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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; i53.5 million shares issued and i40.1 million shares outstanding as of March 31, 2022, and 53.4 million shares issued and 40.0 million shares outstanding
as of December 31, 2021
i1
i1
Additional
paid-in capital
i1,995
i1,998
Retained
earnings
i3,982
i3,891
Treasury
stock
(i2,169)
(i2,159)
Accumulated
other comprehensive loss
(i987)
(i923)
Total
stockholders’ equity
i2,822
i2,808
Total
liabilities and stockholders’ equity
$
i10,557
$
i10,627
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 an all-domain defense and technologies partner, recognized worldwide as America’s largest shipbuilder. HII is organized into ithree reportable segments: Ingalls Shipbuilding ("Ingalls"), Newport News Shipbuilding ("Newport News"), and Mission Technologies (formerly named 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 Mission Technologies segment delivers high-value engineering and technology solutions to enable multi-domain distributed operations in the government and commercial services marketplace.
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 Mission Technologies segment provides a wide range of services and products, including C5ISR systems and operations; the application of Artificial Intelligence and machine learning to battlefield decisions; defense and offensive cyberspace strategies and electronic warfare; unmanned autonomous systems; live, virtual, and constructive solutions; platform modernization; and critical nuclear operations.
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, 2021.
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.
iAccounting 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.
i
Fair 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 $i216 million and $i220
million as of March 31, 2022, and December 31, 2021, 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.
The
estimated fair values of the Company's total long-term debt as of March 31, 2022, and December 31, 2021, were $i3,184 million and $i3,449
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.
iDebt Prepayment - For the three months ended March 31, 2022, the
Company prepaid $i100 million of long-term debt related to its Term Loan due August 19, 2024./
3. iACCOUNTING
STANDARDS UPDATES
Accounting pronouncements issued but not effective until after December 31, 2022, are not expected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
4. iACQUISITIONS
On
August 19, 2021, the Company acquired all of the outstanding common stock of Alion Holding Corp., the parent company of Alion Science and Technology Corporation (“Alion”), a technology-driven solutions provider. The Company accounted for the transaction as a business combination using the acquisition method of accounting in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805 Business Combinations. The preliminary purchase price was $i1.79
billion, including $i148 million of cash received in the acquisition. In connection with the acquisition, the Company recorded $i1,024
million of goodwill, which included the value of Alion's workforce, and $i720 million of intangible assets related to customer relationships and existing contract backlog. The goodwill is attributable to operational synergies and growth opportunities and was allocated to the
Company's Mission Technologies segment. None of the goodwill resulting from this acquisition is expected to be amortizable for tax purposes.
Alion provides advanced engineering and research and development services in the areas of intelligence, surveillance, and reconnaissance, military training and simulation, cyber, data analytics, and other next-generation technology based solutions to the DoD and intelligence community customers, with the U.S. Navy representing about one-third of current annual revenues.
Pro Forma Financial Information
i
The
following unaudited consolidated pro forma summary has been prepared by adjusting the Company's historical data to give effect to the acquisition of Alion as if it had occurred on January 1, 2021.
Three Months Ended March 31
($
in millions, except per share amounts)
2022
Pro Forma (Unaudited) 2021
Sales and service revenues
$
i2,576
$
i2,593
Net
earnings
$
i140
$
i160
Basic
earnings per share
$
i3.50
$
i3.98
Diluted
earnings per share
$
i3.50
$
i3.98
/
These
unaudited pro forma results include adjustments associated with the acquisition, such as the amortization of acquired intangible assets and interest expense on debt financing.
The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.
The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition date, including, but not limited to, the anticipated realization of operating synergies in subsequent periods. These
results also do not give effect to certain charges that the Company expects to incur in connection with the acquisition, including, but not limited to, additional professional fees and employee integration.
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 three months ended March 31, 2022, the Company repurchased i50,549 shares at an aggregate cost of $i10
million. For the three months ended March 31, 2021, the Company repurchased i291,581 shares at an aggregate cost of $i50
million, of which approximately $i1 million was not yet settled for cash as of March 31, 2021. 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 $i1.18
and $i1.14 for the three months ended March 31, 2022 and 2021, respectively. The Company paid cash dividends totaling $i47
million and $i46 million for the three months ended March 31, 2022 and 2021, 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 March
31, 2022, was comprised of unamortized benefit plan costs of $i987 million. The accumulated other comprehensive loss as of December 31, 2021, was comprised of unamortized benefit plan costs of $i923
million.
iThe changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2022 and 2021, were as follows:
1
These accumulated comprehensive loss components are included in the computation of net periodic benefit cost. See Note 14: Employee Pension and Other Postretirement Benefits. The tax benefit associated with amounts reclassified from accumulated other comprehensive loss for the three months ended March 31, 2022 and 2021, was $i3 million and $i7
million, respectively.
iBasic
and diluted earnings per common share were calculated as follows:
Three Months Ended March 31
(in millions, except per share amounts)
2022
2021
Net
earnings
$
i140
$
i148
Weighted-average
common shares outstanding
i40.0
i40.2
Net
dilutive effect of stock awards
—
—
Dilutive
weighted-average common shares outstanding
i40.0
i40.2
Earnings
per share - basic
$
i3.50
$
i3.68
Earnings
per share - diluted
$
i3.50
$
i3.68
/
Under
the treasury stock method, the Company has excluded from the diluted share amounts presented above the effects of i0.4 million Restricted Performance Stock Rights ("RPSRs") for each of the three months endedMarch 31, 2022 and 2021.
