided by operating activities for the same period in 2020. The unfavorable change in operating cash flow was primarily due to changes in trade working capital. The change in trade working capital was primarily driven by the timing of receipts of accounts receivable
and payments of accounts payable.
For the six months ended June 30, 2021, we made discretionary contributions to our qualified defined benefit pension plans totaling $60 million, compared with $65 million of discretionary contributions for the same period in 2020. As of June 30, 2021, we anticipate no further significant cash contributions to our qualified defined benefit pension plans in 2021.
We expect cash generated
from operations in combination with our current cash and cash equivalents, as well as existing credit facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and finance capital expenditures for at least the next 12 months.
Investing Activities
Cash used in investing activities for the six months ended June 30, 2021, was $134 million, compared with $519 million used in investing activities for the same period in 2020. The change in investing cash was driven by the acquisition of Hydroid in 2020, disposition of our oil and gas business in 2021, and lower capital expenditures in 2021, partially offset by the acquisition of a non-controlling interest in Titan in 2021. For 2021, we expect our capital expenditures for maintenance and sustainment to be approximately
1.0% of annual revenues and our discretionary capital expenditures to be approximately 2.0 % to 3.0% of annual revenues.
Financing Activities
Cash used in financing activities for the six months ended June 30, 2021, was $169 million, compared with $806 million provided by financing activities for the same period in 2020. The change in financing cash was primarily due to receipt of net proceeds from the issuance of $1 billion of long-term debt in 2020 and an $8 million increase in cash dividend payments, partially offset by a decrease of $14 million from common stock repurchases and a decrease of $6 million in employee taxes on certain share-based payment arrangements.
Free Cash Flow
Free
cash flow represents cash provided by (used in) operating activities less capital expenditures net of related grant proceeds. Free cash flow is not a measure recognized under GAAP. Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. We believe free cash flow is an important liquidity measure for our investors because it provides them insight into our current and period-to-period performance and our ability to generate cash from continuing operations. We also use free cash flow as a key operating metric in assessing the performance of our business and as a key performance measure in evaluating management performance and determining incentive compensation. Free cash flow may not be comparable to similarly titled measures of other companies.
The following table reconciles net cash provided
by operating activities to free cash flow:
Six Months Ended June 30
2021 over 2020
($ in millions)
2021
2020
Dollars
Net
cash provided by operating activities
$
139
$
269
$
(130)
Less capital expenditures:
Capital expenditure additions
(134)
(150)
16
Grant
proceeds for capital expenditures
2
9
(7)
Free cash flow
$
7
$
128
$
(121)
Free
cash flow for the six months ended June 30, 2021, decreased $121 million from the same period in 2020, primarily due to higher contributions to retiree benefit plans and changes in trade working capital, partially offset by lower capital expenditures.
Governmental Regulation and Supervision
The U.S. Government has the ability, pursuant to regulations relating to contractor business systems, to decrease or withhold contract payments if it determines significant deficiencies exist in one or more such systems. As of June
30, 2021 and 2020, the cumulative amounts of payments withheld by the U.S. Government under our contracts subject to these regulations were not material to our liquidity or cash flows.
Other Sources and Uses of Capital
In August 2021, we entered into a $400 million 364-day delayed draw term loan and a $650 million 3-year delayed draw term loan to finance a portion of the purchase price for Alion. Commitments under the 364-day facility, but not the 3-year facility, are subject to mandatory reduction upon the occurrence of certain events specified in the term loan credit agreement, including certain debt and equity issuances. Neither term loan
requires principal amortization payments and each must be repaid prior to or at maturity, which is 364 days and 36 months, respectively, from the date of the initial draw. Each term loan has a variable interest rate on outstanding borrowings based on LIBOR, plus a spread based upon our credit rating, which may vary between 1.125% and 2.000%. The current interest rate on drawn amounts would be 1.375% based on our current credit rating. The term loans also have a commitment fee rate on unutilized amounts, currently 0.20%, which will begin accruing on September 2, 2021.
In August 2021, we also amended and restated our existing $1.25 billion Credit Facility, increasing the capacity thereunder to $1.5 billion and extending the maturity date to five years from signing. The amended and restated revolving credit facility has a variable interest rate on outstanding
borrowings based on LIBOR, plus a spread based upon our credit rating, which may vary between 1.125% and 2.000%. The current interest on drawn amounts would be 1.375% based on our current credit rating. The amended and restated revolving credit facility also has a commitment fee rate on unutilized amounts, currently 0.20%.
