Huntington Ingalls Industries, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Dollar amounts are in millions unless stated otherwise. HII builds naval ships and provides defense technology and services through Ingalls, Newport News, and Mission Technologies. Its business is predominantly with the U.S. Government, primarily the Department of Defense.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 / prior date | Change |
|---|---|---|---|
| Sales and service revenues | $2,805 | $2,674 | +5% |
| Operating income | $154 | $141 | +9%; operating margin approximately 5.5% vs. 5.3% |
| Net earnings | $153 | $129 | +19%; net margin approximately 5.5% vs. 4.8% |
| Diluted EPS | $3.87 | $3.23 | +20% |
| Operating cash flow | $(202) | $(9) | More cash used, primarily from working capital timing |
| Free cash flow | $(274) | $(49) | Declined $225 |
| Cash and cash equivalents | $10 | $430 at Dec. 31, 2023 | Down $420 |
| Total debt, including current portion | $2,438 | $2,445 at Dec. 31, 2023 | Down $7 |
| Backlog | $48.4 billion | $48.1 billion at Dec. 31, 2023 | Up $0.3 billion |
Revenue growth was driven by services, up 20% to $1,018, while product sales fell 2% to $1,787. The effective tax rate declined to 16.8% from 20.9%, primarily due to research and development tax credits and tax benefits from stock award settlements. Interest expense fell to $21 from $24. The $44 non-operating retirement benefit, versus $37, also supported pre-tax earnings.
Cash used in operations reflected a $396 increase in trade working capital, including the timing of receivable collections and payable payments. Capital expenditures were $75, net of $3 in grant proceeds. Quarter-end current assets were $2,833 and current liabilities $2,948. HII had $117 of commercial paper and $22 outstanding under its revolving credit facility; its stated revolving facility is $1.5 billion and commercial paper program is $1 billion. The company prepaid its remaining $145 term-loan balance in January.
Financing included $145 of long-term debt repayments, $62 of share repurchases, and $51 of dividends paid, partly offset by net commercial paper and revolving-credit borrowings. The board expanded the repurchase authorization to $3.8 billion and extended it through December 31, 2028. Q1 dividends declared were $1.30 per share, versus $1.24.
Material changes and segment results
- Ingalls: Revenue rose 14% to $655 and segment operating income increased 9% to $60. Higher surface combatant and amphibious assault ship volumes were partly offset by lower National Security Cutter volume.
- Newport News: Revenue declined 5% to $1,434 and segment operating income fell 2% to $82, mainly reflecting lower aircraft carrier and Virginia-class submarine volumes.
- Mission Technologies: Revenue increased 20% to $750 and segment operating income grew 65% to $28, driven primarily by C5ISR and cyber, electronic warfare and space activity.
Segment operating income was $170, up 9%; GAAP operating income was $154 after the operating FAS/CAS adjustment and non-current state income taxes. Net cumulative catch-up revenue adjustments contributed $2 to operating income, versus $9 a year earlier. The 2023 comparison included significant offsetting Newport News contract adjustments.
Outlook, risks and contingencies
- Management expects cash from operations, existing cash, and borrowing facilities to be sufficient for debt service, retiree benefits, contractual obligations, and capital expenditures for at least the next 12 months from April 1, 2024.
- For 2024, maintenance and sustainment capital expenditures are expected to be approximately 1.5%–2.0% of annual revenue, with discretionary capital expenditures of approximately 2.5%–3.5%. Capital spending is expected to rise as HII expands shipbuilding capacity. The filing provides no full-year revenue or EPS guidance.
- HII expects approximately 22% of December 31, 2023 backlog to convert to sales in 2024. Of the $48.4 billion of remaining performance obligations at March 31, about 40% is expected to be recognized through 2025, another 30% through 2027, and the balance thereafter. Backlog includes funded and unfunded orders.
- Fiscal 2024 defense appropriations broadly supported shipbuilding programs, and the fiscal 2025 budget request was under congressional consideration. Budget decisions, contract execution and funding remain important uncertainties.
- Management cites labor shortages, supply-chain challenges, inflation, geopolitical instability, cyber threats, and the ability to estimate and perform long-term contracts as risks. Persistent inflation could raise costs or constrain resources; escalation protections are used where possible.
- The antitrust class action was dismissed against all defendants in April 2024. HII’s COVID-related insurance coverage dispute remains unresolved. The company also describes government investigations and claims, asbestos litigation, and contract matters; it says it cannot assure outcomes, but does not expect specified environmental remediation and certain other matters to have a material effect.
- HII reported $12 of issued but undrawn letters of credit and $360 of surety bonds outstanding. Management said government payment withholdings were not material to liquidity or cash flows.
Important facts for investors to verify
- Whether the elevated working-capital use and low quarter-end cash balance reverse as receivables are collected and payables settle.
- Execution of shipbuilding and Mission Technologies contracts, including labor availability, supplier performance, inflation exposure, and any contract cost-estimate revisions.
- Conversion, funding, and timing of backlog and remaining performance obligations, particularly the unfunded portion.
- Progress and actual spending on capacity expansion and the stated 2024 capital expenditure ranges.
- Developments in the COVID insurance dispute, government investigations, and other legal or contract contingencies.
- Future borrowing, debt maturities, dividends, and repurchases under the expanded authorization; the filing says cash and available facilities are expected to cover near-term needs but reports only $10 of cash at quarter-end.