7.
iREVENUE
Disaggregation of Revenue
The Company's contracts with customers typically fall into one of four categories: firm fixed-price, fixed-price incentive, cost-type, and time and materials.
•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.
The Company monitors its policies and procedures with respect to its 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 ("DCAA") routinely audits the costs the Company incurs that are allocated to U.S. Government contracts.
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 March 31, 2022, the Company had $i47.9 billion of remaining performance obligations. The Company expects to recognize approximately i35%
of its remaining performance obligations as revenue through 2023, an additional i30% through 2025, and the balance thereafter.
Cumulative Catch-up Adjustments
For the three months ended March 31, 2022, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $i45
million and $i0.89, respectively. For the three months ended March 31, 2021, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $i50
million and $i0.98, respectively.
Cumulative catch-up adjustments for the three months ended March 31, 2022, included a favorable adjustment of $i17
million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $i0.34. Cumulative catch-up adjustments for the three months ended March 31, 2021, included a favorable adjustment of $i25
million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $i0.50.
The Company is organized into ithree
reportable segments: Ingalls, Newport News, and Mission Technologies, consistent with how management makes operating decisions and assesses performance.
iThe following table presents segment results
for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31
($ in millions)
2022
2021
Sales
and Service Revenues
Ingalls
$
i631
$
i649
Newport
News
i1,390
i1,407
Mission
Technologies
i590
i259
Intersegment
eliminations
(i35)
(i37)
Sales
and service revenues
$
i2,576
$
i2,278
Operating
Income
Ingalls
$
i86
$
i91
Newport
News
i81
i93
Mission
Technologies
i9
i7
Segment
operating income
i176
i191
Non-segment
factors affecting operating income
Operating FAS/CAS Adjustment
(i37)
(i40)
Non-current
state income taxes
(i1)
(i4)
Operating
income
$
i138
$
i147
/
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.
iThe following table presents the Company's assets by segment:
1
Includes amounts capitalized pursuant to applicable provisions of the FAR and CAS.
/
10. iINTANGIBLE ASSETS
The
Company's intangible assets are being 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 customer relationships and existing contract backlog within Mission Technologies, as well as nuclear-powered aircraft carrier and submarine program intangible assets, with an aggregate weighted-average useful life of i29 years based on the long life cycle
of the related programs. Aggregate amortization expense was $i35 million and $i13 million for the three months ended March
31, 2022 and 2021, respectively.
In connection with the Alion purchase in 2021, the Company recorded $i720
million of intangible assets pertaining to customer relationships and existing contract backlog, which is being amortized using the pattern of benefits method over a weighted-average life of i15 years.
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 March 31, 2022 and 2021, were i20.5% and i14.5%,
respectively. The higher effective tax rate for the three months ended March 31, 2022, was primarily attributable to a tax loss associated with the sale of the Company’s oil and gas business recorded in 2021.
For the three months ended March 31, 2022, the Company’s effective tax rate did not differ materially from the federal statutory corporate income tax rate of i21%.
For the three months ended March 31, 2021, the Company’s effective tax rate differed from the federal statutory tax rate primarily as a result of the loss associated with the sale of its oil and gas business.
The Company's unrecognized tax benefits increased by $i2
million during the three months ended March 31, 2022. As of March 31, 2022, the estimated amounts of the Company's unrecognized tax benefits, excluding interest and penalties, were liabilities of $i83 million. Assuming a sustainment of these tax positions, the reversal of $i64
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 months ended March 31, 2022, interest resulting from the unrecognized tax benefits noted above increased income tax expense by $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.
12. 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 ASC 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 in September 2021, and the plaintiff has appealed the dismissal to the United States Court of Appeals for the 11th Circuit.
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. In July 2021, the Vermont court granted the reinsurers’ motion for judgment on the pleadings, 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 to the Vermont Supreme Court. Although the Company still believes its position is well-founded, no assurances can be provided regarding the ultimate resolution of this matter.
In September 2021, the Company filed a complaint in the Superior Court of Delaware, seeking a judgment against certain insurers for breach of contract and breach of the implied covenant of good faith and fair dealing under three representations and warranties insurance policies purchased in connection with the
Company’s acquisition of Hydroid. The policies insure the Company against losses relating to the seller’s breach of certain representations and warranties in the Hydroid acquisition agreement. The coverage limit under the insurance policies is $i70 million, and the Company believes it has incurred losses equal to at least that amount as a result
of breaches of the acquisition agreement. 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 three months ended March 31, 2022 and 2021, 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 - 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.