Off-Balance Sheet Arrangements
In the ordinary course of business, we use letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support our self-insured workers' compensation plans. As of June 30, 2021, $15 million in letters of credit were issued but undrawn and $276 million of surety bonds were outstanding. As of June
30, 2021, we had no other significant off-balance sheet arrangements.
ACCOUNTING STANDARDS UPDATES
See Note 3: Accounting Standards Updates in Part I, Item 1 for information related to accounting standards updates.
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
Statements in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission ("SEC"), as well as other statements we may make from time to time, other than
statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Factors that may cause such differences include:
•Changes in government and customer priorities and requirements (including government budgetary constraints, shifts in defense spending, and changes in customer short-range and long-range plans);
•Our ability to estimate our future contract costs and perform our contracts
effectively;
•Changes in procurement processes and government regulations and our ability to comply with such requirements;
•Our ability to deliver our products and services at an affordable life cycle cost and compete within our markets;
•Natural and environmental disasters and political instability;
•Our ability to execute our strategic plan, including with respect to share repurchases, dividends, capital expenditures, and strategic acquisitions;
•Adverse economic conditions in the United States and globally;
•Health epidemics, pandemics and similar outbreaks, including
the COVID-19 pandemic;
•Our ability to complete the acquisition of Alion Science and Technology and integrate its operations into our business;
•Changes in key estimates and assumptions regarding our pension and retiree health care costs;
•Security threats, including cyber security threats, and related disruptions; and
•Other risk factors discussed herein and in our other
filings with the SEC.
There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business, and we undertake no obligation to update or revise any forward-looking statements. You should not place undue reliance on any forward looking statements that we may make.
Included below are brief descriptions of some of the programs discussed in this Quarterly Report on Form 10-Q.
Program Name
Program Description
America class (LHA 6) amphibious assault ships
Design and build large deck amphibious assault ships that provide forward presence and power projection as an
integral part of joint, interagency and multinational maritime expeditionary forces. The America class (LHA 6) ships, together with the Wasp class (LHD 1) ships, are the successors to the decommissioned Tarawa class (LHA 1) ships. The America class (LHA 6) ships optimize aviation operations and support capabilities. We delivered USS Tripoli (LHA 7) in February 2020, and we are currently constructing Bougainville (LHA 8).
Arleigh Burke class (DDG 51) destroyers
Build
guided missile destroyers designed for conducting anti-air, anti-submarine, anti-surface, and strike operations. The Aegis-equipped Arleigh Burke class (DDG 51) destroyers are the U.S. Navy's primary surface combatant, and have been constructed in variants, allowing technological advances during construction. In 2019 we delivered USS Paul Ignatius (DDG 117), and in 2020 we delivered USS Delbert D. Black (DDG 119). We have contracts to construct the following Arleigh Burke class (DDG 51) destroyers: Frank E. Petersen Jr. (DDG 121), Lenah H. Sutcliffe Higbee (DDG 123), Jack
H. Lucas (DDG 125), Ted Stevens (DDG 128), Jeremiah Denton (DDG 129), George M. Neal (DDG 131), Sam Nunn (DDG 133), Thad Cochran (DDG 135), and John F. Lehman (DDG 137).
Carrier RCOH
Perform refueling and complex overhaul ("RCOH") of nuclear-powered aircraft carriers, which is required at the mid-point of their 50-year life cycle. USS George Washington
(CVN 73) arrived at Newport News for the start of its RCOH in August 2017 and USS John C. Stennis (CVN 74) arrived at Newport News for the start of its RCOH in May 2021.
Columbia class (SSBN 826) submarines
Newport News is participating in designing the Columbia class submarine as a replacement for the current aging Ohio class nuclear ballistic missile submarines, which were first introduced into service in 1981. The Ohio class SSBN includes 14 nuclear ballistic missile submarines
and four nuclear cruise missile submarines. The Columbia class program plan of record is to construct 12 new ballistic missile submarines. The U.S. Navy has initiated the design process for the new class of submarines, and, in early 2017, the DOD signed the acquisition decision memorandum approving the Columbia class program’s Milestone B, which formally authorizes the program’s entry into the engineering and manufacturing development phase. We perform design work as a subcontractor to Electric Boat, and we have entered into a teaming agreement with Electric Boat to build modules for the entire Columbia class (SSBN 826) submarine program that leverages our Virginia class (SSN 774) experience. We have been awarded contracts
from Electric Boat for integrated product and process development, providing long–lead–time material and advance construction, and construction of the first two boats of the Columbia class (SSBN 826) program. Construction of the first Columbia class (SSBN 826) submarine began in 2020.
