Huntington Ingalls Industries, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. HII builds naval ships and provides defense and technology services through Ingalls, Newport News, and Mission Technologies. Most business is with the U.S. Government, primarily the Department of Defense.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $2.626B | $2.338B | $7.864B | $6.847B |
| Operating income | $131M | $118M | $460M | $393M |
| Net earnings | $138M | $147M | $456M | $424M |
| Diluted EPS | $3.44 | $3.65 | $11.37 | $10.52 |
| Operating margin | 5.0% | 5.0% | 5.8% | 5.7% |
Revenue grew 12% in Q3 and 15% year to date. Q3 growth was led by Mission Technologies, whose revenue rose 51% to $595M, largely reflecting the Alion acquisition; Newport News revenue increased 7% to $1.445B, while Ingalls declined 1% to $623M. For nine months, Mission Technologies revenue more than doubled to $1.785B, principally due to Alion. Segment operating income was $166M in Q3 (+2%) and $567M year to date (+8%).
Q3 net earnings declined 6% despite higher operating income, reflecting higher income tax expense and other net expense. The effective tax rate was 14.8% versus a tax benefit in the prior-year quarter; year-to-date rates were 18.6% versus 10.7%, primarily due to prior-period R&D tax credits recorded in 2021. Net cumulative contract catch-up adjustments increased operating income by $27M in Q3 and $140M year to date; the Q3 amount included a favorable $41M Newport News contract adjustment.
Cash flow, debt and liquidity
- Operating cash flow was $165M for the first nine months, down from $489M. The company attributed the decline mainly to working-capital use, including timing of receivables, and higher tax and interest payments.
- Free cash flow, defined by HII as operating cash flow less capital expenditures net of grants, was negative $14M versus positive $284M. Capital expenditures were $179M.
- Cash was $117M at September 30, down from $627M at year-end 2021. Total debt was approximately $3.004B, including $399M current and $2.605B long-term, versus $3.298B long-term debt at year-end. HII prepaid $300M of debt during the period; $325M remained outstanding on its term loan.
- Current assets were $2.817B and current liabilities $2.892B. HII said cash from operations, existing cash, and credit facilities should be sufficient to meet obligations and planned capital needs for at least the next 12 months.
- Dividends paid were $142M; share repurchases were $41M for the nine months. Q3 dividend declared was $1.18 per share.
Backlog, outlook and risks
Total backlog was $46.7B at September 30, down from $48.5B at December 31, 2021; $23.2B was funded and $23.4B unfunded. Remaining performance obligations were also reported at $46.7B; HII expects to recognize approximately 30% as revenue through 2023, another 35% through 2025, and the balance thereafter. New awards for the first nine months were approximately $6.1B.
HII did not provide specific consolidated revenue or earnings guidance in the supplied filing text. It estimated 2022 maintenance and sustainment capital expenditures at about 1.0% of annual revenue and discretionary capital expenditures at 1.5%–2.0%. Management cited labor shortages, supply-chain constraints, inflation, geopolitical uncertainty, and unresolved federal fiscal-year 2023 appropriations; the government was operating under a continuing resolution through December 16, 2022. The company noted that sustained cost inflation could pressure contract economics, particularly on fixed-price work.
- Contract and execution: Long-term contract estimates, cost growth, schedule performance, and contract adjustments can materially affect margins. Catch-up adjustments were a meaningful contributor to reported earnings.
- Government funding and oversight: Delayed or reduced defense funding could affect awards, revenue, and cash flow. In August 2022, a Navy contracting officer found a significant deficiency in Ingalls’ property management system and imposed a 2% payment withholding on certain invoices under one contract, pending correction.
- Other contingencies: HII is pursuing insurance recovery for COVID-related losses; a Vermont court ruling in September 2022 allowed its claim to proceed, but the outcome is uncertain. Other disclosed matters include a False Claims Act case on appeal, asbestos claims, and disputes involving government contract cost treatment. Management said it did not expect the disclosed matters to have a material financial effect, while noting outcomes are uncertain.
- Goodwill: Ahead of its November 2022 impairment test, HII expected the Government Services reporting unit’s fair value to exceed carrying value by less than 10%; other reporting units were expected to exceed carrying value by more than 10%.
Important facts for investors to verify
- Whether working-capital timing and negative year-to-date free cash flow improve, and how cash conversion develops.
- Whether labor, supplier availability, and inflation affect contract schedules, costs, or margins, particularly on fixed-price contracts.
- How much Mission Technologies’ growth and profitability reflect Alion acquisition effects versus underlying performance.
- Whether backlog converts to funded orders and revenue as expected, given its substantial unfunded component and federal budget uncertainty.
- Progress resolving the Ingalls property-system deficiency and the related payment withholding, as well as the status of material legal and insurance claims.
- Results of the November 2022 goodwill impairment test for Government Services.