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 March 31, 2022, 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 March 31, 2022, 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 March 31, 2022, 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 or the Company incurs additional remediation obligations 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 March 31, 2022, the Company had $i15
million in issued but undrawn letters of credit 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 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. Under the 1985 settlement agreement, the Company has not recognized as allowable cumulative billable costs of approximately $i120 million resulting from 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.
In January 2022, the Navy Contracting Officer issued a written determination that the Ingalls Shipbuilding Material Management and Accounting System had three significant deficiencies, resulting in a i5% withhold of payments on certain invoices issued under one contract. Ingalls Shipbuilding subsequently submitted a corrective action plan, which was approved in February 2022, and the withhold was reduced to i2%.
The withhold will terminate and withheld funds returned to the Company when the Contracting Officer determines that the significant deficiencies have been corrected. Although the Company believes the ultimate resolution of this matter will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict or give assurances regarding the ultimate outcome of this matter.
Collective Bargaining Agreements - Of the Company's approximately i44,000
employees, approximately i45% are covered by a total of inine collective bargaining agreements and ione
site stabilization agreement. Newport News has ithree collective bargaining agreements covering represented employees, including ione with United
Steelworkers Local 8888 (Newport News) (the “USWs”), which covers approximately i50% of Newport News employees. The collective bargaining agreement with the USWs expired in November 2021, and the Company reached a tentative agreement with representatives of the USWs in February 2022. The members of the USWs bargaining unit ratified the contract in March
2022. The Company believes its relationship with its employees is satisfactory.
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.
14.
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 months ended March 31, 2022 and 2021, were as follows:
Three
Months Ended March 31
Pension Benefits
Other Benefits
($ in millions)
2022
2021
2022
2021
Components
of Net Periodic Benefit Cost
Service cost
$
i45
$
i50
$
i2
$
i3
Interest
cost
i64
i60
i4
i3
Expected
return on plan assets
(i150)
(i138)
—
—
Amortization
of prior service cost (credit)
i4
i4
(i1)
(i1)
Amortization
of net actuarial loss (gain)
i9
i27
(i1)
(i1)
Net
periodic benefit (income) cost
$
(i28)
$
i3
$
i4
$
i4
/
iThe
Company made the following contributions to its defined benefit pension plans and other postretirement benefit plans for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31
($ in millions)
2022
2021
Pension
plans
Discretionary
Qualified
$
—
$
i60
Non-qualified
i3
i2
Other
benefit plans
i7
i10
Total
contributions
$
i10
$
i72
/
As
of March 31, 2022, the Company anticipates no further significant cash contributions to its qualified defined benefit pension plans in 2022.
In March 2022, the Company concluded negotiations on one of its collective bargaining agreements, which required an amendment to one of the Company's pension plans. As a result of the amendment, the remeasurement of the plan increased the pension liability and pre-tax accumulated other comprehensive loss by approximately $i97
million.
Restricted Performance Stock Rights - For the three months ended March 31, 2022, the Company granted approximately i0.1 million RPSRs at a weighted average
share price of $i204.10. These rights are subject to cliff vesting on December 31, 2024. For the three months ended March 31, 2021, the Company granted approximately i0.2
million RPSRs at a weighted average share price of $i178.41. These rights are subject to cliff vesting on December 31, 2023. 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 the three months ended March 31, 2022 and 2021, awards of approximately i0.2
million and i0.1 million shares of stock vested, respectively, of which less than i0.1
million each period 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 March 31, 2022:
Stock
Awards (in thousands)
Weighted-Average Grant Date Fair Value
Weighted-Average Remaining Contractual Term (in years)
The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors of $i9 million for each of the three months ended March
31, 2022 and 2021.
The Company recorded tax benefits related to stock awards of $i1 million and $i2
million for the three months ended March 31, 2022 and 2021, respectively. The Company recognized tax benefits associated with the issuance of stock in settlement of stock awards of $i4 million and $i2
million for the three months ended March 31, 2022 and 2021, respectively.
Unrecognized Compensation Expense
As of March 31, 2022, the Company had $i4
million of unrecognized compensation expense associated with Restricted Stock Rights granted in 2022, 2021, and 2020, which will be recognized over a weighted average period of i1.4 years, and $i50
million of unrecognized compensation expense associated with RPSRs granted in 2022, 2021, and 2020, which will be recognized over a weighted average period of i1.8 years.
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 Mission Technologies (formerly named Technical Solutions) segment provides a range of services to government and commercial customers. Headquartered in Newport News, Virginia,
HII employs approximately 44,000 people domestically and internationally.
We conduct most of our business with the U.S. Government, primarily the Department of Defense ("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 Mission Technologies segment provides a wide range of services and products, including C5ISR systems and operations; the application of Artificial Intelligence and machine learning to battlefield decisions; defense and offensive cyberspace strategies and electronic warfare; unmanned autonomous systems; live, virtual, and constructive solutions; platform modernization;
and critical nuclear operations.
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, 2021.
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 costs for paid leave, quarantining employees, vaccinations, and recurring facility cleaning. Our shipyards and other facilities have remained open and productive,
but
we continue to experience challenges meeting our hiring requirements, which has impacted our operations due to delay and disruption from a shortage of critical skills and out-of-sequence work.