Defense and federal solutions
DFS is focused on solving tough national security challenges for the DoD, the intelligence community, and federal civilian agencies around the globe. The group’s expertise includes intelligence, surveillance, and reconnaissance; cyber operations; secure enterprise information technology engineering and operations; advanced modeling, simulation, and training; logistics management and maritime fleet sustainment.
USS Gerald R. Ford class (CVN 78) aircraft carriers
Design and construction for the Ford class program, which is the aircraft carrier replacement program for the decommissioned Enterprise (CVN 65) and Nimitz class (CVN 68) aircraft carriers. USS Gerald R. Ford (CVN 78),
the first ship of the Ford class, was delivered to the U.S. Navy in the second quarter of 2017. In June 2015, we were awarded a contract for the detail design and construction of John F. Kennedy (CVN 79), following several years of engineering, advance construction, and purchase of long-lead time components and material. In addition, we have received awards for detail design and construction of Enterprise (CVN 80) and Doris Miller (CVN 81). This category also includes the class' non-recurring engineering. The class is expected to bring improved warfighting capability, quality of life improvements for sailors, and reduced life cycle costs.
Legend
class National Security Cutter
Design and build the U.S. Coast Guard's National Security Cutters ("NSCs"), the largest and most technically advanced class of cutter in the U.S. Coast Guard. The NSC is equipped to carry out maritime homeland security, maritime safety, protection of natural resources, maritime mobility, and national defense missions. The plan is for a total of 11 ships, of which the first nine ships have been delivered. Calhoun (NSC 10) and Friedman (NSC 11) are currently under construction.
Naval nuclear support services
Provide
services to and in support of the U.S. Navy, ranging from services supporting the Navy's carrier and submarine fleets to maintenance services at U.S. Navy training facilities. Naval nuclear support services include design, construction, maintenance, and disposal activities for in service U.S. Navy nuclear ships worldwide through mobile and in-house capabilities. Services include maintenance services on nuclear reactor prototypes.
Nuclear and environmental services
Provide services in nuclear management and operations, including site management, nuclear and industrial facilities operations and maintenance, decontamination and decommissioning, radiological and hazardous waste management services, and technical engineering services. We participate
in several joint ventures, including Newport News Nuclear BWXT Los Alamos, LLC (" N3B"), Mission Support and Test Services, LLC ("MSTS"), and Savannah River Nuclear Solutions, LLC ("SRNS"), and we are an integrated subcontractor to Triad National Security. N3B was awarded the Los Alamos Legacy Cleanup Contract at the DoE/National Nuclear Security Administration’s Los Alamos National Laboratory. MSTS was awarded a contract for site management and operations at the Nevada National Security Site. SRNS provides site management and operations at the DoE’s Savannah River Site near Aiken, South Carolina. Triad provides site management and operations at the DoE’s Los Alamos National Laboratory.
San Antonio
class (LPD 17) amphibious transport dock ships
Design and build amphibious transport dock ships, which are warships that embark, transport, and land elements of a landing force for a variety of expeditionary warfare missions, and also serve as the secondary aviation platform for Amphibious Readiness Groups. The San Antonio class (LPD 17) is the newest addition to the U.S. Navy's 21st century amphibious assault force, and these ships are a key element of the U.S. Navy's seabase transformation. We are currently constructing Fort Lauderdale (LPD 28), Richard M. McCool Jr. (LPD 29), and Harrisburg (LPD 30). In 2020 we were awarded a contract
to construct Pittsburgh (LPD 31).
Unmanned systems
Our unmanned systems products and services create advanced unmanned maritime solutions for defense, marine research, and commercial applications. Serving customers in more than 30 countries, unmanned systems provides design, autonomy, manufacturing, testing, operations, and sustainment of unmanned systems, including unmanned underwater vehicles and unmanned surface vessels.
