Huntington Ingalls Industries, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. HII builds and services U.S. Navy and Coast Guard ships and provides government and energy-related services through Ingalls, Newport News, and Technical Solutions. More than 95% of 2020 revenue came from the U.S. Government; approximately 88% came from the U.S. Navy.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $9.361 billion | $8.899 billion | +5% |
| Operating income | $799 million | $736 million | +9% |
| Operating margin | 8.5% | 8.3% | +0.2 percentage points |
| Net earnings | $696 million | $549 million | +27% |
| Diluted EPS | $17.14 | $13.26 | +29% |
| Operating cash flow | $1.093 billion | $896 million | +22% |
| Free cash flow (non-GAAP) | $757 million | $460 million | +$297 million |
Revenue growth reflected higher shipbuilding volumes, particularly at Newport News, and Hydroid’s acquisition. Net earnings benefited in part from a lower effective tax rate (14.1%, versus 19.6% in 2019), primarily due to research and development tax-credit adjustments. Operating results also included a $119 million non-operating retirement benefit, compared with $12 million in 2019.
Segment operating income was $555 million, down 12% from $631 million. Ingalls improved to $281 million from $235 million; Newport News declined to $233 million from $410 million; Technical Solutions returned to income of $41 million from a $14 million loss. The Newport News decrease was primarily driven by unfavorable Virginia-class Block IV submarine cost and schedule estimates.
Fourth quarter: Revenue was $2.757 billion, operating income $305 million, net earnings $249 million, and diluted EPS $6.15. Compared with Q4 2019, revenue rose from $2.412 billion, operating income from $186 million, net earnings from $149 million, and diluted EPS from $3.61. The filing does not provide quarterly cash-flow figures in the selected quarterly data.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $512 million at year-end, up from $75 million. Current assets were $2.444 billion and current liabilities $2.226 billion.
- Long-term debt was $1.686 billion, versus $1.286 billion a year earlier. The company issued $1 billion of senior notes and redeemed $600 million of 5.000% notes during 2020; it reported a $21 million early-extinguishment loss. Net debt, using reported long-term debt and cash, was approximately $1.174 billion.
- The $1.25 billion revolving facility was undrawn; $1.234 billion remained available after letters of credit. A separate $500 million 364-day facility was also established. HII reported compliance with debt covenants and no commercial paper outstanding.
- Operating cash flow benefited from working-capital timing and deferred payroll taxes under the CARES Act; the tax deferrals are expected to reduce cash flow in 2021 and 2022. Capital expenditures, net of grants, were $336 million, versus $436 million in 2019.
- Dividends paid were $172 million, or $4.23 per share; the quarterly dividend was raised to $1.14 in November 2020. HII repurchased 390,904 shares for $84 million during the year and temporarily paused repurchases amid COVID-19 uncertainty.
Changes, outlook, and key risks
- Backlog was approximately $46.0 billion, down from $46.5 billion; $20.5 billion was funded and $25.5 billion unfunded. Management expected approximately 17% to convert to sales in 2021. New awards were approximately $8.9 billion, compared with $32.3 billion in 2019, when major carrier and submarine awards were received.
- The FY2021 defense authorization and appropriations measures supported shipbuilding, including funding or authority for an additional Virginia-class submarine, LHA 9 with LPD 32 and LPD 33, and another DDG 51 destroyer. Management nevertheless cautioned that future defense budgets and program priorities remain uncertain. The filing does not provide consolidated revenue or EPS guidance.
- For 2021, management expected maintenance and sustainment capital expenditures of about 1% of revenue and discretionary capital expenditures of 2%–3%. Expected qualified pension contributions were $60 million and other postretirement contributions approximately $33 million. Management said cash, operating cash generation, and credit facilities should cover obligations and planned capital expenditures for at least 12 months.
- COVID-19 caused an estimated $61 million unfavorable operating-margin impact in 2020 from delays and disruption, including lower attendance, limited critical skills, and out-of-sequence work. Reimbursement under government relief provisions and insurance recovery remain uncertain; HII is pursuing coverage from reinsurers.
- Net cumulative catch-up adjustments reduced 2020 operating income by $29 million, versus benefits of $96 million in 2019. The filing attributes a significant unfavorable estimate adjustment to Virginia-class Block IV costs and schedules; the program’s future efficiencies and performance remain an execution risk.
- Other material exposures include dependence on U.S. Government funding, fixed-price contract cost overruns, supplier and skilled-labor constraints, audits and contract-payment withholding, cyber threats, nuclear-operation risks, and collective bargaining negotiations. Approximately half of employees were covered by labor agreements; one agreement covering about half of Newport News employees expires in November 2021.
- A U.S. Navy contracting officer determined in December 2020 that a 1985 workers’ compensation billing settlement did not comply with CAS and directed HII to develop a different process. HII disputes the determination; a change that prevents recovery of the relevant CAS-to-GAAP cost difference could materially affect results. Approximately $120 million of costs had not been recognized as billable under the existing settlement.
- HII’s COVID-19 insurance coverage dispute is unresolved. A False Claims Act case involving allegedly non-conforming supplier parts is at an early stage, and the company cannot estimate a loss. HII is also pursuing enforcement of a Venezuela arbitration award of about $151 million, subject to a $22 million counterclaim; collection is uncertain. Management considered other disclosed litigation and environmental exposures not likely to have a material effect, while noting uncertainty in outcomes.
- In the first quarter of 2021, HII completed the contribution of its San Diego Shipyard for a minority interest in Titan and sold its oil and gas business; related assets and liabilities were classified as held for sale at year-end.
Most important facts for investors to verify
- Whether shipbuilding contract estimates—especially Virginia-class Block IV—stabilize and margins recover.
- How much of backlog is funded, converted to revenue, and supported by timely congressional appropriations and contract awards.
- Whether COVID-19 disruption costs are recovered from the government or insurers, and the eventual outcome of the reinsurer dispute.
- The effect of the workers’ compensation CAS determination on allowable costs and future cash flows.
- Debt and liquidity needs, including the timing of credit-facility availability, pension funding, and the cash-flow impact of deferred payroll taxes.
- Execution and financial effects of the 2021 San Diego Shipyard and oil-and-gas transactions, along with labor negotiations and supplier capacity.