While costs related to COVID-19 Events are allowable under U.S. Government contracts, our contract estimates reflect profit 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. Reinsurers under our property insurance 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. The Vermont court dismissed our complaint in response to a motion of the reinsurers for judgment on the pleadings, and we have appealed the decision. Although we continue to believe that our position is well-founded, no assurance can be provided regarding the ultimate resolution of this matter. See Note 12: Investigations, Claims, and Litigation.
We have also focused on actively supporting our customers, suppliers, and communities. We have been proactive 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. Our suppliers have experienced reductions in employee attendance and hiring challenges, similar to us, which has affected their performance and delayed material deliveries. We are therefore continuing to monitor material availability and affordability. We are unable to predict how our customers and suppliers will allocate resources in the future as they react to the evolving demands of the COVID-19 response.
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 fiscal year 2022 budget cycle ultimately concluded with the passage of the Consolidated Appropriations Act of 2022, signed into law March 15, 2022. Final defense appropriations broadly supported shipbuilding programs, including funding for two Arleigh Burke class (DDG 51) destroyers and two Virginia class attack submarines. Additionally, the appropriations measure provided $250 million for Advance Procurement ("AP") funding for LPD 32 (unnamed), additional AP for a third Arleigh Burke class
(DDG 51) destroyer in fiscal year 2023, funding for the Columbia class ballistic-missile (SSBN 826) submarine program, USS Gerald R. Ford class (CVN 78) nuclear aircraft carrier programs, and the refueling and complex overhaul ("RCOH") of USS John C. Stennis (CVN 74).
The President submitted the fiscal year 2023 budget request on March 28, 2022, and it is now under consideration by Congress. The budget request reflects continued investment in shipbuilding, funding two amphibious ships, LPD 32 (unnamed) and LHA 9 (unnamed), two Arleigh Burke class (DDG 51) surface combatants, and two Block V Virginia class submarines equipped
with the Virginia Payload Module, and continues funding USS Gerald R. Ford class (CVN 78) nuclear aircraft carrier programs, carrier RCOH programs, and construction of Columbia class (SSBN 826) submarines. Additionally, the budget request includes investment in the submarine industrial base.
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 federal 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 could 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, 2021, we consider our policies relating to the following matters to be critical accounting policies and estimates:
•Revenue recognition;
•Purchase accounting, goodwill, and intangible assets;
•Litigation, commitments, and contingencies;
•Retirement related benefit plans; and
•Workers' compensation.
As of March
31, 2022, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2021.
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.
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 certain merger and acquisition costs, and advertising costs.
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.
The
following table presents selected financial highlights:
Three Months
Ended March 31
2022 over 2021
($ in millions)
2022
2021
Dollars
Percent
Sales
and service revenues
$
2,576
$
2,278
$
298
13
%
Cost of product sales and service revenues
2,227
1,936
291
15
%
Income
from operating investments, net
7
8
(1)
(13)
%
Other income and gains (losses), net
(1)
3
(4)
(133)
%
General
and administrative expenses
217
206
11
5
%
Operating
income
138
147
(9)
(6)
%
Other income (expense)
Interest
expense
(26)
(21)
(5)
(24)
%
Non-operating retirement benefit
71
46
25
54
%
Other,
net
(7)
1
(8)
(800)
%
Federal and foreign income taxes
36
25
11
44
%
Net
earnings
$
140
$
148
$
(8)
(5)
%
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 March 31
2022 over 2021
($ in millions)
2022
2021
Dollars
Percent
Product
sales
$
1,724
$
1,721
$
3
—
%
Service revenues
852
557
295
53
%
Sales
and service revenues
$
2,576
$
2,278
$
298
13
%
Product sales for the three months ended March
31, 2022, increased $3 million from the same period in 2021. Ingalls product sales decreased $26 million for the three months ended March 31, 2022, primarily as a result of
lower volumes in surface combatants and amphibious assault ships. Newport News product sales increased $20 million for the three months ended March 31, 2022, primarily as a result of higher volumes in submarines and aircraft carriers. Mission Technologies product sales increased $9 million for the three months ended March
31, 2022, primarily as a result of higher volumes in unmanned systems and defense and federal solutions ("DFS").
Service revenues for the three months ended March 31, 2022, increased $295 million, or 53%, compared with the same period in 2021. Ingalls service revenues for the three months ended March 31, 2022, increased $8 million, primarily as a result of higher volumes in amphibious assault ship services, partially offset by lower volumes in surface combatant services. Newport News service revenues decreased $37 million for the three months ended March 31, 2022, primarily as a result of lower volumes in aircraft carriers and naval nuclear support services. Mission Technologies service revenues increased $324 million for the three months ended March
31, 2022, primarily as a result of higher volumes in DFS services, partially offset by the divestiture of our oil and gas business in the first quarter of 2021 and lower volumes in Fleet Sustainment.