Construct attack submarines as the principal subcontractor to Electric Boat. The Virginia class (SSN 774) is a post-Cold War design tailored to excel in a wide range of warfighting missions, including anti-submarine and surface ship warfare; special operation forces; strike; intelligence, surveillance, and reconnaissance; carrier and expeditionary strike group support; and mine warfare.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk, primarily related to interest rates and foreign currency exchange rates.
Interest Rates - Our financial instruments subject to interest rate risk include commercial paper and floating rate borrowings under our credit facility. As of June 30, 2021, our $1,250 million revolving credit facility was undrawn, and we had no outstanding commercial paper indebtedness.
Foreign Currency - We currently have, and in the future may enter into,
foreign currency forward contracts to manage foreign currency exchange rate risk related to payments to suppliers denominated in foreign currencies. As of June 30, 2021, the fair values of our outstanding foreign currency forward contracts were not significant.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company's management,
with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of June 30, 2021. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2021, the Company's disclosure controls and procedures were effective to ensure that
information required to be disclosed in reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) accumulated and communicated to management to allow their timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2021, no change occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
We have provided information about legal proceedings in which we are involved in the unaudited condensed consolidated financial statements in Part I, Item 1, which is incorporated herein by reference. In addition to the matters disclosed in Part I, Item 1, we are a party to various investigations, lawsuits, claims, and other legal proceedings that arise in the ordinary course of our business. Based on information available to us, we do not believe
at this time that any of such other matters will individually, or in the aggregate, have a material adverse effect on our financial condition, results of operations, or cash flows. For further information on the risks we face from existing and future investigations, lawsuits, claims, and other legal proceedings, please see "Risk Factors" in Item 1A below.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10–Q, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in the 2020 Form 10–K, which could materially affect our business, financial condition, or future results.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases under our stock repurchase program are made from time to time at management's discretion in accordance with applicable federal securities laws. All repurchases of HII common stock have been recorded as treasury stock. The following table summarizes information relating to purchases made by or on behalf of the Company of shares of the Company's common stock during the quarter ended June 30, 2021.
Period
Total
Number of Shares Purchased1
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (in millions)2, 3
1We
purchased an aggregate of 94,882 shares of our common stock in the open market pursuant to our repurchase program and 575 shares were transferred to us from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted performance stock rights during the period.
2 From the stock repurchase program's inception through June 30, 2021, we purchased 13,237,323 shares at an average price of $160.75 per share for a total of $2.1 billion.
3 In October 2012, we commenced our stock repurchase program. In November 2019, we announced an increase in the stock repurchase program to $3.2 billion and an extension of the term to October 31, 2024.
Item
3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
None.
Item 5.Other Information
Amended and Restated Revolving Credit Facility
On August 2, 2021,
we entered into an Amended and Restated Credit Agreement (as so amended and restated, the “Amended and Restated Revolving Credit Facility”) with the lenders party thereto, JPMorgan Chase Bank, N.A., as
administrative agent and an issuing bank, and certain other issuing banks. Our Amended and Restated Revolving Credit Facility is comprised of a revolving credit facility of $1.50 billion, which may be drawn upon during a period of five years from the date thereof. It also includes a letter of credit subfacility of $300 million. In addition, our Amended and Restated Revolving Credit Facility permits
us to solicit lenders to provide incremental revolving loan commitments and/or new tranches of term loans in an aggregate amount not to exceed $1.0 billion.
Guarantors - Each of our existing and future material wholly owned domestic subsidiaries, except those that are specifically designated as unrestricted subsidiaries or immaterial subsidiaries, are and will be guarantors under the Amended and Restated Revolving Credit Facility.
Interest Rates - The Amended and Restated Revolving Credit Facility has a variable interest rate on
outstanding borrowings, which is generally based on LIBOR, plus a spread based upon our credit rating, which may vary between 1.125% and 2.000%. It also has a commitment fee rate on the unutilized balance based upon our credit rating. The commitment fee rate, currently 0.200%, may vary between 0.125% and 0.300%.