Cost of Sales and Service Revenues
Cost of product sales, cost of service revenues, income from operating investments, net, and general and administrative expenses were as follows:
Three
Months Ended March 31
2022 over 2021
($ in millions)
2022
2021
Dollars
Percent
Cost
of product sales
$
1,468
$
1,454
$
14
1
%
% of product sales
85.2
%
84.5
%
Cost
of service revenues
759
482
277
57
%
% of service revenues
89.1
%
86.5
%
Income
from operating investments, net
7
8
(1)
(13)
%
Other income and gains (losses), net
(1)
3
(4)
(133)
%
General
and administrative expenses
217
206
11
5
%
% of sales and service revenues
8.4
%
9.0
%
Cost
of sales and service revenues
$
2,438
$
2,131
$
307
14
%
Cost of Product Sales
Cost
of product sales for the three months ended March 31, 2022, increased $14 million, or 1%, compared with the same period in 2021. Ingalls cost of product sales decreased $10 million for the three months ended March 31, 2022, primarily as a result of volume decreases described above. Newport News cost of product sales increased $20 million for the three months ended March 31, 2022, primarily as a result of volume increases described above. Mission Technologies cost of product sales increased $6 million for the three months ended March 31, 2022, driven by volume increases described above. Cost of product sales related to the Operating FAS/CAS Adjustment decreased $2 million for the three months ended March 31, 2022, as described
below.
Cost of product sales as a percentage of product sales increased from 84.5% for the three months ended March 31, 2021, to 85.2% for the three months ended March 31, 2022. The increase was primarily due to lower risk retirement on the Virginia class (SSN 774) submarine program and Bougainville (LHA 8), as well as a contract incentive on USS Jack H. Lucas (DDG 125) in the first quarter of 2021, partially offset by higher risk retirement on USS Gerald R. Ford (CVN 78) and Fort Lauderdale
(LPD 28) following its delivery, as well as a favorable change in the Operating FAS/CAS Adjustment.
Cost of Service Revenues
Cost of service revenues for the three months ended March 31, 2022, increased $277 million, or 57%, compared with the same period in 2021. Ingalls cost of service revenues increased $7 million for the three months ended March 31, 2022, primarily as a result of higher volumes described above. Newport News cost of service revenues decreased $35 million for the three months ended March 31, 2022, primarily as a result of lower volumes described above. Mission Technologies cost of service revenues increased $306 million for the three months ended March
31, 2022, primarily as a result of higher volumes described above. Cost of service revenues related to the Operating FAS/CAS Adjustment decreased $1 million for the three months ended March 31, 2022, as described below.
Cost of service revenues as a percentage of service revenues increased from 86.5% for the three months ended March 31, 2021, to 89.1% for the three months ended March 31, 2022, primarily driven by lower performance
in DFS services and higher amortization of purchased intangible assets, partially offset by year-to-year variances in contract mix and a favorable change in the Operating FAS/CAS Adjustment.
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 months ended March 31, 2022, was flat compared to 2021.
Other Income and
Gains (Losses), Net
Other income and gains (losses), net was a net loss of $1 million and a net gain of $3 million for the three months ended March 31, 2022 and 2021, respectively. The unfavorable change of $4 million was primarily due to the gain on sale of our oil and gas business in the first quarter of 2021.
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 months ended March 31, 2022, increased $11 million from the same period in 2021, primarily due to higher overhead costs as a result of the acquisition of Alion in the third quarter of 2021 and current state income tax expense, partially offset by favorable changes in non-current state income taxes.
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 costs 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:
Segment operating income for the three months ended March 31, 2022, was $176 million, compared with segment operating income of $191 million for the same period in 2021. The decrease was primarily due to lower risk retirement on the Virginia class (SSN 774) submarine program and Bougainville (LHA 8), receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in the first quarter of 2021, and higher amortization of purchased intangible assets, partially
offset by higher risk retirement on Fort Lauderdale (LPD 28) following its delivery and USS Gerald R. Ford (CVN 78), as well as higher performance in DFS services and unmanned systems.
Activity within each segment is discussed in Segment Operating Results below.
FAS/CAS Adjustment and Operating FAS/CAS Adjustment
The FAS/CAS Adjustment reflects the difference between expenses for pension and other postretirement benefits determined in accordance with GAAP ("FAS") and the expenses for these items included in segment operating income in accordance with U.S. Cost Accounting Standards ("CAS"). The Operating FAS/CAS Adjustment excludes the following components of net periodic benefit
costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.
The components of the Operating FAS/CAS Adjustment were as follows:
Three
Months Ended March 31
2022 over 2021
($ in millions)
2022
2021
Dollars
Percent
FAS
benefit (expense)
$
24
$
(7)
$
31
443
%
CAS cost
10
13
(3)
(23)
%
FAS/CAS
Adjustment
34
6
28
467
%
Non-operating retirement benefit
(71)
(46)
(25)
(54)
%
Operating
FAS/CAS Adjustment
$
(37)
$
(40)
$
3
8
%
The Operating FAS/CAS Adjustment was a net expense of $37 million and $40 million for the three
months ended March 31, 2022 and 2021, respectively. The favorable change in the Operating FAS/CAS Adjustment of $3 million was driven by higher interest rates.
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 March 31, 2022, was $1 million, compared to non-current state income tax expense of $4 million for the same period in 2021. The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to an increase in expenses that are not currently deductible for income tax purposes.
Interest Expense
Interest expense for the three months ended March 31, 2022, increased $5 million, compared with the same period in 2021, primarily due to borrowing under the Term Loan and the issuance of senior notes in August 2021.
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 months ended March 31, 2022, the favorable change in the non-operating retirement benefit of $25 million was primarily driven by higher 2021 returns on plan assets.
Other, net expense increased
$8 million for the three months ended March 31, 2022, compared with the same period in 2021, primarily driven by losses on investments in marketable securities.
Federal and Foreign Income Taxes
Our effective income tax rates on earnings from operations for the three months ended March 31, 2022 and 2021, were 20.5% and 14.5%, respectively. The higher effective tax rate for the three months ended March 31, 2022, was primarily attributable to a tax loss associated with the sale of the Company’s oil and gas business recorded in 2021.
For
the three months ended March 31, 2022, our effective tax rate did not differ materially from the federal statutory corporate income tax rate of 21%. For the three months ended March 31, 2021, our effective tax rate differed from the federal statutory rate primarily as a result of the loss associated with the sale of our oil and gas business. See Note 11: Income Taxes.
SEGMENT OPERATING RESULTS
Basis of Presentation
We are aligned into three reportable segments: Ingalls, Newport News, and Mission Technologies.
The
following table presents segment operating results:
Three Months Ended March
31
2022 over 2021
($ in millions)
2022
2021
Dollars
Percent
Sales
and Service Revenues
Ingalls
$
631
$
649
$
(18)
(3)
%
Newport
News
1,390
1,407
(17)
(1)
%
Mission Technologies
590
259
331
128
%
Intersegment
eliminations
(35)
(37)
2
5
%
Sales and service revenues
$
2,576
$
2,278
$
298
13
%
Operating
Income
Ingalls
$
86
$
91
$
(5)
(5)
%
Newport
News
81
93
(12)
(13)
%
Mission Technologies
9
7
2
29
%
Segment
operating income
176
191
(15)
(8)
%
Non-segment factors affecting operating income
Operating
FAS/CAS Adjustment
(37)
(40)
3
8
%
Non-current state income taxes
(1)
(4)
3
75
%
Operating
income
$
138
$
147
$
(9)
(6)
%
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 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.
Cumulative Adjustments
For the three months ended March 31, 2022 and 2021, favorable and unfavorable cumulative catch-up margin adjustments were as follows:
Three
Months Ended March 31
($ in millions)
2022
2021
Gross favorable adjustments
$
107
$
86
Gross
unfavorable adjustments
(62)
(36)
Net adjustments
$
45
$
50
For the three months ended March
31, 2022, favorable cumulative catch-up margin adjustments were related to risk retirement on Fort Lauderdale (LPD 28) following its delivery and other individually insignificant adjustments. During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.
For the three months ended March 31, 2021, favorable cumulative catch-up margin adjustments were related to risk retirement on Bougainville (LHA 8) and Block IV of the Virginia class (SSN 774) submarine program. During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.
Ingalls
Three
Months Ended March 31
2022 over 2021
($ in millions)
2022
2021
Dollars
Percent
Sales
and service revenues
$
631
$
649
$
(18)
(3)
%
Segment operating income
86
91
(5)
(5)
%
As
a percentage of segment sales
13.6
%
14.0
%
Sales and Service Revenues
Ingalls revenues for the three months ended March 31, 2022, decreased
$18 million, or 3%, from the same period in 2021, primarily driven by lower revenues in surface combatants, partially offset by higher revenues in amphibious assault ships. Revenues on surface combatants decreased due to lower volumes on Jeremiah Denton (DDG 129), George M. Neal (DDG 131), and Frank E. Petersen Jr. (DDG 121), partially offset by higher volumes on Sam Nunn (DDG 133). Revenues on amphibious assault ships increased due to higher volumes on LHA 9 (unnamed) and L-Class planning yard services contract, partially offset by lower volumes on Bougainville (LHA 8).
Segment
Operating Income
Ingalls segment operating income for the three months ended March 31, 2022, was $86 million, compared with segment operating income of $91 million for the same period in 2021. The decrease was primarily driven by lower
risk retirement on Bougainville (LHA 8) and receipt of a contract incentive on USS Jack H. Lucas
(DDG 125) in the first quarter of 2021, partially offset by higher risk retirement on Fort Lauderdale (LPD 28) following its delivery.