Covenants - Our Amended and Restated Revolving Credit Facility requires that we comply with customary affirmative covenants, including, but not limited to, those related to our maintaining our corporate existence, complying with applicable laws, payment of lawful obligations, maintaining books and records, maintenance of property, designation of subsidiaries and our maintaining a separate existence between us and our wholly owned subsidiary Titan II Inc. Our Amended and Restated Revolving
Credit Facility also includes customary negative covenants, which include, but are not limited to, limitations on incurrence of indebtedness by non-guarantor subsidiaries, liens, sale and leaseback transactions, fundamental changes, dividends and activities of Titan II Inc., and it requires that we not exceed a maximum total leverage ratio.
Events of Default - Our Amended and Restated Revolving Credit Facility contains customary events of default and remedies provisions.
The administrative agent, issuing banks, and lenders, together with their affiliates, are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management,
investment research, principal investment, hedging, financing and brokerage activities. The administrative agent, issuing banks, and lenders and/or their affiliates have, from time to time, performed, or may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses.
The foregoing description of the Amended and Restated Revolving Credit Facility is qualified in its entirety by reference to the Amended and Restated Credit Agreement, a copy of which is attached hereto as Exhibit 10.1 and incorporated herein by reference.
Term Loan Credit Facility
On August
2, 2021, we entered into a Credit Agreement (the "Term Loan Credit Facility") with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. Our Term Loan Credit Facility is comprised of an unsecured term loan credit facility with commitments in an aggregate principal amount of $1.05 billion consisting of (i) commitments for a 3-year tranche of term loans in an aggregate principal amount equal to $650 million (the “3-Year Tranche”) and (ii) commitments for a 364-day tranche in an aggregate principal amount equal to $400 million (the “364-DayTranche”). The 3-Year Tranche will mature on the date that is three years from the date of funding of the term loans under the Term Loan Credit Facility, and the 364-Day Tranche will mature on the date that is 364 days from the date of funding of the term loans under the Term Loan Credit Facility. The amount committed under the 364-Day
Tranche is subject to mandatory reductions upon the occurrence of certain events specified in the Term Loan Credit Facility and is expected to be reduced on a dollar for dollar basis with the net proceeds of this offering. No loans have been advanced under the Term Loan Credit Facility. The substantially concurrent consummation of the acquisition of Alion is a condition to funding under the Term Loan Credit Facility.
Guarantors - Each of our existing and future material wholly owned domestic subsidiaries, except those that are specifically designated as unrestricted subsidiaries or immaterial subsidiaries, are
and will be guarantors under the Term Loan Credit Facility.
Interest Rates - The Term Loan Credit Facility has a variable interest rate on outstanding borrowings, which is generally based on LIBOR, plus a spread based upon our credit rating, which may vary between 1.125% and
2.000%. We have agreed to pay a ticking fee under the Term Loan Credit Facility in respect of the unutilized commitments for each tranche thereunder at a rate ranging from 0.125% to 0.300% per annum based upon our credit rating. The ticking fee accrues
beginning September 2, 2021 and continuing until the earlier of the termination or expiration of the commitments under the applicable tranche of the Term Loan Credit Facility and the closing date of the acquisition of Alion.
Covenants -Our Term Loan Credit Facility requires that we comply with customary affirmative covenants, including, but not limited to, those related to our maintaining our corporate existence, complying with applicable laws, payment of lawful obligations, maintaining books and records, maintenance of property, designation of subsidiaries and our maintaining a separate existence between us and our wholly owned subsidiary Titan II Inc. Our Term Loan Credit Facility also includes customary negative covenants,
which include, but are not limited to, limitations on incurrence of indebtedness by non-guarantor subsidiaries, liens, sale and leaseback transactions, fundamental changes, dividends and activities of Titan II Inc., and it requires that we not exceed a maximum total leverage ratio.
Events of Default -Our Term Loan Credit Facility contains customary events of default and remedies provisions.
The administrative agent and lenders, together with their affiliates, are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing, and
brokerage activities. The administrative agent and lenders and/or their affiliates have, from time to time, performed, or may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses.
The foregoing description of the Term Loan Credit Facility is qualified in its entirety by reference to the Credit Agreement, a copy of which is attached hereto as Exhibit 10.2 and incorporated herein by reference.
The
following financial information for the Company, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations and Comprehensive Income, (ii) the Condensed Consolidated Statements of Financial Position, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Changes in Equity, and (v) the Notes to Condensed Consolidated Financial Statements.
104
The cover page from the Company’s Quarterly Report on Form 10-Q, formatted in Inline XBRL and contained in
Exhibit 101.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.