Newport News
Three
Months Ended March 31
2022 over 2021
($ in millions)
2022
2021
Dollars
Percent
Sales
and service revenues
$
1,390
$
1,407
$
(17)
(1)
%
Segment operating income
81
93
(12)
(13)
%
As
a percentage of segment sales
5.8
%
6.6
%
Sales and Service Revenues
Newport News revenues for the three months ended March 31, 2022, decreased $17 million, or
1%, from the same period in 2021, primarily driven by lower revenues in aircraft carriers and naval nuclear support services, partially offset by higher revenues in submarines. Aircraft carrier revenues decreased primarily as a result of lower volumes on the RCOH of USS George Washington (CVN 73), the construction of John F. Kennedy (CVN 79), and USS Gerald R. Ford (CVN 78), partially offset by higher volumes on the RCOH of USS John C. Stennis (CVN 74). Naval nuclear support services revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services. Submarine revenues increased due to higher volumes on the Columbia
class (SSBN 826) program and Block V boats of the Virginia class (SSN 774) submarine program, partially offset by lower volumes on Block IV boats of the Virginia class (SSN 774) submarine program.
Segment Operating Income
Newport News segment operating income for the three months ended March 31, 2022, was $81 million, compared with segment operating income of $93 million for the same period in 2021. The decrease was primarily due to lower risk retirement on the Virginia class (SSN 774) submarine program, partially offset by higher risk retirement on USS Gerald R. Ford (CVN 78).
Mission
Technologies
Three Months Ended March 31
2022
over 2021
($ in millions)
2022
2021
Dollars
Percent
Sales and service revenues
$
590
$
259
$
331
128
%
Segment
operating income
9
7
2
29
%
As a percentage of segment sales
1.5
%
2.7
%
Sales
and Service Revenues
Mission Technologies revenues for the three months ended March 31, 2022, increased $331 million, or 128%, from the same period in 2021, primarily due to higher volumes in DFS attributable to the acquisition of Alion in the third quarter of 2021, partially offset by the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture in the first quarter of 2021, as well as lower volumes in Fleet Sustainment.
Segment Operating Income
Mission Technologies segment operating income for the three months ended March 31, 2022, was $9 million, compared with segment operating income of $7 million for the same period in 2021. The increase
was primarily driven by higher performance in DFS and unmanned systems, partially offset by higher amortization of purchased intangible assets.
Total backlog as of March 31, 2022, and December 31, 2021, was approximately $47.9 billion and $48.5 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 Indefinite Delivery/Indefinite Quantity orders. For contracts having no stated contract values, backlog includes only the amounts committed by the customer.
Approximately
19% of the $48.5 billion total backlog as of December 31, 2021, is expected to be converted into sales in 2022. U.S. Government orders comprised substantially all of the backlog as of March 31, 2022, and December 31, 2021.
Awards
The value of new contract awards during the three months ended March 31, 2022, was approximately $2 billion, comprised primarily of an award for the construction of DDG 139 (unnamed).
LIQUIDITY
AND CAPITAL RESOURCES
We seek to efficiently convert operating results into cash for deployment in operating our businesses, implementing our business strategy, and maximizing stockholder value. We use various financial measures to assist in capital deployment decision making, including net cash provided by operating activities and free cash flow. We believe these measures are useful to investors in assessing our financial performance.
The following table summarizes key components of cash flow provided by operating activities:
Three
Months Ended March 31
2022 over 2021
($ in millions)
2022
2021
Dollars
Net earnings
$
140
$
148
$
(8)
Depreciation
and amortization
89
67
22
Provision for doubtful accounts
(7)
—
(7)
Stock-based compensation
9
9
—
Deferred
income taxes
2
31
(29)
Gain
on disposition of business
—
(3)
3
Loss (gain) on investments in marketable securities
9
(4)
13
Retiree
benefit funding in excess of expense
(34)
(65)
31
Trade working capital increase
(291)
(140)
(151)
Net
cash (used in) provided by operating activities
$
(83)
$
43
$
(126)
We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our
leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt
obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt.
Cash Flows
We discuss below our significant operating, investing, and financing activities affecting cash flows for the three months ended March 31, 2022 and 2021, as classified on our unaudited condensed consolidated statements of cash flows.
Operating Activities
Cash used in operating activities for the three months ended
March 31, 2022, was $83 million, compared with $43 million provided by operating activities for the same period in 2021. The unfavorable change in operating cash flow was primarily due to changes in trade working capital and income tax refunds in the first quarter of 2021, partially offset by lower contributions to retiree benefit plans. The change in trade working capital was primarily driven by the timing of receipts of accounts receivable and payments of accounts payable.
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 12 months beginning April 1, 2022 and beyond such 12-month period
based on our current business plan.
Investing Activities
Cash used in investing activities for the three months ended March 31, 2022, was $43 million, compared with $46 million used in investing activities for the same period in 2021. The change in investing cash was driven by the disposition of our oil and gas business in the first quarter of 2021 and lower capital expenditures in 2022, partially offset by contribution of our San Diego Shipyard to a joint venture in the first quarter of 2021. For 2022, 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 1.5% to 2.0% of annual revenues.
Financing Activities
Cash
used in financing activities for the three months ended March 31, 2022, was $171 million, compared with $102 million used in financing activities for the same period in 2021. The change in financing cash was primarily due to an increase in the repayment of long-term debt of $100 million, an increase of $7 million in employee taxes on certain share-based payment arrangements, and a $1 million increase in cash dividend payments, partially offset by a decrease of $39 million in common stock repurchases.
Free Cash Flow
Free cash flow represents cash provided by (used in) operating activities less capital expenditures net of related grant proceeds. Free cash flow is not a measure recognized under GAAP. Free cash flow has limitations as an analytical tool and should not be considered in isolation
from, or as a substitute for, net earnings as a measure of our performance or net cash provided by operating activities as a measure of our liquidity. We believe free cash flow is an important liquidity measure for our investors because it provides them insight into our current and period-to-period performance and our ability to generate cash from continuing operations. We also use free cash flow as a key operating metric in assessing the performance of our business and as a key performance measure in evaluating management performance and determining incentive compensation. Free cash flow may not be comparable to similarly titled measures of other companies.
The
following table reconciles net cash (used in) provided by operating activities to free cash flow:
Three Months Ended March 31
2022 over 2021
($ in millions)
2022
2021
Dollars
Net
cash (used in) provided by operating activities
$
(83)
$
43
$
(126)
Less capital expenditures:
Capital expenditure additions
(43)
(60)
17
Grant
proceeds for capital expenditures
—
1
(1)
Free cash flow
$
(126)
$
(16)
$
(110)
Free cash
flow for the three months ended March 31, 2022, decreased $110 million from the same period in 2021, primarily due to changes in trade working capital and income tax refunds in the first quarter of 2021, partially offset by lower contributions to retiree benefit plans and 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 March 31, 2022 and 2021, 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.
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 March 31, 2022, $15 million in letters of credit were issued but undrawn and $276 million of surety bonds were outstanding. As of March 31, 2022, 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. You can generally identify forward-looking statements by words such as "may,""will,""should,""expects,""intends,""plans,""anticipates,""believes,""estimates,""predicts,""potential,""continue," and similar words or phrases or the negative of these words or phrases. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable when made, we cannot guarantee future results,
levels of activity, performance, or achievements. There are a number of important factors that could cause our actual results to differ materially from the results anticipated by our forward-looking statements, which include, but are not limited to:
•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, and the impacts of vaccination mandates on our workforce;
•Our ability to effectively integrate the operations of Alion into our business;
•Disruptions impacting global supply, including those attributable to the ongoing COVID-19 pandemic and those resulting from the ongoing conflict between Russia and Ukraine;
•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. In 2020, we delivered USS Tripoli (LHA 7), and we were awarded a long-lead-time material and construction contract for LHA 9 (unnamed). 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. We delivered USS Paul Ignatius (DDG 117), USS Delbert D. Black (DDG 119), and Frank E. Petersen Jr. (DDG121) in 2019, 2020, and 2021, respectively. We have contracts to construct the following Arleigh
Burke class (DDG 51) destroyers: 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), John F. Lehman (DDG 137), and DDG 139 (unnamed).
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")
Develops integrated solutions that enable today's connected, all–domain force. Capabilities include: C5ISR systems and operations; the application of
artificial intelligence ("AI") and machine learning to battlefield decisions; defensive and offensive cyberspace strategies and electronic warfare ("EW"); and live, virtual, and constructive ("LVC") solutions.
Maintains
and modernizes a significant majority of the U.S. Navy fleet, from small watercraft to submarines, combatants, and aircraft carriers, our systems and maintenance experts help the Navy maintain a high state of readiness. Ensures effective system operation and sustainment by actively supporting design and decision–making processes through studies, analyses, and reviews of program documents, and provides a wide range of logistics products.
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
Supports the national security mission of the Department of Energy ("DoE") through the management and operation of its sites, as well as the safe cleanup of legacy waste across the country. We meet our clients' toughest nuclear and environmental challenges and are positioned to serve the growing commercial nuclear power plant decommissioning market. 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. In 2022, we delivered Fort Lauderdale (LPD 28). We are currently constructing Richard M. McCool Jr. (LPD 29) and Harrisburg (LPD 30). In 2020, we were awarded a contract
to construct Pittsburgh (LPD 31).
Unmanned systems
Creates 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.
Virginia class (SSN 774) fast attack submarines
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 floating rate financial instruments subject to interest rate risk include a $650 million Term Loan, a $1.5 billion Revolving Credit Facility, and a $1 billion commercial paper program. As of March 31, 2022, we had $525 million outstanding on the Term Loan and no indebtedness outstanding under our Revolving Credit Facility or our commercial paper program. Based on the amounts outstanding under our Term Loan as of March 31, 2022, an increase of 1% in interest rates would increase the interest expense
on our debt by approximately $5 million on an annual basis.
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 March 31, 2022. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2022, 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
On August 19, 2021, the Company completed the acquisition of Alion. The Company is in the process of implementing its internal control structure over Alion operations, and the process must be completed within one year of the acquisition.
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 2021 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 March 31, 2022.
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 50,549 shares of our common stock in the open market pursuant to our repurchase program and 67,574 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 March 31, 2022, we have purchased 13,445,849 shares at an average price of $161.31 per share for a total of $2.2 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.
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.
